PBS Reforms The Need for a Measured Approach

Dr Teresa Nicoletti

Partner, Piper Alderman Senior Member, Administrative Appeals Tribunal

Phone : 02 9253 9946

Email: tnicoletti@piperalderman.com.au

Outline of Presentation

!   Why reform?

!   Impact of PBS reforms

!   How have the measures affected stakeholders?

!   Finding the right balance

!   Conclusion

Why reform?

A sustainable PBS

!   Government must be able to sustain cost of PBS !   Sustainability concerns continuing “ability to pay”

or “affordability”

!   What is the Government concerned about? >  Ability to pay

> Willingness to pay

!   Or is it both?

What is “Sustainability”?

!   Key considerations >  Demand and supply

>  Can the government allocate sufficient resources to meet its obligations (fiscal balance)

>  Spending as a proportion of GDP (economic stability)

!   Government’s ability to pay and willingness to pay in the face of rising costs and resource constraints

Impact of PBS Reforms

Drivers of PBS Costs

!   Advances in technology >  Account for between 50-75% of all growth in

health care spending

!   Ageing population

!   Increases in chronic disease

!   Growth of preventative medicine

Drivers of PBS Costs

!   Leakage/off-label use !   Rising income and consumer expectations

>  Access to medicines

>  Access to the latest technology –  Newer, more targeted drugs

–  Fewer side effects

>  Range of options to choose from

Economic impact of PBS spending

!   In the context of GDP

!   Measure of the total health of the economy

!   Sum of Consumption, Investment, Government Spending and Net Exports

>  Government spending as a proportion of GDP –  Total government expenditure on health

Ø  PBS expenditure

Economic impact of spending on health !   Health spending contributes to social welfare, but

so does education, food and leisure

!   Opportunity cost of resources allocated to healthcare equals value that would have been gained from allocating those resources to their best alternative use

!   If healthcare consumes an increasing share of GDP, resources are being directed from other valued activities

!   Do welfare gains from higher spending outweigh opportunity cost of not spending those resources elsewhere?

Economic impact of PBS spending !   PBS spending contributes to improved health and

welfare

!   But so does Medicare subsidy, spending on Aged Care and other areas of health

!   If the PBS consumes an increasing share of the health budget, less resources for spending in other areas

!   Opportunity cost of allocating health budget to PBS equals the value that would have been gained from allocating those resources to other areas of health

!   Do gains from PBS expenditure outweigh opportunity cost of not spending those resources in other areas of health?

PBS Expenditure against GDP Table 2 : PBS Expenditure v GDP

Sources: Department of Health Annual Report, PBPA annual report, Australian Institute of Health and Welfare, Australian Government website

Year ending June 2009 2010 2011 2012 2013

GDP ($ billion) ^ 1037 1321 1583 1636 1580

∆ GDP (%) 5.54 27.39 19.83 3.34 -3.42

PBS Expenditure* ($ Billion)

7.66 8.34 8.87 9.19 9.00

∆ PBS Expenditure (%)

8.83 8.97 6.36 3.62 -2.15

PBS Expenditure as

% of GDP 0.85 0.63 0.56 0.56 0.56

PBS Expenditure Trends

0.00

2.00

4.00

6.00

8.00

10.00

FY 00/01

FY 01/02

FY 02/03

FY 03/04

FY 04/05

FY 05/06

FY 06/07

FY 07/08

FY 08/09

FY 09/10

Ann

ual P

BS

Expe

nditu

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($ b

illio

n)

Financial Year

PBS Expenditure over the Past Decade

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

FY 03/04 FY 04/05 FY 05/06 FY 06/07 FY 07/08 FY 08/09 FY 09/10 FY 10/11 FY 11/12 FY 12/13

Ann

ual P

BS

Expe

nditu

re ($

bill

ion)

Financial Year

PBS Expenditure over the Past Decade

PBS Expenditure Trends

-5

0

5

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25

FY 03/04 FY 04/05 FY 05/06 FY 06/07 FY 07/08 FY 08/09 FY 09/10 FY 10/11 FY 11/12 FY 12/13

% C

hang

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Financial Year

Change in PBS Expenditure over the Past Decade

PBS Expenditure against Govt Health Expenditure

Table 4. PBS v Department of Health and Ageing Portfolio & Treasury Expenditure on Health

Sources: Department of Health Annual Reports, PBPA Annual Reports, Australian Institute of Health and Welfare

Expenditure 2009/10

Expenditure 2010-11

Expenditure

2011-12

TOTAL DoHA portfolio ($ billion) 121.4 132.6 140.2

Pharmaceutical Benefits Scheme ($ billion) 8.34 8.87 9.19

PBS expenditure as a Proportion of DoH Portfolio (%)

6.87 6.69 6.55

DoHA Expenditure as a Proportion of GDP (%)

9.19 8.39 8.57

Health Expenditure of OECD Countries

Countries Range of Total Expenditure on Health relative to GDP from 2000-2013

Australia 8.1 – 9.0%

Canada 8.8 – 11.4%

Germany 10.4 – 11.8%

Japan 7.6 – 9.6 %

Switzerland 9.9 – 11.3%

United Kingdom 7.0 – 9.9%

United States 13.7 – 17.7%

Table 1. Total Health Expenditure as % GDP+

+Adapted from: OECD Health Data – www.oecd.org

What does it all mean?

