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National Health Amendment (Pharmaceutical Benefits-Budget and Other Measures) Bill 2017



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ISSN 1328-8091

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BILLS DIGEST NO. 65, 2017-18 23 JANUARY 2018

National Health Amendment (Pharmaceutical Benefits— Budget and Other Measures) Bill 2017 Alex Grove Social Policy Section

Contents

Purpose of the Bill ............................................................... 3

Background ......................................................................... 3

About the PBS .......................................................................... 3

PBS medicine pricing ............................................................... 3

Statutory price reductions and price disclosure.................... 4

2017-18 Budget ...................................................................... 4

Industry Agreements ............................................................... 5

Community Pharmacy Agreement .......................................... 5

Pharmacy location rules ........................................................ 5

Committee consideration .................................................... 6

Senate Selection of Bills Committee........................................ 6

Senate Standing Committee for the Scrutiny of Bills .............. 6

Policy position of non-government parties/independents ..... 7

Position of major interest groups ......................................... 8

Financial implications .......................................................... 8

Statement of Compatibility with Human Rights .................... 8

Parliamentary Joint Committee on Human Rights .................. 9

Key issues and provisions..................................................... 9

Twenty-five per cent price reduction when the first competitor brand is listed ....................................................... 9

Return to 16 per cent price reduction in 2022 .................... 10

Anniversary price reductions ................................................. 10

Price disclosure price reduction thresholds .......................... 11

Pharmacy location rules ........................................................ 12

Prescribing by medical practitioners ..................................... 12

Date introduced: 18 October 2017

House: House of Representatives

Portfolio: Health

Commencement: Part 1 of Schedule 1 commences on 1 October 2018. Part 2 of Schedule 1, Part 2 of Schedule 2, Part 2 of Schedule 3 and Part 2 of Schedule 4 commence on 1 July 2022. Part 1 of Schedule 2, Part 1 of Schedule 3, Part 1 of Schedule 4 and Schedules 5 to 9 commence the day after Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at

January 2018.

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Other provisions ................................................................ 13

Concluding comments ....................................................... 13

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Purpose of the Bill The purpose of the National Health Amendment (Pharmaceutical Benefits—Budget and Other Measures) Bill 2017 (the Bill) is to amend the National Health Act 1953 (the Act) to:

• increase statutory price reductions for medicines listed on the Pharmaceutical Benefits Scheme (PBS)

• grant the Minister discretion in applying some statutory price reductions

• extend the operation of the pharmacy location rules beyond their current sunset date and

• make other minor and technical changes.

Background About the PBS The Pharmaceutical Benefits Scheme (PBS) provides subsidised access to necessary medicines for Australians. Most of the listed medicines on the PBS are prescribed by doctors, dispensed by pharmacists and used by patients at home. Patients pay a co-payment of $6.40 (for concession card holders) or up to $39.50 (for general patients) towards the cost of each PBS medicine, with the Australian Government paying any remaining cost. Since 1 January 2016, pharmacists have been permitted to offer consumers a discount of up to $1 on each PBS co-payment, as long as the pharmacist absorbs the cost of the discount.1 There is also a PBS Safety Net scheme which is intended to protect patients needing a large number of medicines in one year from excessive out of pocket costs. 2

Expenditure on the PBS is uncapped, and may increase as new medicines are added and demand grows.3 Government expenditure on pharmaceutical benefits under the Act was around $11.3 billion in 2016-17, but is forecast to fall to around $11.0 billion in 2017-18.4

PBS medicine pricing The Australian Government is committed to increasing the ‘sustainability of the PBS’, which it defines as ‘the ability of the Government to continue to fund medicines over the longer term given increasing demand for and costs of medicines and related services e.g. dispensing.’5 To this end, the Government tightly regulates the prices of medicines listed on the PBS.

Applications by a pharmaceutical company for PBS listing of a medicine are considered by the Pharmaceutical Benefits Advisory Committee (PBAC), which is an independent expert body appointed by the Australian Government. A new medicine cannot be listed on the PBS unless the PBAC makes a positive recommendation for its listing. The PBAC must take into account both the cost and clinical effectiveness of the medicine when compared with other treatments for the same condition.6

If the PBAC recommends listing the medicine, the sponsor must still negotiate the final arrangements for listing on the PBS, including pricing, with the Department of Health (DoH). Final approval can be granted by the Minister for Health, unless the net cost of the medicine to the PBS is more than $20 million per year, in which case Cabinet approval is required for PBS listing.7

The price negotiated between the pharmaceutical company and the Minister is known as the Approved Ex-manufacturer Price (AEMP).8 Various fees (such as dispensing fees) are then added to the AEMP to arrive at the PBS-dispensed price (also known as the Commonwealth price). The method for calculating the PBS-dispensed price is agreed between the Minister and the Pharmacy Guild of Australia (the Guild, representing community pharmacy owners) in a Community Pharmacy Agreement. When a pharmacist dispenses a PBS

1. Department of Health (DoH), ‘About the PBS’, The Pharmaceutical Benefits Scheme (PBS) website, last updated 18 July 2017. 2. Department of Human Services (DHS), ‘Pharmaceutical Benefits Scheme (PBS) Safety Net’, DHS website, last updated 27 August 2017. 3. DoH, ‘About the PBS’, op. cit. 4. Australian Government, Portfolio budget statements 2017-18 budget related paper no. 1.10: Health Portfolio, Commonwealth of Austalia,

Canberra, 2017, p. 24. 5. DoH, Annual report 2015-2016, DoH, Canberra, 2016, p. 73. 6. National Health Act 1953, section 101. 7. DoH, ‘8.2 Finalisation of the budget impact’, PBS website, last updated September 2017. 8. DoH, ‘Fact sheet - Setting an approved ex-manufacturer price for new or extended listings’, PBS website, last updated 25 July 2017.

