Legal Insights

Discounting in the era of the Medicines Supply Security Guarantee

By Steven Tang

• 05 December 2022 • 7 min read
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In brief

  • As part of the 5-year strategic agreements entered into in September 2021 by the Australian Government with Medicines Australia and with the Generics and Biosimilars Medicines Association (together, the Strategic Agreements),[1] a package of funding and legislative amendments were committed to bolster medicine supply and better protect patients against supply chain volatility (Medicine Supply Security Guarantee).

  • One feature of the reforms agreed in the Strategic Agreements was the introduction of stockholding requirements which come into effect from 1 July 2023 for certain low price listed brands[2] on the PBS.

  • Another plank of the Medicine Supply Security Guarantee involves increases of, and/or protections against price disclosure reductions to, the Approved Ex-Manufacturer Price (AEMP) for listed brands with an AEMP below $4 (Price Floor Products).

  • Under the Strategic Agreements, it was recognised that the additional funding provided towards the Price Floor Products was intended to be used to manage supply chain risk and was not to be passed on as discounts or incentives. In support of that intent, legislative amendments came into effect from 1 October 2022 which:
    • make discounts or incentives offered on Price Floor Products a relevant consideration in the exercise of the Minister’s power to list or revoke listings of PBS items
    • deem discounts or incentives offered on Price Floor Products to be applied to other PBS listings of the supplier which are not Price Floor Products for the purposes of calculating price disclosure for the supplier’s other products.
  • In the lead-up to 1 October 2022, there has been some considerable uncertainty as to how the restrictions on discounts will be applied, particularly given the potentially significant consequences (i.e. potential revocation of all of the supplier’s PBS listings).

  • Additional guidance has been published by the Department of Health to better understand the matters the Minister will consider in exercising the new powers.

Minimum Supply Security Guarantee

As part of the discussions leading to the GBMA Strategic Agreement, it was recognised that global medicine shortages were interrupting the supply to Australia of medicines used in the treatment of many prevalent health conditions. It was further identified that in 2019 and 2020, medicines supplied by manufacturers for $4 or less per pack were the most susceptible to supply chain interruption.

Consequently, a package of measures was agreed under the Strategic Agreements, which:

  • committed to the introduction of minimum stockholding requirements for certain PBS listed medicines (Designated Brands). The stockholding requirements of between 4 and 6 months’ stock were introduced to provide a buffer of stock in the Australian market in the event of further global disruptions
  • provided for the minimum stockholding requirements to be met by 1 July 2023 to allow time for suppliers to prepare the relevant stockpiles, and
  • protected the sector against price reductions which could impact the sector’s ability to maintain supply of low-cost medicines in the face of global supply chain disruption and competition through:
    • modifying the application of the 30% price disclosure threshold
    • introducing a price floor for products with an AEMP below $4, which would not be subject to price disclosure reductions, and in certain cases would result in an uplift of the applicable AEMP

New Ministerial power to deal with discounts

In recognition of the fact that the price disclosure changes and floor price provisions were intended to provide additional funding to suppliers to help manage supply chain risk, rules were introduced to prevent the additional funding being passed on as discounts or incentives.

In amendments[3] which took effect from 1 October 2022, the Minister was given additional discretions if a supplier (a responsible person) for a Floor Price Product offers a discount or incentive, in relation to sales of the Floor Price Product on one or more occasions.

The additional discretions allow the Minister to:

  • revoke or vary the PBS listing of the Floor Price Product
  • revoke or vary the PBS listing of any pharmaceutical item of that responsible person
  • refuse to list a brand or brands of any pharmaceutical item of that responsible person, or
  • refuse to declare a legal instrument drug, form or manner of administration of any of the brands supplied by that responsible person.

In addition, any discounts or incentives actually provided in relation to Floor Price Products will be apportioned to other brands in the responsible person’s portfolio which have AEMPs above $4 as part of the price disclosure calculations for those other brands.

What if I have offered a discount? Will I lose my PBS Listing?

In exercising the powers described above, the amendments provide that the Minister:

  • must have regard to any relevant information that relates to discounts or incentives that was disclosed in compliance with the price disclosure requirements; and
  • in addition, may have regard to:
    • the extent to which the discount or incentive will compromise the responsible person’s capacity to continue to supply the brand of the pharmaceutical item
    • whether the responsible person will consistently maintain adequate stock levels of the brand of the pharmaceutical item in the future
    • the extent to which the discount or incentive will compromise another person’s capacity to continue to supply another brand of the pharmaceutical item
    • any other matter the Minister thinks is relevant

From 1 July 2023, it will also be a relevant consideration as to whether the responsible person has breached the minimum stockholding requirements.

But I’ve always offered discounts – existing arrangements entered prior to 13 December 2021

The Department of Health has recently published updated Price Disclosure Guidelines (Guidelines) which, amongst other things, provide that the Minister may consider whether the discounts or incentives were provided in accordance with contractual arrangements entered into prior to 13 December 2021 (Existing Arrangements), when the amendments received assent.

In considering Existing Arrangements, the Guidelines go on to advise responsible persons that it will assist the Minister if the responsible person provides evidence that:

  • the responsible person has not offered discounts or incentives above and beyond the Existing Arrangements
  • despite the discounts or incentives under the Existing Arrangements, there’s no risk to maintaining adequate stock levels
  • after 1 July 2023, the minimum stockholding requirements will always be met.

Further, the Guidelines confirm that the Minister is also likely to consider what opportunities the responsible person has had to vary the discount or incentives, such as at any renewal or extension of the Existing Arrangements.

What's next?

The legislative restrictions applying to discounts and incentives have been applicable for just over a month and is an area we understand the sector is watching anxiously. While we are yet to see or hear of any precedent exercise of the Minister’s powers in this area, we expect that any compliance activity will ramp up as we approach the 1 July 2023 introduction of the minimum stockholding requirements.

Speaking of the minimum stockholding requirements, applications for Ministerial determinations to vary the quantity of stockholding opened on 21 October 2022 with the first round closing on 18 November 2022.

[1] More about the GBMA Strategic Agreement and the new Strategic Agreement with Medicines Australia.
A current list of designated brands as at the date of this article can be found here.
See National Health Amendment (Enhancing the Pharmaceutical Benefits Scheme) Act 2021 (Cth)

Read more articles from the December 2022 edition of The Prescription.

By Steven Tang

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