!   In the past 3 financial years: >  GDP has remained the same

>  PBS expenditure has increased by 15% in dollar terms

–  But PBS expenditure in 2013 decreased in dollar terms from 2012 expenditure

>  PBS expenditure as a percentage of GDP has not changed

>  PBS expenditure as a proportion of DoH expenditure has decreased by 4.66%

What does that tell us?

!   PBS expenditure as a percentage of GDP has remained stable

!   PBS expenditure stable as a percentage of overall expenditure on health

!   This is in the face of the sustainability measures that have been introduced

!   Would indicate that reform measures have had the desired effect

How have measures affected stakeholders?

Government

!   Key beneficiary of PBS reforms

!   Overwhelming majority of the savings (94%) estimated to accrue to Government

!   Manufacturers (innovators and generics) estimated to contribute bulk of savings

Government

!   2007 PBS Reform package estimated to deliver $14.5 billion in savings to Govt and consumers to 2017-18

!   2010 PBS Reform will deliver an additional $3.4 billion in savings in same period

!   2010 price disclosure reforms saved $1.9bn in the first year

Government

!   Price changes in 2012-13 and ongoing due to 2010 reforms will save approx $4 billion

!   In FY13, Govt saved $661.3m from 2010 reforms

!   Annual PBS expenditure decreased for the first time (from 9.19 in FY12 to 9.00 million in FY13)

Government

!   Treasury’s MYEFO shows that expenditure on PBS in 2013-14 will be $526 million lower than budgeted

!   Overall savings from 2010 PBS Reforms from 2010-2015 estimated to be approx $1.8 billion

Supply Chain Impact

!   Revenue foregone by stakeholders from the 2010 PBS reforms

Adapted from Dr K Sweeny, “Impact of Further PBS Reforms”, Report to Medicines Australia, Centre for Strategic Economic Studies, Victoria University May 2013

Wholesalers

!   ↓ in agreed manufacturers’ prices

!   Wholesaler margins ↓ due to reduction in dollar value of wholesaler mark up

!   Estimated to lose approx $116m in revenue from FY11 to FY15 due to 2010 reforms

Innovator companies

!   Negative impact on innovator companies as manufacturers

!   ↓ in manufacturer component of PBS prices

!   Depends if innovator has a majority of drugs still on the F1

!   Off-patent innovator brands to lose $883.7m in revenue from FY11 to FY15 as a result of 2010 PBS reforms

Generic Companies

!   Affected by price disclosure rules given that all of their drugs are in F2 formulary

!   Despite more generics entering market, generic sector experienced decline in sales revenue

!   Estimated to lose $654.8m in revenue from FY11 to FY15 as a result of 2010 PBS reforms

Access to Medicines

!   Access to low-cost medicines has improved

!   Off-patent medicines cheaper for consumers

!   Decline in number of new innovative medicines listed on PBS since 2009-2010

!   Access to innovative medicines hit an historic low in 2011-12 (cf past 20 years)

>  Is it too expensive to bring a drug to market, when compared to price Govt is willing to pay?

>  Is process of obtaining reimbursement more difficult?

Patients !   Patients stand to save 6% due to the 2010 PBS reforms

!   Positive flow-on effects from statutory price reductions

!   Flow-on effects from price disclosure

!   No evidence that manufacturers have offset statutory price reductions through increased prices

!   Price-to-pharmacist is lower

!   Price pharmacist charges consumer is lower

!   Increased access to F2 medicines

!   Increased access to cost-effective medicines

!   Counter-argument of threatened access to new medicines due to unfavourable pricing environment

Pharmacies

!   Pharmacy Guild estimates reduction of $90,000 off bottom line

!   Decreases in PBS remuneration due to price disclosure and price reductions

!   Reduction of Govt funding for mark-up

!   Loss of trading terms

!   Increase in costs to pharmacy passed down from wholesalers

Finding the right balance

Sustainability Issues – Real or Perceived?

!   Yes, but the reforms appear to be working

!   PBS expenditure under control

!   Stable as a percentage of GDP

!   Stable or decreasing as a percentage of overall spending on health

!   Market competition in the generics sector has created more headroom for innovative drugs

Need for a measured approach

!   Impact on all stakeholders must be considered before implementing PBS reforms

!   PBS spending should be weighed against other health costs and other government expenditure

!   Fundamentally, if a medicine returns more in terms of health and economic benefit than it costs, then expenditure should be justified and sustainable

!   Indiscriminate costs may increase rather than increase pressure

Is access to medicines in jeopardy?

!   Possible long term implications of extreme PBS reforms and cost cuts

>  Less incentive to introduce new medicines

>  Compromised industry due to constant downward pressure on price

>  Companies less willing or able to do business due to cost pressures

–  Less suppliers in the market to meet whole of supply

–  Impact on jobs in pharmaceutical industry

>  Local research and manufacturing expertise to go off-shore

Conclusions

Conclusions

!   Sustainability of the PBS is a real issue

!   PBS and health expenditure are stable

!   BUT this is in the face of a number of sustainability measures already implemented

!   Effect of PBS reforms is ongoing – still to see long-term effect of these

>  The next 2-3 years will be interesting

!   Ad hoc measures introduced without consultation undermine industry’s confidence in government

Conclusions

!   Need to be mindful that ongoing downward pressure on price may have long term detrimental effects:

> Reduced access to medicines

> Reduced business in Australia

!   Government and industry ought to work together to find a balance between sustainability measures and long-term viability of the sector