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medicine to a patient, the Australian Government pays the pharmacist the PBS-dispensed price for the medicine, less any patient contribution.9 Community Pharmacy Agreements are further discussed below.

Statutory price reductions and price disclosure PBS medicines are divided into two categories for pricing purposes. Formulary 1 (F1) is for single brand (generally patented) medicines and Formulary 2 (F2) is for medicines (generally off-patent) that have more than one brand listed on the PBS.10 Medicines on F1 currently take a five per cent cut in AEMP after five years on the PBS.11 When a second brand of a medicine is listed on the PBS, the medicine moves to F2 and takes a 16 per cent price cut.12

Medicines on F2 can then be subject to further price reductions via a mechanism known as price disclosure. Price disclosure requires the suppliers of certain PBS listed brands of medicines to disclose information to the Department relating to the price at which their brands are sold. The Government uses this information to move the AEMP closer to the price at which the medicines are supplied in the market.13 Price disclosure arrangements were introduced in 2007 to allow the Government to reap the savings from generic medicines being offered to pharmacists at discounted prices.14 The arrangements were expanded in 2010 and 2014 and amended in 2015.15

Current price disclosure arrangements apply to all drugs on the F2 formulary (unless they are exempt).16 The Government saved around $2.4 billion as a result of price disclosure in 2016-17.17

The Government can also vary the price of a medicine outside of the above mechanisms (for example as the result of a post market review or if the price has fallen so low that supply may be at risk).18

2017-18 Budget The 2017-18 Budget contained $1.8 billion in savings over five years under the ‘Improving Access to Medicines - cheaper medicines’ measure, to be achieved through the expansion of existing statutory price reductions for PBS-listed medicines. Under this budget measure, F1 medicines will continue to take a five per cent price cut after five years on the PBS (extended to 2022), but will also take further price cuts of 10 per cent after 10 years and five per cent after 15 years. When a medicine moves to F2, the price cut will increase from 16 to 25 per cent. Savings from the measure will offset the cost of health policy priorities and other medicines measures in the 2017-18 Budget, and ‘contribute to the net cost of future new and amended listings on the PBS’.19

The price cuts may result in cheaper PBS medicines for general patients if medicine prices fall below the maximum general co-payment of $39.50. Significant savings for the Australian Government are also forecast. Largely as a result of the price cuts, expenditure on pharmaceutical benefits and services is expected to decrease by 10.3 per cent in real terms from 2017-18 to 2020-21.20

The Bill implements these price cuts.

Also in the 2017-18 Budget, the Government announced its intention to ‘ensure the ongoing legislative basis for pharmacy location rules’, to give pharmacy owners confidence that the location of pharmacies dispensing PBS

9. DHS, ‘Pricing of Pharmaceutical Benefits Scheme medicine’, DHS website, last updated 22 September 2017. 10. DoH, ‘Formulary allocations - 1 November 2017’, PBS website, last updated 1 November 2017. 11. DoH, F1 5% Statutory price reduction, PBS fact sheet, DoH, 2015. 12. DoH, ‘12.5% and 16% Price Reductions - 1 October 2017’, PBS website, last updated 1 October 2017. 13. DoH, Pharmaceutical Benefits Scheme price disclosure arrangements: procedural and operational guidelines, version 6, DoH, Canberra,

June 2016, p. 8. 14. R de Boer and S Scully, National Health Amendment (Pharmaceutical Benefits Scheme) Bill 2010, Bills digest, 13, 2010-11, Parliamentary Library, Canberra, 2010, p. 5. 15. DoH, Pharmaceutical Benefits Scheme price disclosure arrangements: procedural and operational guidelines, op. cit., pp. 8-9. 16. Ibid., p. 9. 17. DoH, Annual Report 2016-17, DoH, Canberra, 2017, p. 124. 18. See for example PharmaDispatch, ‘No therapeutic groups but no respite on reviews’, PharmaDispatch website, 4 May 2017; PharmaDispatch,

‘Sector slams “misleading” Grattan Institute report’, PharmaDispatch website, 6 March 2017. 19. Australian Government, Budget measures: budget paper no. 2: 2017-18, pp. 112-3. 20. Australian Government, Budget strategy and outlook: budget paper no. 1: 2017-18, p. 6-21. ‘Estimates for the PBS do not include the

potential listing of new medicines or price adjustments to existing listings, which typically increase spending above the original estimates’.

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medicines will continue to be regulated.21 The pharmacy location rules are discussed further below. The Bill removes the sunset date of 30 June 2020 for the current pharmacy location rule arrangements.

