CSO perspectives & direct distribution

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Feedback on my recent post about the Community Service Obligation (CSO) has provided some alternate viewpoints:

(1) Like Australia’s population, 80% of PBS items are distributed in urban areas. Hence, irrespective of the per item delivery cost, the business of distribution in major cities and larger regional centres will be profitable due to economies of scale, and the ability to offset transport costs with multiple other deliveries, particularly if not solely distributing pharmaceuticals. It is only the 20% of rural and remote deliveries that require Government subsidisation to ensure timely equitable access to PBS medicines for patients.

(2) Apparently, the counter-intuitive is the case. In urban and regional centres, distributors own and operate their own delivery infrastructure and twice a day (at least) deliveries and special orders are guaranteed as part of service agreements. However, rural and remote distribution is generally via existing transport networks. Delivery schedules are less frequent and only cost when an order is made. Consequently, the average distribution cost per item may actually be less for deliveries to rural and remote pharmacies.

(3) An economist perspective, as provided by Dan Swain (Swain Health Economics), regarding the need for a CSO funding pool. On one hand, the annual CSO cost of approximately $200 million to ensure timely delivery of any PBS item anywhere in Australia, may be considered a good investment in the context of the $10 billion annual Government expenditure on the PBS.

On the other hand, the need for a subsidy may be a signal that the pharmaceuticals distribution market is in need of restructure. That is, the CSO may be propping up an unsustainable business model instead of permitting market forces to operate as they would in a less regulated environment.

This standpoint is supported by the decision of 13 companies to date, led by Pfizer in early 2011, to adopt a direct distribution model to community pharmacies across Australia for some or all of their products. They have chosen to by-pass the full-line wholesalers completely or opted to distribute directly in addition to the existing channel.

In the case of Pfizer, this covers all PBS product lines, includes a dedicated field force and a single logistics provider (the DHL direct-to-pharmacy distribution service is known as ‘Pfizer Direct’). In this case, the aim of direct distribution was and is to protect sales of Pfizer brands from generic competition, in particular as a number of its highest volume products lose patent protection.

At the recent PharmaDispatch Conference, the reasons given by Liz Chatwin, Country President AstraZeneca, for last year’s decision to go direct for nine high cost products included, in addition to the financial savings, improved data collection leading to a better understanding of patients and how products are being used, without compromising service standards.

An overarching assumption is that the cost to distribute directly via DHL is less than the 6CPA mandated distribution costs (7.52% of ex-man cost <$930, or $70). DHL distribution occurs independent of CSO funding, however the impact on CSO distributors is immediate as they are compensated monthly in arrears based on items supplied.

Opponents to the the direct distribution model note the increased administrative burden placed on pharmacies, and an increase in medicine shortages as more companies have gone direct. The Pharmacy Guild and National Pharmaceutical Services Association are concerned that exclusive monopoly supply arrangements put the first objective of the National Medicines Policy at risk, namely ‘Timely access to the medicines that Australians need, at a cost individuals and the community can afford’.

Submissions to the current Government review of the CSO will undoubtedly present detailed arguments and evidence supporting  these divergent opinions.

The CSO because <5% of PBS medicines are profitable to distribute

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During evaluation of the third Community Pharmacy Agreement (2000-2005), gaps in the pharmacy network that didn’t meet the ‘reasonable access to PBS medicines regardless of place of residence’ (National Medicines Policy) test were recognised. At the same time, the Federal Government was also concerned about long term PBS growth and identified pharmacy distribution as a potential area to reduce expenditure.

These two issues were ultimately solved in the fourth CPA (2005-2010) with a reduction of the wholesale price mark-up from 11.1% to 7.52%, and the establishment of a Community Service Obligation (CSO) Funding Pool (AU$150 million per year, indexed annually, paid monthly in arrears) for direct payments to those pharmaceutical wholesalers who supply the full PBS range of medicines and distribute in a timely manner anywhere in Australia.

The CSO was continued in the fifth and sixth CPAs providing approximately $200 million per year in direct financial support to the five eligible pharmaceutical wholesalers for any additional costs incurred in providing the full PBS range. However, as Mark Hooper, Chair of the peak body for CSO distributors, the National Pharmaceutical Services Association (NPSA) showed in his 2016 APP presentation, the combined impact of patent losses, price disclosure and changes in fee structure, to flat fees rather than percent of value, are also at play. The result being that over the course of the 6CPA, wholesalers revenue will decrease by at least $400 million.

Modelling commissioned by the NPSA shows that sustainable funding, such as provided by the CSO, is even more critical to retaining service standards as the proportion of low costs drugs by PBS prescription volume increases.  By 2020 approximately 84% of PBS medicines will cost less than $15 (AEMP) while the range of PBS medicines will increase by up to 50% due to generics. In other words, over time wholesalers will continue to be delivering more and more units for less cost.

