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Big Ramifications for all of Industry From the PBS reforms

Chris Arblaster, PhD
A Consumer Self-Care Perspective

Issue 59: April 2007
Page: 1 of 1 Author's Profile | Send to a Friend | Printer Version

The PBS is a complex system. It is about to have another layer of complexity added to it.
The PBS reforms will largely affect the prescription sector of the market, both generics and patented medicines.
However, some of the details of the proposed changes have only just come to light including a restructuring of pharmacy make-ups and an additional dispensing fee of $1.50 for every benchmark priced prescription.
The Government stated reasons for changing the PBS is to give Australians access to new and expensive medicines while ensuring the PBS remains affordable in the future.
The main changes will be the way that government prices medicines that are operating in a competitive market.

From 1 August 2007, medicines on the PBS will be separated into two formularies for pricing purposes.
Each formulary will be subject to different pricing arrangements, reflecting the existing level of market competition.
Mandatory price reductions will apply for medicines on F2 from 1 August 2008. The 12.5% generic price reduction policy will continue to apply. 

All medicines in F2A will have staged price reductions of 2% per year for three years from 1 August 2008.
Medicines in F2T will have a one-off 25% mandatory price reduction on 1 August 2008.
In addition, there will be mandatory price disclosure arrangements.
The 25% mandatory price reduction for F2T products is a once-off price reduction and mandatory price disclosure will then be the major price trigger for price reductions.

Price disclosure will be phased in for medicines that operate in a competitive market.
Under disclosure, the price the government pays for PBS-listed medicines will move closer to the actual price at which those medicines are supplied.

The changes to the PBS will result in less discounting of PBS items and thus the government and the Pharmacy Guild have signed and addendum to the Guild Government Agreement that compensates pharmacy in two ways.
Firstly for every benchmark priced item dispensed pharmacy will receive $1.50.
In addition, a new mark-up scheme will be instituted.
Of particular note is that products below $30 will now be marked up 15% rather than 10%.

Thus under the new arrangements, low priced items in the PBS will be subsidizing higher priced products.
For example, paracetamol will incur a 25% price decrease which equates to approximately 70 cents.
However a pharmacist will now receive an extra $1.50 for dispensing the product.
This translates to an extra 80 cents per prescription.
Since the vast majority of paracetamol prescriptions are to concessional card holders who do not pay the full dispensed price, the cost to government will be higher than it was before the changes, with all of these increased costs going to pharmacy and in effect subsidizing higher priced items on the PBS.
Paracetamol, because of its high volume on the PBS will be subsidizing other products by about $3m.

Another impact of the reforms will be huge increase in compensation claims as pharmacy and wholesalers try to make claims on manufacturers each time there is a mandatory price decrease.
Added to this will be reduction in stock holdings in the supply chain.
This increased administration work load will divert pharmacists from their businesses and make it harder for all manufacturers, not just those with PBS items.

As with all changes, pharmacy will be confused and take time to adjust to the new operating environment where they will not receive the discounts or other non-financial inducements they once received.
Further to this, some larger pharmacies may start to price discount PBS products where the dispensed price is below the patient co-payment for general beneficiaries (currently $30.90) as they will have increased dispensing and mark-up margins.

In relation to suppliers of PBS items, it is forecast that several suppliers of low priced items will withdraw these products from the market as they will not be able to accommodate a 25% price reduction.
However vertically integrated companies will be in a position to offset mandatory price reductions on one product and offer continuing discounts that will not become part of the mandatory price disclosure. This will place them in a stronger position with retail pharmacy.

In addition, as previously reported in Voice there will be a strong disincentive for companies to invest in producing innovative new formulations of products that will have improved clinical and patient benefits.
Furthermore, such innovative unique formulations that already exist on the PBS may be withdrawn, as they will no longer be commercially viable if they are subject to a 25% price decrease.

Another unfortunate consequence is that enforced price reductions will also potentially limit the number of prescription to S3 switches, particularly as there are some price aggressive generic companies that are implementing additional price reductions.
A classic case is simvastatin where as of 1 August this year the price will reduce 20% and then be subject to a further price reduction of 25% on 1 August 2008.
These sorts of massive price reductions will also impact on the price competitiveness of lipid lowering complementary medicines.

In summary, there are wide ranging ramifications for all sectors, generics, patented medicines and OTCs as well as pharmacy, resulting form the PBS reforms.
As the impact of the reforms becomes better understood there will be changing business models for suppliers who operate in multiple sectors and parts of the supply chain.

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