Industry Agreements The above price cuts are contained in a new five-year agreement with Medicines Australia (MA) representing the innovative pharmaceutical industry, and also in a two-year extension to the Government’s existing agreement with the Generic and Biosimilar Medicines Association (GBMA) representing generic and biosimilar medicine suppliers. Both agreements, announced to coincide with the 2017-18 Budget, also include measures to encourage (but not mandate) prescribing of lower-cost generic and biosimilar medicines, including changes to doctor’s prescribing software. 22 MA has also secured a degree of policy certainty for the life of the agreement, with the Government undertaking to consult with MA before pursuing any additional savings measures.23 The MA agreement also includes an undertaking that the Commonwealth will record savings from the agreement in the contingency reserve to support the listing of new medicines on the PBS.24

Community Pharmacy Agreement Since 1991, every five years the Australian Government makes a new Community Pharmacy Agreement (CPA) with the Guild. The CPA establishes rules about how community pharmacies will provide PBS medicines. The most recent, the Sixth Community Pharmacy Agreement (6CPA), commenced on 1 July 2015 and provides around $18.9 billion in remuneration (from the Government and from patient co-payments) for community pharmacies and wholesalers. The 6CPA covers matters including:

• pharmacy remuneration for dispensing PBS medicines

• funding for the pharmaceutical supply chain

• funding for community pharmacy programs to help patients manage their medicines

• the Review of Pharmacy Remuneration and Regulation and

• the continuation of the pharmacy location rules until 30 June 2020.25

As part of the 2017-18 Budget process, the Australian Government and the Guild agreed to vary the 6CPA. Among other matters, the Government guaranteed funding for certain community pharmacy programs under the 6CPA, and also committed to continue the pharmacy location rules beyond the life of the 6CPA. In return, the Guild pledged to support a number of Government measures, including the savings measures contained in this Bill. 26

Pharmacy location rules Pharmacists who wish to dispense PBS medicines from a particular location must seek approval under the Act.27 Such requests will generally only be granted if they comply with the pharmacy location rules.28 The current rules, as agreed between the Guild and the Australian Government under the 6CPA, are determined by the Minister under the Act.29

21. Australian Government, Budget measures: budget paper no. 2: 2017-18, op. cit., p. 115. 22. Australian Government, Strategic Agreement [between the Commonwealth of Australia and Medicines Australia], Medicines Australia, 2017; Generic and Biosimilar Medicines Association (GBMA), Strengthening PBS measures to support generic and biosimilar medicines uptake, GBMA, 2017.

23. Australian Government, Strategic Agreement [between the Commonwealth of Australia and Medicines Australia], op. cit., clause 3. 24. Ibid., clause 6. The contingency reserve is an allowance that reflects anticipated events that cannot be assigned to individual programs in the Budget. See Australian Government, ‘Statement 6: Expenses and net capital investment’, Budget strategy and outlook: budget paper no. 1: 2017-18, p. 6-45. 25. DoH, ‘Sixth Community Pharmacy Agreement’, PBS website, last updated 1 May 2017. 26. Australian Government, Strengthening PBS Agreement with Pharmacy Guild to vary the Sixth Community Pharmacy Agreement, DoH website,

2017.

27. National Health Act 1953, section 90. 28. Requests for approval are referred to the Australian Community Pharmacy Authority (ACPA). Section 99K of the National Health Act 1953 provides that the ACPA can only recommend that an application be approved if it complies with the rules determined by the Minister under section 99L. Section 90A provides that the Minister can overrule a decision to reject an application that does not comply with the rules if a

community would be left without reasonable access to PBS medicines and it is in the public interest to approve the application. 29. National Health Act 1953, section 99L. The current pharmacy location rules are in the National Health (Australian Community Pharmacy Authority Rules) Determination 2011 (PB 65 of 2011).

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The rules specify location-based criteria intended to support the equal distribution of pharmacies across the country. Generally speaking, pharmacists cannot open a new pharmacy or relocate a pharmacy within a certain distance of an existing pharmacy, although the exact distance varies depending on factors such as the presence of prescribing doctors and supermarkets in the area, and the type of facility (such as shopping centre or medical centre), if any, the pharmacy will be located in. An applicant must nominate the specific rule (which best suits their circumstances) under which they wish to seek approval. The rules also include general requirements for all applications. For example, the proposed premises for the pharmacy must not be directly accessible by the public from within a supermarket.30

Critics of the rules have argued that they are ‘anti-competitive, limit access and choice in rural and remote areas and prevent young pharmacists from owning their own business as a result of the high cost.’ 31 A number of reviews and reports have recommended changing or removing the rules. Former Health Minister Sussan Ley acknowledged that ‘the National Commission of Audit, the Competition Policy Review by Professor Ian Harper, and the Productivity Commission Research Paper: Efficiency in Health have all suggested that the location rules affect competition and that they should be revised or removed’.32

The 6CPA contained an agreement to continue the pharmacy location rules in their current form until 30 June 2020, but also provided for an independent review of the rules (and other matters). The Interim Report of this Independent Review of Pharmacy Remuneration and Regulation was released on 22 June 2017. The Review noted a number of issues with the rules and concluded they should be removed and possibly replaced with a simpler system:

A number of submissions concluded that the current pharmacy location rules are not fit-for-purpose and may be limiting equitable and affordable access in some areas.

