PBS Reforms will save $74 billion

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					3 April 2009


PBS Reforms will save $7.4 billion
The PBS Reforms introduced in 2008 have seen the most significant changes to the scheme since
its inception over 60 years ago. The reforms have included:

    •    Mandatory price reductions of 25%, effective from 1 August 2008, across drugs
         representing approximately 50% of PBS prescriptions dispensed. This is in addition to the
         continuing policy of a minimum 12.5% price reduction when the first new brand of a drug
         is listed.

    •    A new system of Price Disclosure, whereby manufacturers are required to provide
         information to government showing the market prices of their drugs. Where there is a
         significant difference between the government price and the market price of a drug, the
         PBS price will be reduced to match the market.

A report released at APP, the Guild’s annual conference on the Gold Coast, has concluded that
these reforms will reduce Commonwealth Government PBS expenditure by a total of almost $7.4
billion over ten years. This estimate compares with a government estimate of just $3 billion
released by then Health Minister Tony Abbott when the PBS Reforms were announced in
November 2006.

The report, commissioned by the Guild and conducted by Illuminate Health Consulting, was
based on detailed modelling of known price reductions, and estimates of future price reductions
that will flow from patent expiries and the exposure of the F2T formulary to price disclosure after
January 2011.

The savings estimates in the report are based on the central assumption that all of the current
remuneration arrangements remain in place at their current levels (and indexed where applicable)
for the full ten year period.

The report also provides an estimate of the cost to community pharmacy of the price disclosure
arrangements over the period until the end of the next Community Pharmacy Agreement (30 June
2015). Price disclosure will reduce pharmacy incomes over this period by a total of over $1.2
billion. This represents an average annual cost per pharmacy of $35,500 over the seven years to
June 2015.

However, as the impact of the new arrangements compounds each year, average pharmacy
incomes are estimated to be more than $114,000 lower in the final year (2014-15) than would be
the case without the reforms. Again, this analysis was performed based on the assumption that
current remuneration arrangements, including the premium-free dispensing incentive and PBS
Online incentive, are carried forward.



National Secretariat
Level 2, 15 National Circuit, Barton, ACT 2600 Australia · PO Box 7036, Canberra Business Centre, ACT 2610 Australia
Telephone: + 61 2 6270 1888 · Facsimile: + 61 2 6270 1800 · Email: guild.nat@guild.org.au · Internet: www.guild.org.au
The graph below, taken from the report, shows how pharmacy trading terms will be progressively
‘squeezed out’ of the marketplace as price disclosure reduces the PBS dispensed price, placing
more downward pressure on margins over time.


      Disclosure triggered

   110

   100

    90
                                                                                 Dispensed
    80                                                                           price
    70                                                                           Actual
    60                                                                           pharmacy
                                                                                 buy in price
    50

    40
          year year year year year year year year
           1    2    3    4    5    6    7    8



Given the findings from this report, community pharmacies need to brace themselves for lower
returns and will need to look for further efficiencies, as normal business responses are not
available in community pharmacy. Normal business responses would include increasing prices, or
cutting expenses such as rent and wages through a reduction in staff hours or shedding jobs. In
community pharmacy, however, the price of most medicines is fixed by government policy. Also,
wages and rent are the two biggest expenses in pharmacy and continue to rise at a rate higher than
inflation. Guild policy and our members’ focus on health outcomes actively promote maintaining a
high service level, which means preserving jobs and staff hours wherever possible.

Along with growing evidence from other sources that PBS expenditure is now well-controlled, this
new report clearly shows that no further PBS savings measures should be introduced. Price
disclosure provides the government with a transparent market and embeds a systematic method
for the government to capture savings as a result of price competition in both the short and long
term.


For further media enquiries contact Michael Pittman on 02 6270 1888.




National Secretariat
Level 2, 15 National Circuit, Barton, ACT 2600 Australia · PO Box 7036, Canberra Business Centre, ACT 2610 Australia
Telephone: + 61 2 6270 1888 · Facsimile: + 61 2 6270 1800 · Email: guild.nat@guild.org.au · Internet: www.guild.org.au

				
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Description: PBS Reforms will save $74 billion