Health - Pharmaceuticals and pharmacy

Budget Review 2010-11 Index

Budget 2010–11: Health

Pharmaceuticals and pharmacy

Rebecca de Boer

Pharmaceutical policy in Australia is a highly contested space fuelled by debates over listing and pricing of medicines, costs to the consumer and persistent concerns over the long-term sustainability of the Pharmaceutical Benefits Scheme (PBS). Changes to the PBS and the finalisation of the Fifth Community Pharmacy Agreement (5CPA) announced in the Budget are expected to deliver the Government net total savings of $2.5 billion between 2010–11 and 2014–15.[1] The Government has signed a Memorandum of Understanding (MOU) with Medicines Australia which is designed to ensure ‘a stable environment for business and continued access to new medicines for all Australians’.[2] The 5CPA provides more than $15.4 billion over the next five years (2010–11 to 2014–15) to pharmacists to ensure the timely and reliable supply of PBS medicines and other professional services. According to the Government, this also represents a saving of $1.0 billion across the forward estimates.[3] Although measures announced in this Budget are predicted to garner the Government $1.9 billion of savings over five years, the MOU with Medicines Australia also includes a guarantee that the Government will not seek to impose any further price savings on the pharmaceutical industry before 30 June 2014 or introduce any measure which favours the dispensing of generic medicines, thereby possibly precluding further measures which could deliver additional savings to the Government.

Changes to the Pharmaceutical Benefits Scheme

This Budget extends the PBS reforms of the 2006 PBS Reform package. When first announced, the PBS Reform package was expected to save more than $580 million over the succeeding four years and more than $3 billion dollars over 10 years.[4] These savings have since been revised down to $103 million over four years. This may be in part due to the high cost of the structural adjustment package ($359.3 million to date).[5]

The PBS Reform package signalled a radical change to the PBS. Key features included the creation of two separate formularies, Formulary 1 (F1) and Formulary 2 (F2), the imposition of price cuts for products listed on F2, and the introduction of price disclosure arrangements for products listed on F2. F1 are ‘single brand’ medicines (only one medicine of its type listed on the PBS) and typically includes patented drugs. No price cuts were applied to products listed on F1. Products listed on F2 had multiple brands and typically include medicines that are interchangeable at the patient level and where generic drugs are available. Perhaps the most significant change was the ‘de-linking’ between F1 and F2. This effectively shielded most patented products from being subject to the price cuts that would previously have flowed from the expiry of the patents on products to which they were cost-minimised at the time of their original PBS listing.

This Budget contains plans for further pricing changes to medicines listed on F2, with expected savings of $1.9 million over five years.[6] These measures are the outcome of negotiations between Medicines Australia and the Department of Health and Ageing reflected in the MOU.[7] The MOU brings forward implementation of price disclosure arrangements to October 2010 from January 2011 and captures all products on F2. Price disclosure was previously agreed in the context of the 2006 reform package. However, it was only applied at the time of listing of a new brand on F2 and therefore was voluntary for existing products. Price disclosure was designed to ensure that the Government reaped the benefits of the discounting arrangements between pharmacists and wholesalers. Manufacturers are required to disclose the actual price at which medicines are supplied to wholesalers and/or pharmacists. Price reductions occur if there is a difference of more than ten per cent between the weighted average disclosed price and the price paid by the Government.[8]

The MOU also provides agreement that further statutory price reductions would be applied to F2 listings. There are two sub-groups on F2, Formulary 2A (F2A) and Formulary 2T (F2T), which will be combined from 1 October 2010. The following pricing arrangements will apply:

  • the statutory price reduction of 12.5 per cent when a product moves from F1 to F2 will be increased to 16 per cent
  • products formerly listed on F2A will be subject to a 2 per cent reduction on 1 February 2011, as well as the scheduled reduction of 2 per cent on 1 August 2011 and
  • products formerly listed on F2T will be subject to a 5 per cent reduction on 1 February 2011.