Rather than try to modify the existing rules, the Panel has considered that it is more appropriate to remove the existing rules and, if required, replace them with a different, simpler system that directly deals with the issues of consumer access. 33

The Review proposed a number of options including removing the rules in urban areas, removing them and replacing them with a statutory authority that decides where new pharmacies can open, or modifying the existing rules.34 However, in light of the Government’s announcement in the 2017-18 Budget that it would seek to ensure the ongoing legislative basis for pharmacy location rules, the Review Panel indicated that it would not be further considering options to remove, or remove and replace the rules. The Panel ‘will continue to consider options to modify the location rules that have been put forward on the assumption that the current location rules will be retained.’35

Committee consideration Senate Selection of Bills Committee The Senate Selection of Bills Committee has deferred consideration of the Bill to its next meeting.36

Senate Standing Committee for the Scrutiny of Bills The Senate Standing Committee for the Scrutiny of Bills notes that the Bill seeks to introduce ministerial discretion regarding the application of statutory price reductions. The Committee notes:

… the explanatory memorandum does not explain why there is a need to exempt medicines from statutory price reductions in certain circumstances, nor the need to leave the application of such exemptions to the discretion of the Minister rather than setting out the criteria for applying an exemption in the bill. 37

30. National Health (Australian Community Pharmacy Authority Rules) Determination 2011 (PB 65 of 2011). 31. R de Boer, ‘Pharmaceuticals and pharmacy’, Budget review 2010-11, Research paper series, 2009-10, Parliamentary Library, Canberra, 2010. 32. S Ley, ‘Second reading speech: National Health Amendment (Pharmaceutical Benefits) Bill 2015’, House of Representatives, Debates, 27 May 2015, p. 4711.

33. Review of Pharmacy Remuneration and Regulation Panel, Review of Pharmacy Remuneration and Regulation, Interim report, Commonwealth of Australia, June 2017, p. 104. 34. Ibid., pp. 104-7. 35. Ibid., p. 94. 36. Senate Selection of Bills Committee, Report, 15, 2017, The Senate, 7 December 2017, p. 4.

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The Committee further notes the Bill provides that the Minister may exercise this discretionary power by making determinations by written instrument or notifiable instrument. These categories of instrument are not subject to disallowance by the Parliament. The Committee has asked the Minister to advise:

… why the bill proposes to provide the Minister with a broad discretionary power to apply statutory price reductions and to do so by way of written or notifiable instrument (noting that such instruments are not subject to disallowance). 38

The Minister has responded to the Committee’s questions, noting that the introduction of ministerial discretion regarding the application of statutory price reductions is contained in the agreement with MA. The Minister states that price reductions are currently applied without discretion or consideration of additional information, and that this can sometimes threaten the supply of a medicine:

Current requirements for statutory price reductions and price disclosure reductions mean that price reductions are required regardless of the nature of a medicine, the supply history, or supply volume for a product. If mandatory reductions (especially flow-on reductions) make products unviable to supply, it can be difficult for companies to maintain supply which threatens continuity of therapy for patients. In some cases, it has been necessary for companies to apply for price increases immediately following a statutory price reduction in order to continue to support the supply of affected products in Australia. The Agreement acknowledges that it would be preferable for relevant information to be considered before applying the new statutory price reductions.

39

The Minister claims it would be counterproductive to include a list of criteria for ministerial discretion in the Bill, as it might limit the information considered and inadvertently prevent the Minister from considering unusual circumstances:

It would be counterproductive for a detailed list of criteria for ministerial discretion to be included in the Bill. Ministerial discretion is intended to be exercised only where genuinely justified based on pricing or other history. Including further criteria may result in applications prioritising those criteria when others could be more important for a particular medicine, and create the perception or expectation that applications would be judged according to the response to the criteria. Setting criteria may also inadvertently fetter the Minister from considering unusual circumstances which would warrant adjustment of a price reduction. Either way, including criteria in the legislation is unlikely to be of assistance.

40

The Minister argues that the technical nature of the subject matter and the availability of expert advice from the PBAC and the Joint Oversight Committee (composed of Department of Health and MA representatives) make it unnecessary for the exercise of such ministerial discretion to be subject to Parliamentary scrutiny.41

Policy position of non-government parties/independents Catherine King, the Australian Labor Party’s Shadow Minister for Health, reportedly expressed support for the MA agreement with the Government and indicated that Labor might seek to amend the Bill to ensure that all savings generated are reinvested in new medicines.42

At the time of writing, no comments by other non-government parties or independents specifically relating to the Bill had been identified.

However, in the lead up to the 2016 election, both Labor and the Nick Xenophon Team expressed support for continuing the pharmacy location rules.43

37. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 13, 2017, The Senate, 15 November 2017, p. 37. 38. Ibid.

39. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 15, 2017, The Senate, 6 December 2017, p. 79. 40. Ibid., pp. 80-1. 41. Ibid.

