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Australian Journal of Pharmacy : February 2005
capital hill capital hill from our Canberra correspondent Another PBS dilemma T HE New Year fireworks will pale in comparison to the explosive generic price reduction policy set to impact the pharmaceutical industry—and phar- macy in due course. The changes will, if implemented, mean less incentive for manufacturers to introduce multiple brands and competi- tion—the cornerstone of the Howard government—will be out the window. Observers believe the enforced priced reduction will seriously undermine the competition necessary to achieve the $830 million in savings earmarked by the government to fund retirees. The price cut will, in fact, increase the cost of drugs on the PBS to the government as generic manufacturers react to the huge disincen- tive to introduce multiple brands. The origin of the proposal is obscure. Nobody appears to want to own it. It was born halfway into the election run-up when Health Minister Tony Abbott announced without warning that a 12.5 per cent price reduction would automati- cally apply to generics from 1 January. Then someone clever thought it might be a good idea to do the right thing and con- sult with industry before legislating the policy, so the start date was pushed back to 1 April. Generics, which have been a favourite hobby horse for the Minister, have long enjoyed prices which are above the inter- national average. Even in the US, gener- ics are cheaper than they are in Australia. In the UK, some generics are up to 40 per cent cheaper on a per dose basis. Oddly, the government has chosen to ignore the 2001 Productivity Commission findings that Australian generic prices were low. It has also ignored the funda- mental precept underpinning the PBS, which is that all medicines listed are sub- ject to cost-benefit analysis based on cost to the Scheme. It also forgot that some 70 per cent of the savings target could have simply been achieved when statins go generic on 1 July. An arbitrary, flawed policy decision here will not solve the PBS cost problem; it will only exacerbate it—and in a very short space of time. The means by which Minister Abbott intends to attack PBS costs has nothing to do with competition at all. It simply acknowledges the structural inability of the PBS to stimulate cost reduction—so it’s going to be stimulated arbitrarily by non-competitive price reduction instead. An arbitrary, flawed policy decision here will not solve the PBS cost problem; it will only exacerbate it—and in a very short space of time Why has the PBS failed to deliver sub- stantial savings on generics? Because, basically, it’s impossible for a company under the present arrangements to offer competitive price reductions. This is because policy dictates any price reduc- tion offered by a company must be com- municated to all other suppliers before it’s accepted. The result is that the price reduction stimulus is negated because other companies are able to match the lower price before it’s listed—destroying any potential competitive advantage for a company brave enough to offer a signifi- cant price reduction. It just goes broke by getting swamped in the market. So generic prices are maintained close to branded products, and market advan- tage is pursued by discounting to phar- macy. The 12.5 per cent price reduction does nothing to address this. Earlier last year, during a series of rep- 76 ? THE AUSTRALIAN JOURNAL OF PHARMACY VOL.86 FEBRUARY 2005 resentations to the Senate Select Com- mittee examining PBS costs and pricing, media began quoting a potential savings figure of some $830m achievable over the ensuing four-year period. Those propos- ing this figure were a group of academics who applied a calculation based on the introduction of generic versions of patent- expired blockbuster medicines including statins, ACE inhibitors, antidepressants and other formerly high cost drugs, such as the PPIs. Most sanguine observers—including the government at that time—argue the calculation was flawed in the first place and the figure was publicly disowned by the Generics Manufacturers’ Industry Association (GMiA). So when the Howard Government went looking for about a billion dollars to offer the grey vote in order to match Labor’s Medicare Gold policy, savings from generics became front of mind. But where did the 12.5 per cent figure come from? It appears it came from ‘very high up’, according to Hill sources now scouring their offices for tables to hide under. Certainly it wasn’t from within the Department, whose efforts to contain PBS costs had been on the public record for years in the form of financial options offered in successive pre-Budget rounds which argued for wholesaler margin reductions, pharmacy margin reductions —and generic price reductions. However, those options weren’t taken up at the time for whatever politically relevant reason. The effect of the new policy was out- lined to the GMiA on 10 January and Medicines Australia on 12 January. They were scheduled to be outlined to the Guild before the end of January, but already the balloon has gone up. Both sides of the industry are consternated. The Guild will be consternated too when it discovers that its members have the government-directed responsibility of explaining the complicated new system of ?continued page 110