These price cuts will be applied in addition to any reductions that occur as a result of price disclosure. In short, generic medicine manufacturers and pharmaceutical wholesalers are likely to be most affected by this MOU, while the originator sector remains largely protected.

Other features of the MOU include:

  • improved access to information held by the Commonwealth by Medicines Australia. This is of particular note as the MOU does not require Medicines Australia to reciprocate
  • a guarantee that the Commonwealth will not amend the existing provisions for exemption from price disclosure
  • a minimum price reduction of 23 per cent as a result of price disclosure arrangements
  • greater transparency for price disclosure arrangements
  • a commitment from the Commonwealth that no new Therapeutic Groups will be formed, other than in limited circumstances[9]
  • sponsors will be provided with ‘reasonable notice’ of any additions to existing Therapeutic Groups
  • an undertaking by the Commonwealth that it will not introduce any measure that favours the prescribing or dispensing of generic drugs over originator brands of the same drug, without the agreement of Medicines Australia
  • parallel Therapeutic Goods Administration (TGA) and Pharmaceutical Benefits Advisory Committee (PBAC) evaluation processes
  • other arrangements to reduce the time between a positive recommendation by the PBAC and approval by the Minister
  • the development of a so-called ‘managed entry’ mechanism to facilitate the PBS listing of products for which there is limited evidence of cost-effectiveness and
  • a commitment to ‘work together’ formally on matters such as pricing.


Despite the obvious support from Medicines Australia, this announcement has generated considerable consternation within the pharmaceutical supply chain in Australia. Generic manufacturers, wholesalers and some pharmacists in particular have expressed outrage at the lack of consultation and argue that these measures will result in significant cuts to their revenue.[10] The Pharmacy Guild of Australia cautiously welcomed the ‘increased certainty’ for community pharmacy.[11] The Generic Medicines Industry of Australia (GMIA) expressed disappointment that its savings proposals had been ignored.[12]

There is no doubt that the pricing of generic medicines in Australia represents a significant policy challenge. There is a case for price reductions as the prices of generic medicines in Australia are high by international standards. However, the MOU, while offering some mechanistic savings, does little to re-engineer the market. Commentators anticipate that the Australian Government is therefore likely to continue to pay high prices for generic medicines.[13] The MOU also prevents the Government from introducing any additional price cuts or new policy proposals beyond those agreed, further limiting the capacity of the Government to garner savings from the anticipated market entry of generic versions of several big ticket PBS medicines over the next five years.

Furthermore, the record shows that, to date, implementation of price disclosure arrangements has been fraught with both administrative complexity and legal challenge.[14] The extension of price disclosure arrangements to all products listed on F2 is likely to create an additional administrative burden for Government. As there is the likelihood of limited returns for products that are either low volume, low value or have been listed on the PBS for a considerable period of time (many of which are already subject to discounting arrangements), one might question whether these administrative costs will outweigh the benefits.

Questions have also been raised about the effectiveness of price disclosure in a market which is not fully competitive.[15] International experience suggests that price disclosure arrangements are notoriously challenging to implement and are often circumvented.[16] In Australia there is a delay of six months from the date of the price determination to when it takes effect for existing products. A price reduction associated with the listing of a new brand typically takes two years to take effect.[17] These delays would limit the savings the Government is able to achieve under this proposal. The value of extending the price disclosure arrangements therefore remains to be seen.

The PBS reform package was introduced in 2007 in part to curb the nominal growth of 12 per cent per annum in PBS expenditure that had occurred between 1995 and 2004.[18] In 2009–10 the PBS is expected to grow by 10.6 per cent, following a 9.2 per cent growth in 2008–09. Governments of all persuasions remain concerned about programs with high growth rates and the PBS is no different. Some stakeholders have suggested that the MOU provides ‘certainty’; however, there would appear to be no such certainty for Government. The MOU does not contain a guarantee that savings will be realised and it limits the capacity of the Government to introduce new measures that potentially offer greater value for money in PBS expenditure. Given that the estimated savings from the previous reform measures have reduced from $540 million to $103 million over four years, it remains to be seen whether the projected savings of $1.9 billion over five years will be realised.