42. D Rowley, ‘Industry wins high praise at political love-in’, Pharma in Focus website, 6 September 2017; PharmaDispatch, ‘The deepening mystery of savings fund’, PharmaDispatch website, 7 September 2017. 43. PharmaDispatch, ‘Guild secures more support for pharmacy’, PharmaDispatch website, 9 June 2016; PharmaDispatch, ‘Pharmacy clean sweep with Labor backing [and] [Letter from the Opposition]’, PharmaDispatch website, 16 June 2016.

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Position of major interest groups As outlined above, the savings measures implemented by the Bill are the result of agreements (or extensions to agreements) with MA, the GBMA and the Guild. Therefore, they should have widespread industry support. The pharmaceutical sector’s key groups are reported to have reviewed the exposure draft of the Bill and, following minor changes, to support the Bill.44 The savings measures announced in the Budget have also been welcomed by the Consumers Health Forum of Australia (CHF, the peak body for health consumer organisations), which believes they will enable new medicines to be subsidised on the PBS.45

The removal of the sunset clause for the pharmacy location rules may prove more controversial. A journalist has described it as ‘a major win for the guild’.46 A Guild spokesman reportedly claims the rules provide certainty for pharmacy owners and a well-distributed network of pharmacies that serve patients where they live.47 However, the Chemist Warehouse group of pharmacies, which is not represented by the Guild, claims the rules are anti-competitive and are preventing the group from serving many communities.48 The CHF likewise believes that there:

… remain significant areas where pharmacy owners, represented by the guild, retain a favoured place as a result of the Government decision to retain location rules which will continue to protect current owners against competition in many areas… 49

Financial implications The measures in Schedules 1 to 4 of the Bill are expected to result in savings of $1.292 billion over four years to 2020-21, and $1.8 billion over the life of the MA and GBMA agreements (to 30 June 2022).50

As noted above, the MA agreement includes an undertaking that the Commonwealth will record the savings in the contingency reserve to support the listing of new medicines on the PBS. The agreement notes that the savings ‘are not intended to limit, and should support, the Australian Government’s commitment to implement all new and amended listings recommended by the PBAC’.51 One pharmaceutical industry media outlet has speculated that some or all of the savings may already have been spent on new PBS listings. 52 The Minister noted in his second reading speech on the Bill that the Australian Government has made significant new investments in medicines since the 2017-18 Budget, including:

$1.1 billion for Opdivo for lung and kidney cancer

$378.5 million for Stelara for Crohn's disease

$466 million for Ibrutinib for leukaemia and lymphoma. 53

Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible ‘as it does not raise any human rights issues’.54

44. PharmaDispatch, ‘Sector backs legislation’, PharmaDispatch website, 8 September 2017. 45. Consumers Health Forum of Australia (CHF), Medicare thaws, now time to take health reforms off ice, media release, 9 May 2017, p. 2. 46. A Tillett, ‘Chemists’ buffer zone becomes law’, The Australian Financial Review, 20 October 2017, p. 9. 47. Ibid.

48. W Beaumont, ‘Govt keeping drugs prices up says Chem Warehouse’, Pharma in Focus website, 8 August 2017. 49. CHF, Consumer voice for community pharmacy, media release, 22 June 2017, p. 1. 50. Explanatory Memorandum, National Health Amendment (Pharmaceutical Benefits - Budget and Other Measures) Bill 2017, p. 4. 51. Australian Government, Strategic Agreement [between the Commonwealth of Australia and Medicines Australia], op. cit., clause 6. 52. PharmaDispatch, ‘The deepening mystery of savings fund’, op. cit. 53. G Hunt (Minister for Health), ‘Second reading speech: National Health Amendment (Pharmaceutical Benefits—Budget and Other Measures)

Bill 2017’, House of Representatives, Debates, 18 October 2017, p. 11037. 54. The Statement of Compatibility with Human Rights can be found at pages 5-7 of the Explanatory Memorandum to the Bill.

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Parliamentary Joint Committee on Human Rights The Parliamentary Joint Committee on Human Rights considers that the Bill does not raise human rights concerns.55

Key issues and provisions Twenty-five per cent price reduction when the first competitor brand is listed Medicines with a single brand listed on the PBS (F1 medicines) currently take a 16 per cent price reduction when the first competitor brand is listed on the PBS. The mechanism in the Act is that the competitor brand takes the 16 per cent price reduction on listing, and this price reduction is flowed on to the original brand.56 As discussed earlier, both the original brand and the competitor brands then move to F2, where they become subject to price disclosure.

The Act also provides for single brand combination items (items containing more than one medicine, which are not listed on either F1 or F2) to take a 16 per cent price reduction when a competitor brand is introduced.57

Part 1 of Schedule 1 increases the price reduction when a first competitor brand lists from 16 to 25 per cent, in accordance with the MA agreement. Part 1 of Schedule 1 also introduces some exceptions to the application of the price reduction, including where the medicine has already taken a price reduction, or where the Minister uses their discretion not to apply part or all of the price reduction. As explained by the Minister in the second reading speech:

… the increased price reduction to be applied when a new, competing brand lists on the PBS can … be adjusted, taking into account previous price reductions that have applied to the medicine. On this basis, a statutory price reduction can be applied in full, in part, or not at all—depending on the amount of previous eligible reductions. The

new method will adjust, taper and cap reductions to ensure that price reductions since January 2016 do not exceed certain maximums. 58

Section 99ACB of the Act provides that the first competitor brand (other than a combination item) of a medicine must generally take at least a 16 per cent price reduction when it lists.

