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.

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).

The supply chain for Australian Pharmaceutical Benefits Scheme (PBS) medicines has come sharply into focus during the changes to rebate arrangements recently pursued by the Federal Government, and whose introduction has subsequently been delayed until July 2019.

Supply chain refers to the specialised pharmaceutical wholesalers and pharmacies (community and hospital) that provide distribution, dispensing and patient care services associated with each listed medicine beyond the manufacturer’s door. This is not necessarily a straight forward endeavour in a sparely populated large country like Australia, and considering the cold-chain and other storage and handling requirements for some medicines.

While the PBS debate has been about time to and funding of new listings, as well as overall investment in the scheme, protagonists of the supply chain have been efficiently taking steps to secure, and even grow their proportion of the PBS ‘pie’. Current estimates put supply chain costs, after removal of rebates, as representing up to as much as 40% of Government expenditure on the PBS.

To put this in context, the proportion is comparable to the 41% reported for the sector in the USA, although the supply chain there includes the additional players in Pharmacy Benefit Managers and Insurers to be compensated.

The details of Government payments for provision of universal access to PBS medicines for Australians, no matter where they live within 24-hours, are contained in a series of, usually 5-year, agreements between supplier associations and the Commonwealth Government.

The content of some these agreements will be reviewed in the next few articles.