Furthermore, these price cuts require legislative amendment and the position of the Opposition and the minor parties is not yet clear.[19] The 2009–10 Budget included a proposal to create a therapeutic group for two cholesterol-lowering drugs that had previously been exempt from therapeutic pricing arrangements.[20] This was subject to significant opposition from Medicines Australia and the federal Opposition. It culminated in a disallowance motion and a referral to the Senate Committee on Community Affairs for inquiry. To date, the Senate Committee has not yet reported, but the disallowance motion has been passed.

Fifth Community Pharmacy Agreement

The Government has consistently highlighted the need to ‘carefully consider’ health expenditure in light of the ‘Government’s significant reform agenda’.[21] During the negotiations for the Fifth Community Pharmacy Agreement (5CPA), Minister Roxon approached the Pharmacy Guild of Australia (the Guild) to advise that the Government would demand ‘significant savings’ from the 5CPA.[22] In late December 2009, the Government announced that agreement on the key areas of the 5CPA had been reached, with a total value of $15.1 billion over five years, and with savings of $1.0 billion over the forecast funding for community pharmacy.[23] The 5CPA was finalised on 3 May 2010 and the full details have been released with this Budget. The total value of the 5CPA is now $15.4 billon, around $300 million higher than originally announced. The projected savings are unchanged, highlighting the strong negotiating skills of the Guild.

With one notable exception, the 5CPA does not appear to materially differ from past agreements. Many of the provisions in the 5CPA, such as the Home Medicines Review and Residential Medication Management Reviews, seek to refine and improve existing arrangements. There is also provision to improve services for Aboriginal and Torres Strait Islander people, more support for pharmacies that supply Aboriginal Health Services and the Aboriginal and Torres Strait Islander pharmacy workforce.[24] Other features include Rural Pharmacy Programs which are designed to provide a number of incentives and support for the rural pharmacy workforce and improve access and availability of services for those living in rural areas. Some Pharmacy Practice Incentive Program payments will now be subject to accreditation and demonstrated delivery of defined services which are designed to promote the quality use of medicines.

The notable exception is that pharmacists will be allowed to dispense a single standard pack of medicines to patients without prescription, known as ‘medication continuance’ (subject to legislative change in all States and Territories).[25] It is envisaged that this will initially apply to two therapeutic categories, oral contraceptives and lipid modifying agents (cholesterol-lowering drugs).[26]  The Australian Medical Association considers this would be ‘putting patients at risk’, arguing that there was no evidence to suggest that it was safe for pharmacists to dispense medication without a prescription or any review of the patient’s condition.[27] Others have described the program as a ‘pragmatic’ way to ensure medication adherence as pharmacists will only be able to dispense prescriptions in limited circumstances, such as the inability to make an appointment with a general practitioner.[28]

Three features of the 5CPA which benefit pharmacy remain relatively unchanged from previous agreements and each of these is not without controversy—the location rules, the continuation of the wholesaler Community Service Obligations payment in full (with a pause on indexation until 2011), and a dispensing fee for each PBS prescription dispensed. A new fee has also been added. This provides for $0.15 per transaction to be paid to pharmacists dispensing scripts under the Repatriation Pharmaceutical Benefits Scheme (RPBS) and under co-payment prescriptions that are generated electronically.[29] This is expected to cost around $75.5 million during the life of the 5CPA.