Item 12 of Schedule 1 repeals subsection 99ACB(5) and inserts proposed subsections 99ACB(4A),(5) and (5A) to provide that:

• if the price of the medicine has been reduced by 15 per cent or less since 1 January 2016 (or since first listing if it was not on the PBS on that date), then the 25 per cent price reduction applies or

• if the price of the medicine has already been reduced by more than 15 per cent but less than 40 per cent since 1 January 2016 (or since first listing if it was not on the PBS on that date) then only part of the 25 per cent price reduction will be applied (such that the final price will not be more than 60 per cent of the price on 1 January 2016 or on first listing).

Items 22, 28 to 30, 32 and 36 of Schedule 1 make similar amendments to sections 99ACD, 99ACE and 99ACF of the Act respectively to provide for price reductions of up to 25 per cent for combination items, and to flow the price reduction on to the original brand of the medicine.

Items 8, 20 and 26 of Schedule 1 amend subsections 99ACB(2), 99ACD(1A) and 99ACE respectively to provide that the 25 per cent price reduction will not be applied if the price of the medicine has already been reduced by 40 per cent or more since 1 January 2016 (or since first listing if it was not on the PBS on that date).

Item 14 of Schedule 1 inserts proposed subsections 99ACB(6A) to (6D) to provide that the Minister may use discretion to determine by written instrument not to apply, or to reduce the amount of, the 25 per cent (or part thereof) price reduction for the first competitor brand. The Minister must take into account what the price of

55. Parliamentary Joint Committee on Human Rights, Twelfth report of the 45th Parliament, The Senate, Canberra, 28 November 2017, p. 96. 56. National Health Act 1953, sections 99ACB, 99ACF and 99ACH. 57. Sections 99ACD and 99ACE. 58. G Hunt, ‘Second reading speech: National Health Amendment (Pharmaceutical Benefits—Budget and Other Measures) Bill 2017’, op. cit.,

p. 11036.

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the medicine would otherwise be if he or she did not make such a determination, and may take into account any other matter that he or she considers relevant.

Items 24, 34 and 38 of Schedule 1 make similar amendments to sections 99ACD, 99ACE and 99ACF of the Act respectively to provide the Minister with a discretion in applying 25 per cent price reductions for combination items and original brands of medicines. Please refer to the section on the Senate Standing Committee for the

Scrutiny of Bills for the Committee’s view on these items.

Section 99ACC of the Act provides for flow-on price reductions where a component medicine of a single brand combination item has taken certain statutory price reductions. Items 15 and 16 of Schedule 1 amend section 99ACC to provide that such flow-on price reductions can also be applied to component medicines that are not listed on the PBS, as though they had been listed on the PBS.

Return to 16 per cent price reduction in 2022 Part 2 of Schedule 1 commences on 1 July 2022, which is the day after the expiration of the Government’s five-year agreement with MA. The agreement provides that the 25 per cent price reduction when a first new brand lists will only apply until the end of the term of the agreement, after which the price reduction will revert to 16 per cent.59

Generally speaking, Part 2 repeals the amendments made by Part 1. In particular,Part 2 of Schedule 1 repeals the 25 per cent price reduction introduced by Part 1 of Schedule 1, and reinstates the existing 16 per cent price reduction when the first competitor brand of a medicine is listed on the PBS. Part 2 of Schedule 1 also removes the proposed provisions providing the Minister with a discretion not to apply part or all of the price reduction, and removes the provision that medicines will not have to take part or all of the price reduction if they have already taken a price reduction of more than 15 per cent.

However, the amendments made by items 15 and 16 of Part 1 of Schedule 1 are not repealed by Part 2 of Schedule 1. This means that flow-on price reductions for single brand combination items can continue to apply to both PBS listed and non-PBS listed component medicines in the item.

Anniversary price reductions Under sections 99ACF and 99ACHA of the Act, medicines listed on F1 currently take a five per cent price reduction when they have been listed for at least five years.60

Part 1 of Schedule 2 provides for further price reductions after 10 and 15 years on the PBS, as specified in the Government’s agreement with MA.61

Items 8 and 18 of Schedule 2 amend section 99ACF of the Act and insert proposed sections 99ACJ, 99ACK and 99ACL such that:

• medicines that have been on F1 for at least ten years will take a one-off price reduction of 10 per cent and

• medicines that have been on F1 for at least fifteen years will take a one-off price reduction of 5 per cent.

Each price reduction will be applied once on 1 April (between 2019 and 2021) after the relevant anniversary has been reached. Proposed section 99ACL is a catch up provision for medicines that have been on F1 for 10 years or more on 1 June 2018. These will take a 10 per cent price reduction on 1 June 2018, and if they have been on F1 for 15 years or more, this will immediately be followed by a 5 per cent price reduction.

Item 11 of Schedule 2 amends section 99ACF of the Act to provide that the Minister has a discretion to determine by written instrument not to apply, or to reduce the amount of, any of the anniversary price reductions. The Minister must take into account what the price of the medicine would otherwise be if he or she did not make such a determination, and may take into account any other matter that he or she considers relevant. Please refer to the section on the Senate Standing Committee for the Scrutiny of Bills for the Committee’s view on this item.

