Global Insight Perspective | |
Significance | The reforms represent a substantial overhaul of Australia’s healthcare delivery and financing system, and will involve a hike in pharmacy dispensing fees alongside mark-ups on more expensive treatments. |
Implications | A number of countervailing forces will be applied on the Australian drug market following the reforms. Ultimately, it appears that on the one hand they will lead to an increase in the volume of generic pharmaceuticals, while pressing on product margins, and, on the other, they will result in an improvement in margins on innovative treatments. Pharmacists will be compensated to the tune of A$1 billion (US$767 million). |
Outlook | The Australian government maintains strict cost-containment measures that have been enhanced by the implementation of MedicarePlus, raised co-pays, new price cuts and the Safety Net 20 Day rule over the past two years—the latest, long-awaited round of changes mark the culmination of its reform agenda, clearly marking a turning point in the industry. |
In a relatively inauspicious statement, the Australian government today announced that it is "making changes" to the subsidised Pharmaceutical Benefits Scheme (PBS). The reforms attempt to delineate further the market for generics and branded drugs once patents have expired, pinpointing this as a key milestone where healthcare spend savings can be made in Australia. The reforms focus on the following areas:
- Pharmacists will no longer receive discounts, which are given by drug companies, on prescriptions for generic drugs. Essentially, from 2012 the government will pay the price for drugs that pharmacists themselves pay from drug companies, thus removing the ad hoc discount scheme currently in place. It is expected that it will ultimately cut the government cost of drugs by one-fourth.
- Instead the government will pass these savings on to consumers through price cuts. The government will implement this price cut on 425 products on 1 August 2008 in the range of A$0.20-4.65—it will average at around A$2.70. The revisions will be spread across the industry in a piecemeal fashion, with an initial 2% price cut on generics that hold near-monopoly status of the market. The price cuts come in addition to the recent reform that implemented a 12.5% price cut on drugs whenever a generic enters the market.
- At the same time, the government has enhanced its “support package”, which will help pharmacies to adjust to the new arrangements. The package includes increased payments for dispensing medicines, plus incentives to take up electronic health systems and to dispense medicines with no additional charges for patients. It also involves a fund of A$1 billion to compensate pharmacies suffering under the new fiscal constraints.
- The government will also increase the dispensing fee, and there will be new mark-ups on more expensive treatments. Pharmacists will also receive two incentive payments: A$1.50 for dispensed scripts, as well as 40% per script for using the online version of PBS.
- Also, it will be simpler for doctors to prescribe certain medicines. From July next year, around 200 medicines that treat long-term, chronic conditions (such as diabetes, osteoporosis, etc.) will be authorised by the doctor alone without a phone call to Medicare Australia. The special authority restrictions have long been considered a "nightmare" in Australia’s drug industry, both being very expensive to administer and creating widespread reluctance on the part of physicians to go through the bureaucratic processes of prescribing these drugs.
Outlook and Implications
Everybody Hurts
These reforms are expected to garner savings of more than A$580 million over the next four years, growing to fully A$3 billion over the next 10 years. Although patients will continue to pay the standard co-payments for a PBS script (currently A$4.70 per script for a concession cardholder and A$29.50 per script for others), the reforms are designed to ensure that more medicines cost less than A$29.50. Ultimately, this will mean cheaper prices for many patients, increasing the volume base, which actually decreased in FY2005/06.
While pointedly "accepting" the reform package, the national secretary of Australia’s Pharmacy Guild Kos Sclavos noted that it will cause "significant hurt" to the industry, and that it represents the largest-ever overhaul of the PBS regulations. That being said, the A$1.1-billion fund will soften the blow for the industry, although Global Insight expects that the pressure on distribution margins from the reforms will lead to further consolidation in the sector.
Essentially, the reforms are designed to further differentiate branded and generic manufacturers on the PBS, which is set to occur officially anyway on the list from 1 August 2007. It is also seeking to encourage more players to join the Australian generics market, and perforate the dominance of Alphapharm (a subsidiary of Germany’s Merck KGaA), and (to a lesser extent) Australia’s own Sigma Pharmaceutical (which is still considering a takeover of distributor Australian Pharmaceutical Industries (API)).