The CSO came under scrutiny during the independent King Review (a 6CPA commitment) with the final report recommending a comprehensive analysis of the entire pharmaceutical supply chain. The Department of Health is currently undertaking a targeted consultation of the CSO.

Interestingly, the King Review also recommends that ‘the Australian Government should ensure that the regulation and remuneration of wholesaling of PBS-listed medicines should not form part of future Community Pharmacy Agreements.’ Time for wholesalers to step out of the Pharmacy Guild shadow and negotiate for themselves.

Australian cancer registry data

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An article published today and available free in The Medical Journal of Australia by Louise Gordon of QIMR provides an insight into another aspect of the Australian healthcare system in addition to the controversial issue of out-of-pocket medical costs.

The findings are based on 452 cancer patients diagnosed from Nov 2010- Nov 2011 identified via linkage to the Queensland Cancer Registry. Melanoma accounted for 44% of cases, prostate 25%, breast 19%, colorectal 7% and lung 5%. The costs for medical services and pharmaceuticals were collected for the 2-year period following diagnosis via data linkages with Medicare.

The power of data linkage is clear, but in 2018, how useful is information on services performed prior to Dec 2013?

All cancers, except basal and squamous cell carcinomas of the skin, are notifiable diseases in Australian states and territories. This means there is legislation in each jurisdiction that requires hospitals, pathology laboratories and various other institutions to report all cases of cancer to their central cancer registry.

An agreed minimum data set collected by these cancer registries is supplied annually to the Australian Institute of Health and Welfare (AIHW), where it is compiled into the Australian Cancer Database (ACD). The ACD currently contains data on all cases of cancer diagnosed from 1982 to 2012 for all states and territories, and for 2013 cases for all jurisdictions except NSW.

However, the current data set does not collect any genetic information at tumour-level, and this needs to be addressed urgently to ensure the ongoing value of the data.

Further to this, the introduction of an electronic health record for every Australian, unless they opt out, by the end of 2018 should be the catalyst for an overhaul of the existing cancer registry infrastructure to enable faster availability of collected data to researchers and policy makers.

Community Pharmacy Agreements

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Community Pharmacy Agreements (CPAs) take the form of 5-year ‘contracts’ between the Commonwealth Government and the Pharmacy Guild of Australia. These determine the remuneration paid to pharmacists for dispensing pharmaceutical benefits and to perform other functions required under that agreement. An interesting nuance is that the agreements also include wholesaler compensation. Why wouldn’t the National Pharmaceutical Services Association (NPSA), who does represent the wholesalers, as well as other relevant stakeholder groups, also be in the negotiation room and part of the agreement?

An independent statutory body, the Pharmaceutical Benefits Remuneration Tribunal (PBRT) was established in 1981 under section 98A of the National Health Act 1953 (the Act) to determine compensation levels. Immediately prior to 1990, remuneration consisted of a dispensing fee and a 25% mark-up on PBS listed items.

In the late 1980s, there was a dispute between the Commonwealth Government and the Pharmacy Guild around the issue of whether the price paid for dispensing PBS drugs should be based on the average cost of dispensing across all pharmacies, or the cost of dispensing in an ‘efficient pharmacy’. No agreement on calculating the price on an efficient pharmacy basis could be reached.

This period of unrest ended after the 1990 election, and since 1990, section 98BAA requires the Commonwealth to enter into successive five-year agreements with the Guild, ‘or another pharmacists’ organisation that represents a majority of approved pharmacists’ approved to supply PBS subsidised medicines in Australia.

The first Community Pharmacy Agreement was negotiated and covered the period 1991-95. A new approach to dispensing fees was introduced with a combination mark-up and flat dollar amount based on the value of the PBS item. Financial incentives to close and amalgamate pharmacies were included to stimulate rationalisation of the distribution of pharmacy services. The intent being that lower pharmacy numbers would encourage economies of scale greater and profitability. From 1991-95, this program resulted in 630 pharmacy closures and 64 amalgamations, at a cost to Government of $52 million.

Other clauses restricted where a pharmacy could relocate its existing PBS approval, and imposing strict restrictions on approving a new pharmacy. Additional financial support was provided to community pharmacies in rural and remote areas, and by the end of the first Agreement, just over 400 pharmacies were receiving an Essential Pharmacy Allowance.

The second Community Pharmacy Agreement 1995-2000 consolidated the gains made by the 1CPA initiatives. It also included a fee for service to accredited pharmacists conducting limited medication reviews for nursing home residents. This expansion into payment for services will be further seen in future CPAs (in the next article).