59. Australian Government, Strategic Agreement [between the Commonwealth of Australia and Medicines Australia], op. cit., clause 5.2. 60. National Health Act 1953, sections 99ACF and 99ACHA. Each medicine only takes this five per cent price reduction once, on the first 1 April (between 2016 and 2020) after it has been listed for at least five years. 61. Australian Government, Strategic Agreement [between the Commonwealth of Australia and Medicines Australia] , op. cit., clause 5.4.

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Section 99ACHA of the Act currently provides that an F1 medicine will take a five-year anniversary price reduction once, on the first 1 April (between 2016 and 2020) after it has been listed for at least five years. Item 17 of Schedule 2 amends subsection 99ACHA(2) of the Act to add two more dates on which medicines can take a five-year anniversary price reduction: 1 April 2021 and 1 April 2022.

The above amendments in Part 1 of Schedule 2 commence on the day after Royal Assent. Part 2 of Schedule 2 commences on 1 July 2022. Item 20 in Part 2 of Schedule 2 repeals the subsections inserted by Item 11 of Schedule 2. This means that the Minister will no longer have discretion not to apply, or to reduce the amount of, any of the anniversary price reductions after 1 July 2022.

Price disclosure price reduction thresholds As noted earlier, medicines on F2 are subject to price reductions via a mechanism known as price disclosure. Price disclosure requires the suppliers of certain PBS listed brands of medicines to disclose information to the Department relating to the price at which their brands are sold. The Government uses this information to move the Approved Ex-manufacturer Price (AEMP) closer to the price at which the medicines are supplied in the market.62 Price disclosure has been very successful in reducing the price the Government pays for off-patent medicines. However, concerns have been raised by the GBMA that price disclosure has made the prices for some generic medicines so low that suppliers may stop supplying them. According to the GBMA, in December 2016 the Government agreed to price increases for around 60 medicines where ongoing supply had been identified as at risk.63

The extension to the GBMA agreement and the MA agreement both specify measures to ‘ensure viability’ of medicines that have been subject to price disclosure for some time.64 These measures are implemented by Schedule 3 of the Bill.

Section 99ADC of the Act sets out the requirements for pharmaceutical companies to provide information about the sales and pricing of medicines on F2 as prescribed by the regulations.65 Subsections 99ADB(4) and (6) permit the Minister to use this information to determine the price at which the medicine is being sold in the market (the weighted average disclosed price or WADP) in accordance with the regulations.66 Section 99ADH provides that if, on a prescribed reduction day, the WADP is at least 10 per cent lower than the current approved price (the AEMP), then the AEMP is reduced to the WADP. That is, the medicine’s approved price is reduced to match the price it is actually being sold into the market.

Item 4 of Part 1 of Schedule 3 amends section 99ADH such that the AEMP will only be reduced:

• if the medicine has been on F2 for less than 42 months, if the price difference is at least 10 per cent or

• if the medicine has been on F2 for at least 42 months, if the price difference is at least 30 per cent (unless the medicine has already taken two consecutive price disclosure price reductions of at least 30 per cent, in which case the threshold for further reductions reverts to a 10 price difference).

This will have the effect of protecting medicines that have been on F2 for some time from further price disclosure price reductions, unless there is still a large (at least 30 per cent) difference between the approved price and the market price of the medicine.

The above amendments in Part 1 of Schedule 3 commence the day after Royal Assent. However, Part 2 of Schedule 3 (which commences on 1 July 2022) then proposes to repeal almost all the amendments made by Part 1 of Schedule 3. In particular, Item 11 of Part 2 of Schedule 3 repeals the amendments made by item 4 of Part 1 of Schedule 3, and restores the provision that price disclosure price reductions will apply when the difference between the approved price and the market price is at least 10 per cent.

62. DoH, Pharmaceutical Benefits Scheme price disclosure arrangements: procedural and operational guidelines, op. cit., p. 8. 63. PharmaDispatch, ‘Sector slams 'misleading' Grattan Institute report’, op. cit. 64. Australian Government, Strategic Agreement [between the Commonwealth of Australia and Medicines Australia], op. cit., clause 9.1; GBMA, Strengthening PBS measures to support generic and biosimilar medicines uptake, op. cit., p. 2.

65. National Health (Pharmaceutical Benefits) Regulations 2017, section 85. 66. The method for calculating the WADP is set out in sections 70 to 82 of the National Health (Pharmaceutical Benefits) Regulations 2017.

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Pharmacy location rules As noted earlier, pharmacists who wish to dispense PBS medicines from a particular location must seek approval under section 90 of the Act. Most requests for approval are referred to the Australian Community Pharmacy Authority (ACPA), unless they relate to a pharmacy that is remaining at the same premises but changing ownership or size.

Section 99K of the Act provides that the ACPA can only recommend that an application be approved if it complies with the pharmacy location rules. The current rules, as agreed between the Guild and the Australian Government under the 6CPA, are determined by the Minister under the Act.67

Under subsection 90(3C) of the Act, the provisions in the Act for referring applications to the ACPA cease to have effect at the end of 30 June 2020. Item 1 of Schedule 5 proposes to repeal subsection 90(3C), thereby removing this sunset clause.

