Significant changes to the Pharmaceutical Benefits Scheme (PBS) are underway. The Australian Parliament recently passed the National Health Amendment (Pharmaceutical Benefits Scheme) Act 2007. At the core of this Act are new sections (85AB and 85AC) to the National Health Act 1953. These had the effect of dividing, from 1 August 2007, the PBS into two separate formularies - F1, which mostly contains single brand medicines, and F2, which mostly contains multiple brand, mainly generic, medicines (see box).

These complex changes aim to 'recognise the importance of world-class life-enhancing drugs to patients', protect patients from higher costs and get better value from market competition between medicines with multiple brands.1 The changes may allow PBS and patient savings through lower priced generics, but their impact on the price of patented single-brand medicines is uncertain in our view. Chiefly this is because in future most new patented medicines will be listed in F1 with reduced reference pricing thereafter.

In Australia, overall pharmacy fees vary for products priced below the general patient co-payment ($30.70), and a Choice survey in August 2006 found a wide range in the prices pharmacies charge.2 This was due to varied application of permissible fees under the Fourth Community Pharmacy Agreement. Australian prices for generic drugs were higher than in countries with larger markets or processes such as competitive tender. In Australia, the price a patient paid for a medicine below the general co-payment depended on the manufacturer's price, wholesale and pharmacy markups, and dispensing fees. Manufacturers could offer generic drugs to pharmacists at large discounts to the prices paid by the PBS. The government therefore considered that it had been paying too much for these medicines. In our view, this consideration unfortunately outweighed policy concerns about the importance of maintaining the full integrity of PBS reference pricing.1,3

PBS prices will now be influenced by which formulary a drug is in (Table 1). To add to the complexity, the criteria do not apply to single brand combination products, as they could have components in different formularies.

F1 contains drugs with a single brand, however it does not contain those single brand drugs that are interchangeable on an individual patient basis with drugs that have multiple brands or single brand combination items.

F2 contains drugs with multiple brands and those single brand drugs that are interchangeable at the individual patient level with drugs that have multiple brands.

Table 1 Examples of drugs in the new Pharmaceutical Benefits Scheme formularies *
F1 F2A F2T
atorvastatin fluvastatin simvastatin
bisoprolol carvedilol metoprolol
cefuroxime cephazolin cephalexin
celecoxib ketoprofen naproxen
doxorubicin (pegylated liposomal) doxorubicin -
levobunolol betaxolol timolol
olanzapine clozapine -
reboxetine - citalopram, fluvoxamine
salmeterol - salbutamol
ticarcillin with clavulanic acid - amoxycillin with clavulanic acid
zolmitriptan sumatriptan -
- oxazepam diazepam

* as at 2007 Sep 11

Drugs which are in F2 are categorised according to the size of the discounts to pharmacy as at 1 October 2006. When the discount was less than 25% the drug is in F2A. Drugs which were heavily discounted by more than 25% are in F2T. The suppliers of drugs in these categories will have to disclose to the Department of Health and Ageing the actual price at which they sell a brand to wholesalers or pharmacies. This requirement applies to new brands of F2A medicines from 1 August 2007 and to new brands of F2T medicines from 1 January 2011. The aim is to ensure that the PBS price is based on the actual supplier price to wholesalers or pharmacy.

A price reduction of 12.5% at the time of PBS listing of the first generic brand of a drug has been required since 2005, and will continue to apply. From 1 August 2008, there will be further compulsory price reductions for F2 drugs: a drop of 2% per year for three years for drugs in F2A, and a one-off price reduction of 25% for drugs in F2T (on 1 August 2008). There are no mandatory price cuts for drugs in F1. There will be compensation for wholesalers and pharmacists for the loss of income from statutory F2 price reductions. For example, from 1 August 2008 pharmacists will receive $1.50 each time they dispense a substitutable brand that costs the patient no more than the co-payment.

Many generic drugs are already priced below the general patient co-payment, and the price reductions to drugs in F2 are expected to result in more drugs falling under the co-payment. The Pharmacy Guild of Australia estimates that the price of more than 400 brands, below the general PBS co-payment, will fall.4 Complete price and volume data will not be available for drugs once they fall below the general PBS co-payment. Although the Drug Utilisation Sub-Committee of the Pharmaceutical Benefits Advisory Committee (PBAC) receives some data, prescriptions for these drugs do not appear in official statistics of PBS expenditure.

The Minister for Health and Ageing has stated that the role of the PBAC, in assessing cost-effectiveness and cost minimisation and then advising the Minister on the listing of drugs on the PBS, is not affected by the legislation.5 Yet the responsibilities of the PBAC will be formally extended to include advice to the Minister on exemptions from mandatory price reductions. It will also advise on whether drugs are 'interchangeable on an individual patient basis', a standard more uncertain than the previous, more evidence-based, 'equivalence' tests used to determine Therapeutic Group Premiums for reference pricing. Drugs appearing 'equivalent' on average effects measured in clinical trials, for example, may not be 'interchangeable' for an individual patient.3 For example, while citalopram and escitalopram were in the same reference pricing group, escitalopram was initially included in F1 and citalopram was in F2T.6

The principle of reference pricing, that drugs with identical or similar clinical outcomes should have similar prices, is integral to the architecture of the PBS and the respect it has achieved internationally. In our view, the separation of listed drugs into two groups (F1 and F2), however this is implemented, weakens the role and fiscal benefits of referencing pricing in the PBS.

Although there will be reference pricing within F1, an effect of the changes is to insulate high priced single brand (patented) F1 drugs from price cuts and from the reference pricing that applied under previous PBS processes.3 Once a new drug is listed on the PBS as F1, its price will not be linked to the price of any similar drug in F2. F1 drugs are not interchangeable at the individual patient level with drugs that have multiple brands, so the manufacturers may be able to retain their original PBS price until the listing of a bioequivalent brand satisfies the new standards for a shift to F2. Reductions in F2 drug prices will not affect F1 prices, even where the therapeutic effect of an F2 medicine is similar though not necessarily 'interchangeable at the individual patient level'.

It is our opinion that the creation of the F1 category will, over time, result in higher prices for some patented drugs than would have been the case under previous PBS arrangements. The government's rationale for this change appears to be that failure to make such changes could result in large 'special patient contributions' or the withdrawal of single-source products from the PBS.5

The government, Medicines Australia, the Consumers' Health Forum and several professional groups view the F1-F2 changes as a means of achieving lower prices and greater transparency in the generics market.6 However, the expectation of price reductions flowing to consumers is premised on trust in effective competition among retail pharmacies. If direct benefits to patients from lower generic medicines prices or government support for an Australian generics industry had been the primary policy objectives, then more broadly framed legislation could have included pharmacy rewards for meeting generic dispensing targets, an incentive period of market exclusivity for the first generic market entrant, and financial incentives for patients who elect to be dispensed a generic, or for patients whose doctors are prepared to prescribe generic drugs. The role of the patented pharmaceutical industry in promoting and framing these changes is also controversial,7 particularly if the new system allows price reductions to be deferred for some products.