The retention of the community pharmacy location rules includes the prohibition on a community pharmacy being co-located in a supermarket. The location rules were first introduced in 2000 as part of the Third Community Pharmacy Agreement and were amended in 2004 to prevent supermarkets from operating pharmacies.[30] Critics have argued that these arrangements 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] Due to the location rules, there are limited opportunities to open a pharmacy in most capital cites and major towns, resulting in a concentration of ownership and a relatively constant number of pharmacies across Australia since 1990.[32]

Prior to the negotiations, media reports had suggested that the Government was prepared to ‘reassess’ the location rules.[33] It was argued that population growth and lack of competition within the sector warranted a systematic review. The preservation of location rules, however, does raise questions about the influence of the Guild and why, despite widespread deregulation and increased market competition in the broader economy, pharmacy continues to be protected by successive governments.

Both pharmacists and wholesalers were given significant compensation arrangements under the PBS Reform package introduced in 2007. Pharmacists were eligible for a $0.40 payment for each script dispensed under PBS Online and a $1.53 payment (indexed annually) for the dispensing of ‘premium free’ medicine.[34] The wholesaler Community Service Obligation (CSO) pool was increased to $69 million over three years from 1 July 2008.[35] Although the PBS Online incentive has been scrapped, the $1.53 payment is likely to generate significant income to pharmacists. This payment generated $112 million (over 75 million scripts) for pharmacists from 1 August 2008 to 31 July 2009.[36] Given the indexation arrangements, this amount will continue to increase during the 5CPA. This payment essentially provides pharmacists additional income for a task which is already remunerated by the dispensing fee. Furthermore, it is not contingent on the supply of a generic medicine or activities associated with the quality use of medicines, raising questions about the ‘value for money’ to government and consumers in this additional payment. Similar arguments could be made about the continuation of the wholesaler CSO payment as it provides additional funding to eligible wholesalers to ensure the timely supply of the full range of PBS medicines. The pricing of PBS medicines includes specific provision for a wholesaler margin which remunerates wholesalers for the supply of PBS medicines.

The introduction of a $0.15 payment for each transaction to pharmacists for dispensing RPBS prescriptions and for co-payment prescriptions is designed to offset some of the costs charged to pharmacists by electronic prescription providers.[37] This electronic prescribing program is owned by the Guild and therefore uptake among Guild members is likely to be high, potentially increasing costs to the Government. Currently, pharmacists are charged $0.25 for each transaction.[38] This program is expected to generate income of $30 million per annum to the Guild and, under the 5CPA, the Government will pay $18 million.[39] Other online initiatives, such as PBS Online, have had a much higher uptake than expected, at a considerable additional cost to the Government.[40] This arrangement has also been criticised on the grounds that, as the Government has abandoned its electronic prescribing project, the Guild will have an advantage in the current market and any future policy considerations.[41]

The 5CPA reinforces the fee-for-service model for community pharmacy. This is in direct contrast to many of the reforms announced as part of the National Health and Hospitals Network which signal a shift from fee-for-service to block funding for the provision of services. Pharmacists are essential to the timely provision of PBS medicines, yet this does come at a cost to Government. It remains to be seen whether the projected savings will be realised, if consumers will benefit from the proposed changes to existing programs and how pharmacy will be integrated into the proposed Medicare Locals, the National Health and Hospitals Network and the new payment arrangements.

Concluding comments

Both the MOU and the 5CPA are expected to deliver considerable savings to the Government, but there is no requirement in either agreement that these savings be delivered, or any indication what the consequences might be if the projected savings are not realised. Both agreements limit the action of the Government for the next five years, creating certainty for the branded pharmaceutical industry and pharmacists, but potentially limiting the capacity of Government to respond to new and emerging policy challenges.

The overarching policy framework for the PBS is the National Medicines Policy and the objectives of access, equity and affordability. It remains to be seen whether the MOU and the 5CPA advance these objectives.

[1].    The budget figures and policy  details in this brief have been taken from the following document unless otherwise sourced: Australian Government, Portfolio budget statements 20010–11: budget related paper no. 1.11: Health and Ageing Portfolio, Commonwealth of Australia, Canberra, 2010.

[2].    Medicines Australia, Australia’s pharmaceutical industry signs historic agreement with Commonwealth Government, media release, 11 May 2010, viewed 12 May 2010,

[3].    Ibid.