Division 4B of Part VII of the Act, which provides for the establishment and operation of the ACPA and requires the Minister to determine the pharmacy location rules, also ceases to have effect at the end of 30 June 2020, as a result of section 99Y of the Act. Item 2 of Schedule 5 proposes to repeal section 99Y, thereby removing this sunset clause.

The effect of these amendments is to allow arrangements for the pharmacy location rules to continue in perpetuity (subject to the relevant determination being remade).68 This is consistent with the Government’s compact with the Guild to continue the rules beyond the life of the 6CPA.69

The controversial nature of the pharmacy location rules is discussed in the ‘background’ and ‘position of major interest groups’ sections of this Digest. The Guild believes the rules provide certainty and stability for pharmacy owners, which is currently threatened every five years when the new community pharmacy agreement is negotiated. A Guild spokesman has pointed out that ‘[r]emoving the sunset clause does not prevent a future government from legislating either to remove the location Rules, or improving the rules to address any anomalies or meet the changing needs of consumers’.70 However, Professor Ian Harper, whose 2015 Competition Policy Review was one of many reports to criticise the rules, ‘told The Australian Financial Review there were more efficient ways of ensuring patients were able to access prescription medicines than relying on location rules to curtail competition’.71

Prescribing by medical practitioners Section 88 of the Act provides that medical practitioners can write a prescription for any generally listed PBS medicine, but that dental practitioners, optometrists, midwives and nurse practitioners can write a prescription for any generally listed PBS medicine determined by the Minister.

Item 2 of Schedule 8 repeals and inserts a new subsection 88(1) of the Act to provide that medical practitioners can prescribe any generally listed PBS medicine determined by the Minister. According to the Explanatory Memorandum, this is not intended to limit prescribing by doctors, but rather to allow superseded PBS medicines to remain available for supply only, but not prescription. This would save patients from having to obtain a new prescription when their medicine has been replaced by a similar product:

New subsection 88(1) is not intended to be used as a restriction on medical practitioner prescribing. It is intended that all items available to medical practitioners for prescribing and subsequent supply prior to this amendment would remain available to them. Rather, the amendment to subsection 88(1) is to facilitate the retention of a pharmaceutical benefit on the PBS for supply-only purposes when it would otherwise have been de-listed from the PBS for all purposes. This would be done by removing the pharmaceutical benefit from the class of drugs

67. National Health Act 1953, section 99L. The current pharmacy location rules are in the National Health (Australian Community Pharmacy Authority Rules) Determination 2011 (PB 65 of 2011). 68. The National Health (Australian Community Pharmacy Authority Rules) Determination 2011 (PB 65 of 2011) containing the pharmacy location rules sunsets on 1 October 2021. See section 50 of the Legislation Act 2003. 69. Australian Government, Strengthening PBS Agreement with Pharmacy Guild to vary the Sixth Community Pharmacy Agreement, op. cit., p. 2. 70. A Tillett, ‘Chemists’ buffer zone becomes law’, op. cit. 71. Ibid.

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determined by the Minister under subsection 88(1) as able to be prescribed by a medical practitioner (and restricting prescription by any other class of PBS prescribers who previously could prescribe the benefit). 72

However, it appears that this provision could theoretically be used in the future to place limits on the generally listed PBS medicines that can be prescribed by medical practitioners. No stakeholder comment on this provision has been identified.

Item 4 of Schedule 8 inserts new subsections 88(1EA) and 88(1EB). New subsection 88(1EA) provides that the Minister must have regard to any advice from the PBAC when determining which health professionals are allowed to prescribe a particular PBS medicine. New subsection 88(1EB) provides that the Minister is not required to determine that at least one kind or prescriber can prescribe a particular PBS medicine, thus allowing a medicine to remain on the PBS for supply only, but not for prescription.

Other provisions Schedule 4 amends the Act to provide for a new presentation of an F1 medicine by the same manufacturer to be listed on the PBS without triggering the first competitor brand price reduction, in certain circumstances.

Schedule 6 makes minor amendments to allow for more than one name for the same medicine to be used for PBS purposes.

Schedule 7 makes minor and technical amendments to the operation of the PBS safety net.73

Schedule 9 makes minor amendments to the collection of prescription data from pharmacists.

These amendments are relatively minor in nature and are adequately explained by the Explanatory Memorandum.

Concluding comments The Bill increases statutory price reductions for both patent and off-patent PBS medicines. The larger price reductions are expected to generate around $1.8 billion in savings for the Government, until they are repealed by the Bill on 1 July 2022. The savings have been agreed with the pharmaceutical industry and seem to have widespread support. The Government has agreed to use the savings to support the listing of new medicines on the PBS. The Bill also repeals the sunset clause for the pharmacy location rules. This removes pressure from the Guild to renegotiate the continuation of the rules every five years. The rules have often been criticised for reducing competition between pharmacies, but it appears that they continue to enjoy bipartisan support.

72. Explanatory Memorandum, op. cit., p. 51. 73. For further information about the PBS safety net, see DHS, ‘Pharmaceutical Benefits Scheme (PBS) Safety Net’, DHS website, last updated 27 August 2017.

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