[Ip-health] Australian PBS cost-cutting options go to cabinet

[Ken Harvey]

PBS cost-cutting options go to cabinet
Author: Annabel Stafford
Date: 11/01/2006

Publication: The Financial Review, Page: 4

Revenue to drug companies and pharmacists could be slashed under new
plans for the PBS, Annabel Stafford writes.

Concession card holders would pay 50 per cent less for medicines and
general patients 25 per cent less under radical plans to change
Australia's Pharmaceutical Benefits Scheme which could save the
government as much as $830 million a year.

The government is seriously considering two options for PBS reform that
would allow competition among generic drug manufacturers once the patent
on a branded medication expires, according to a government source.

A committee of senior bureaucrats will submit its findings on PBS reform
options to cabinet in February. Any changes are likely to be implemented
as part of this year's budget.

Documents seen by The Australian Financial Review show that under both
preferred options, once the patent on a branded medicine expires generic
manufacturers would compete to provide the lowest cost generic to the
government. Under the current system, generic medicines get the same
price as the branded medicine as long as they can demonstrate they have
the same health outcome.

In both scenarios, the manufacturer that offers the lowest price drug
would get an exclusive period during which they could offer patients
massively discounted co-payments - the amount patients contribute
towards the cost of PBS drugs - for that drug.

Under the first option, the prices of all other drugs in the same
therapeutic group would be reduced to match the price of the winning
tenderer's drug. But only the winning tenderer would be allowed to offer
patient discounts, making their drug 50 per cent cheaper for
concessional patients and 25 per cent cheaper for general patients for
the three-year tender period. This model, understood to be preferred by
the Health Department, is expected to save as much as $830 million a year.

Under the other proposal, the winning manufacturer would get six months
during which they alone could offer patients a discount. The price of
other drugs in the therapeutic group would not be forced down to match.
But at the end of the six months any other manufacturer that did drop
its price to match would also be allowed to offer the discount. This
option is expected to save up to $370 million a year and is believed to
be favoured by the Department of Industry.

Under this proposal, even for drugs that didn't drop their price after
six months, some price parity would remain. For example, if at the end
of the six months the generic drug cost $50 and the patented version
$100 and the generic reduced its price by another 10 per cent to $45,
the patented drug would also be forced to lower its price by 10 per cent
to $90.

The $15 billion medicine industry is lobbying furiously against both
options, which could slash revenues of innovative drug companies - which
manufacture about two-thirds of the off-patent drugs in the market - and
of generic companies, which until now have enjoyed relatively high
prices for their drugs.

Pharmacists, who are set to lose the generous discounts they currently
get from generic manufacturers, are also fighting the changes.

In a December 2005 newsletter to the Queensland branch of the Pharmacy
Guild of Australia, national president Kos Sclavos admitted that "the
current discounts that pharmacists enjoy from generic companies would
largely disappear" under the tendering system.

Last year, the generic company Hexal offered pharmacies 45 per cent and
55 per cent discounts on seven different medicines, according to a
pricing sheet obtained by the AFR.

Medicines Australia CEO Kieran Schneemann said the innovative drug
industry supported cutting the link between the price of generics and
the price of innovative medicine.

But even the Industry Department model, which to some extent delinks
prices, could still devastate the industry if it were implemented
overnight, because many innovator companies rely on revenues coming from
off-patent medicines which would suddenly face tough new competition
from offshore generic manufacturers.

WHAT THE OPTIONS ARE

? When a drug comes off patent, the generic manufacturer that offers the
government the lowest price for a copycat version can offer patients a
lower co-payment for three years. The price of all other drugs in the
class are forced down to match. Savings: up to $830m a year.

? When a drug comes off patent, the generic manufacturer that offers the
government the lowest price can offer patients a discounted co-payment
for six months. The price of other drugs in that therapeutic class are
not forced down to match. Savings: up to $370m a year.

? Modelled on the New Zealand system where manufacturers tender to
become the sole provider of a government-subsidised drug in a particular
therapeutic class. Other drugs available only through the private
market. Savings: up to $850m a year. This option is not believed to be
under serious consideration.

? Each time the sales volume of a generic drug rises 10pc, the
manufacturer offers a 1pc price discount to the government. Savings: up
to $120m a year. This option is not believed to be under serious
consideration.
---