[4].    Department of Health and Ageing, Strengthening your PBS – preparing for the future, media release, 16 November 2007, viewed 13 May 2010,

[5].    Commonwealth of Australia, The impact of PBS reform: report to the Parliament on the National Health Amendment (Pharmaceutical Benefits Scheme) Act 2007, Commonwealth of Australia, Canberra, February 2010, pp. 8–9,

[6].    Australian Government, Budget measures: budget paper no.2: 2010–11, Commonwealth of Australia, Canberra, 2010, pp. 248–9.

[7].    Department of Health and Ageing (DoHA) and Medicines Australia, Memorandum of Understanding, 11 May 2010, viewed 12 May 2010,

[8].    Under current price disclosure arrangements, suppliers provide the price at which the drug is sold to wholesalers and/or pharmacies. DoHA then invites other supplies of the same medicines to disclose their pricing arrangements. This information is then used to calculate the weighted average price. If the price reduction is less than 10 per cent of the ex-supplier price, the price reduction will not apply. If the reduction is greater than 10 per cent, the weighted average disclosed price will be the subsidised price, rather than the disclosed price. 

[9].    Presumably this clause does not allow the Government to revisit the therapeutic groups that were announced as part of the 2009–10 Budget. The three new Therapeutic Groups announced in the 2009–10 Mid-Year Economic and Fiscal Outlook are exempted from the MOU.

[10]. K Mercer and N Ahmed, ‘The drug wars’, Australian Financial Review, 14 May 2010, p. 65.

[11]. Pharmacy Guild of Australia, Federal Budget and Fifth Agreement deliver certainty, media release, 11 May 2010, viewed 12 May 2010,

[12]. K Mercer and N Ahmed, ‘The drug wars’, Australian Financial Review, 14 May 2010, p. 65, viewed 14 May 2010, http://parlinfo/parlInfo/search/display/display.w3p;adv=yes;db=;group=;holdingType=;id=;orderBy=customrank;page=0;query=Author%3AMercer%20Date%3A14%2F05%2F2010%20Dataset%3Apressclp;querytype=;rec=0;resCount=Default

[13]. P Clarke, ‘Drug deal costing billions: Medicines Australia’, The Australian, 15 May 2010, viewed 15 May 2010,

[14]. The impact of PBS reform: report to the Parliament on the National Health Amendment (Pharmaceutical Benefits Scheme) Act 2007, op. cit., p. 6.

[15]. Senate Community Affairs References Committee, ‘Reference: Consumer Access to Pharmaceutical Benefits’, Committee Hansard, 7 May 2010, pp. CA 56–7, viewed date,

[16]. See, for example, S Kwon, ‘Pharmaceutical reform and physician strikes in Korea: separation of drug prescribing and dispensing. Social Science and Medicine, vol. 57, 2003, pp. 529–38.

[17]. The impact of PBS reform: report to the Parliament on the National Health Amendment (Pharmaceutical Benefits Scheme) Act 2007, op. cit., p. 36.

[18]. DoHA, Pharmaceutical Benefits Scheme (PBS) reform, media release, 2 February 2007,

[19]. N Lush, ‘Exclusive interview: MA CEO, Brendan Shaw, explains the MOU’, Pharmainfocus, 17–23 May 2010, viewed 17 May 2010,

[20]. The Therapeutic Group arrangements ensure that the Government pays the same price for products that offer the same therapeutic outcome; and the price paid by the Government is the lowest price of the group.

[21]. See, for example, N Roxon (Minister for Health and Ageing), Agreement to deliver certainty for community pharmacy and government, media release, 24 December 2009, viewed 13 March 2010,$File/nr243.pdf

[22]. Pharmacy Guild of Australia, New agreement to deliver certainty for community pharmacy, media release, 24 December 2009, viewed 13 March 2010,

[23]. N Roxon (Minister for Health and Ageing), Agreement to deliver certainty for community pharmacy and government, op. cit.

