Community Pharmacy Agreements

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).

Supply Chain Arrangements

Today’s Budget Estimates 2018-19 Public Hearing of the Senate Community Affairs Legislation Committee on Outcome 4.3 Pharmaceutical Benefits (11.15 am – 1.15 pm) provided a few more details about the new pricing arrangements that are to be piloted from 1 July 2019.

The Department of Health is currently in discussion with a number of companies who have agreed to participate in the trial. Negotiation of changes to Special Pricing Agreement clauses have been underway since the start of 2018. There are currently 162 active Deeds of Agreement.

One of the four supply chain options being considered was described as having two flows of payments for PBS medicines from the Government. One, based on the effective price, being paid directly to the manufacturer. The other, paid directly to the pharmacy, based on eligible fees (dispensing & Administration Handling Infrastructure) including the wholesaler mark-up (per 6CPA, either 7.52% of ex-manufacturer price or a flat fee of approximately $70 depending on the medicine price to pharmacy). The pharmacy would then reimburse the wholesaler.

From 1 July 2018, three products will have changes to their published prices such that the cash flow issue for the Department of Finance and pharmacies will be ameliorated. An interesting consequence of rebates has been the impact on commercial rents where these are linked to business turnover. It is widely speculated that the 3 products treat Hepatitis C and the price reductions are possible due to decreases in company mandated global floor prices.

On the $1 billion provision for new PBS listings, an important question was taken on notice by the Department: will the medicines with positive PBAC recommendations being listed using the contingency funds require Cabinet approval?

Australian PBS Supply Chain

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.

‘Rebate gate’ (Part 2 of 2) – Potential Consequences

Will the real price be revealed?

As described in Part 1, the Australian Federal Government wants to eliminate an existing process whereby certain PBS medicines are reimbursed through the supply chain at ‘published (list) prices’, even though a lower price, known as the ‘effective price’ has been agreed. At a latter date, sponsor companies repay (rebate) the difference between these two prices to the Government. For medicines where this applies, the real price paid is kept confidential for international reference pricing purposes, with the trade-off being subsidised access for Australian patients.

The schematic shows a simplified version of the current flow of money and product through the supply chain from manufacturer to patient based on the published price in the PBS schedule. Note that as mark-ups and fees are calculated on the published price, relevant adjustments are made and also repaid by sponsor companies as part of rebate amounts.

Who pays and when?

The Government is proposing that instead of one Medicare payment being made to a pharmacy on submission of an eligible claim for a dispensed PBS item, for those products to which a rebate applies, the Government will directly pay each step in the supply chain the relevant amount based on the effective price.

Two potential consequences become clear:

1.      Loss of confidentiality of the ‘effective price’. This should be of concern, as it means Australia may be moved to the end of the list of countries provided with the registration dossier for a new medicine. This will add years to the wait for innovative medicines before the TGA or the PBAC even get to consider the value offered to the Australia public.

It is the perfect storm as local affiliates will be forced to sacrifice access for Australian patients for markets that reference to PBS prices. This is a very real phenomenon, and decisions not to launch, or withdraw products have already been made locally by companies due to international reference pricing concerns.

You don’t need to look far to appreciate what the future may look like.

2.      Business mayhem. What happens to well-established terms of trade and legalities around ownership of goods and responsibility for product condition (cold chain continuance, breakages, delivery failures, etc.) with a move to agent status on the basis of ‘phantom’ invoices? The payment of GST as required at the various steps in the process will also need new systems and processes to ensure that obligations to the Australian Tax Office continue to be met (watch this week’s abc Four Corners program).

A way forward?

Without compromise, it is unlikely that change of such magnitude will be in place by the arbitrary time frame of 1 July 2018. Retaining the current arrangements with tweaks seems most sensible. What about tighter (such as, monthly) time frames around repayments to the Government? This would require a quicker turnaround of invoices than has currently been the case. Another option is for companies to pay rebates (monthly or quarterly) in advance based on Deed agreed utilisation estimates. Perhaps you have a better idea?

Did the price of pharmaceuticals really rise by 5.6% in Q1 2018?

The Australian Bureau of Statistics (ABS) Consumer Price Index (CPI) Mar 2018 summary notes a +5.6% increase in the price of pharmaceutical products as contributing to the overall +0.4% rise reported for the quarter. The CPI is the official measure of inflation in the Australia economy and is the non-seasonally adjusted ‘All groups CPI’ weighted average of prices paid for goods and services in eight capital cities.

The CPI is made up of 11 expenditure groups weighted by household spending patterns to produce aggregate measures of price change. Traditionally, these weights have been sourced from the ABS Household Expenditure Survey and updated every 6 years. Housing and Food and non-alcoholic beverages groups are the two most significant components of household expenditure.

Pharmaceutical products are included in the Health group together with costs associated with medical and hospital services, and private health insurance premiums. The detailed ABS report for the March 2018 quarter reveals that the rises observed in pharmaceuticals, +5.6% (and medical and hospital services, +1.5%) are due to the decrease in the proportion of patients who qualify for safety net thresholds under the Pharmaceutical Benefits Scheme (PBS) and Medicare Benefits Scheme (MBS), respectively. This is due to the annual January 1 reset of threshold amounts for the PBS and MBS, as well as co-payment indexation for PBS.

This phenomenon shows why seasonally adjusted CPI figures are also presented. The included graph clearly shows a positive increase in spend on pharmaceuticals in the first quarter of each year. Note: the Mar 2017 CPI rise in pharmaceuticals was +4.9%. Seasonal adjustments are made to control for this type of systematic, calendar related event.

After seasonal adjustment, the Health group household expenditure in Q1, 2018 grew by +0.8% with the main contributor being medical and hospital services. The weighting of the Health group within the CPI has been increasing over time. In the most recent readjustment the group weight rose to 5.43%, although certain population subgroups, namely self-funded retirees and age pensioners are spending over 10% of household expenditure on health.

The weighting rise was driven by medical and hospital services, following increases in private health insurance premiums over the relevant period. This rise was noted to have been partially offset by a fall in the expenditure share of pharmaceutical products. Clearly, the price of pharmaceuticals in Australia has not been rising, but actually decreasing over time.