[24]. N Roxon (Minister for Health and Ageing), Better pharmacy services, media release, 3 May 2010, viewed 13 May 2010,

[25]. Pharmacy Guild of Australia, New agreement: quality care for consumers, certainty for community pharmacy, expanded role for pharmacists, media release, 3 May 2010, viewed 13 May 2010,

[26]. Ibid.

[27]. Australian Medical Association (AMA), Community pharmacy agreement – government puts patients at risk, media release, 3 May 2010, viewed 13 May 2010,

[28]. L Mulligan, ‘Prescriptions still apply: Fifth Community Pharmacy Agreements Continuance Program, The Australian, 15 May 2010, viewed 15 May 2010,

[29]. Portfolio budget statements 2010–11: budget related paper no. 1.11: Health and Ageing Portfolio, p. 107

[30]. L Buckmaster, Fourth Community Pharmacy Agreement, Background note, no. SP008, 2005, Parliamentary Library, Canberra, 2005, viewed 13 May 2010, http://libiis1/Library_Services/BN/health/sp008.doc

[31]. The median price for a pharmacy is estimated to be $1.89 million. See E Connors, ‘Calls to ease limits on new pharmacies’, Australian Financial Review, 10 August 2009, p. 5, http://parlinfo/parlInfo/search/display/display.w3p;adv=yes;db=;group=;holdingType=;id=;orderBy=customrank;page=0;query=Author%3A%22connors%20%22%20Date%3A01%2F08%2F2009%20%3E%3E%2030%2F08%2F2009%20Dataset%3Apressclp;querytype=;rec=6;resCount=Default

[32]. E Connors, ‘Calls to ease limits on new pharmacies’, Australian Financial Review, 10 August 2009, p. 5, http://parlinfo/parlInfo/search/display/display.w3p;adv=yes;db=;group=;holdingType=;id=;orderBy=customrank;page=0;query=Author%3A%22connors%20%22%20Date%3A01%2F08%2F2009%20%3E%3E%2030%2F08%2F2009%20Dataset%3Apressclp;querytype=;rec=6;resCount=Default

[33]. Ibid.; and E Connors and N Ahmed, ‘Roxon puts squeeze on chemists’, Australian Financial Review, 29 June 2009, p. 1, http://parlinfo/parlInfo/search/display/display.w3p;adv=yes;db=;group=;holdingType=;id=;orderBy=customrank;page=0;query=Author%3A%22connors%20%22%20Date%3A01%2F06%2F2009%20%3E%3E%2030%2F06%2F2009%20Dataset%3Apressclp;querytype=;rec=1;resCount=Default

[34]. It should be noted that this is not necessarily a generic medicine. It is a medicine that does not have a brand premium or special patient contribution.

[35]. The impact of PBS reform: report to the Parliament on the National Health Amendment (Pharmaceutical Benefits Scheme) Act 2007, op. cit., p. 6.

[36]. Ibid.

[37]. Portfolio budget statements 2010–11: budget related paper no. 1.11: Health and Ageing Portfolio, p. 107

[38]. Portfolio budget statements 2010–11: budget related paper no. 1.11: Health and Ageing Portfolio, p. 107

[39]. K Mercer, ‘Pharmacy Guild gets electronic leg up’, Australian Financial Review, 8 February 2010, p. 3, http://parlinfo/parlInfo/search/display/display.w3p;adv=yes;db=;group=;holdingType=;id=;orderBy=customrank;page=0;query=Author%3Amercer%20Date%3A01%2F02%2F2010%20%3E%3E%2028%2F02%2F2010%20Dataset%3Apressclp;querytype=;rec=7;resCount=Default

[40]. The impact of PBS reform: report to the Parliament on the National Health Amendment (Pharmaceutical Benefits Scheme) Act 2007, op. cit., p. 8.

[41]. K Mercer, op. cit.

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