Fact sheet – Setting an approved ex-manufacturer price for new or extended listings

Page last updated: 1 December 2016

Making a price agreement or determination

Price negotiations with the responsible person for new or changed listings are undertaken by the Pricing Section on behalf of the Minister, following a positive PBAC recommendation.  A Cost Information (PB11b) form is required to be submitted by the responsible person as part of the initial application to the PBAC.

After a price has been negotiated, the responsible person is requested to submit a Request for Approved Ex-manufacturer Price (PB11a) form in order to formalise the price offer.  The responsible person is then notified by email when the Minister has formally agreed to the negotiated price.

Pricing methods used

Cost plus method

The cost plus method is most commonly used in the case of stand-alone products, those recommended on the basis of acceptable cost-effectiveness and where no specific relativity exists, or when recommending a benchmark price for a therapeutic group.

In these cases a gross margin may be granted based on the cost of manufacture.  This margin can vary and is determined on a case by case basis. A margin on costs of around 30% is usually considered reasonable for new drug listings, but higher margins may be recommended for low volume products and lower ones may be recommended for high volume products.

The cost plus method relies on responsible persons’ cost information (usually presented on a PB11b form) which provides for a detailed breakdown of the manufacturing costs including landed cost, packaging, drug content, quality assurance, plant and equipment, manufacturing overheads and Therapeutic Goods Administration (TGA) fees.

Reference pricing

Reference pricing is a Government pricing policy which applies where drugs considered to be of similar safety and efficacy for pricing purposes are linked, and recommended by the PBAC as cost-minimised. The lowest priced brand or drug sets a benchmark price for either the other brands of that drug or the other drugs within the same sub-group of therapeutically related drugs.  Pricing within these sub-groups is based on the therapeutic relativities between drugs. Those relativities may be direct or indirect (for example, in the case of combination products, they may be based on relativities between drug components).

Reference pricing applies to drugs in F1, single brand combination products on the Combination Drug List and to drugs in Therapeutic Groups regardless of formulary, but not to other drugs in F2.

For new drugs being considered by the PBAC for listing on the PBS comparators for pricing purposes may be in either formulary.

Pricing of new strengths of existing items

For new strengths of already listed drugs, as a general rule, the pricing of half strength formulations is at two-thirds to 70% of the full strength.  For example, a new 10 mg tablet would be priced at about two-thirds of the existing 20 mg tablet.  Likewise, a double strength is usually one and two-thirds of the single strength.  There are no general guidelines for other ratios.

These guidelines do not apply in all cases, for example if there is ‘flat’ pricing or for expensive drugs where history indicates pricing of the different strengths is based on the same price per unit (or mg or gram).

Weighted Pricing

For a small number of drugs with multiple indications, each indication may have an indication-specific price which relates to its cost-effectiveness for the eligible patient population.  The indication-specific price is usually different (i.e. higher or lower) from the published price. In this case, it is usual practice to employ a weighted pricing methodology to fulfil the requirements of the National Health Act 1953 to have a single published list price per pharmaceutical item.  This generally involves applying a weighting to each indication-specific price and then adding these prices together in order to arrive at a single weighted price. 

The weightings represent the estimated proportion of drug utilisation for each indication.  These weightings are generally based on Medicare Australia (Services or Benefits) data for the particular indication over a dispensing period. For new indications with less than 12 months of Medicare data, it is usual practice to use the projected utilisation estimates accepted by the PBAC.

The published price may be re-calculated prior to PBS listing of each new indication, as appropriate and any indications subject to a Special Pricing Arrangement (SPA) are included in the weighted price calculation at the unrebated indication-specific price.

The indication-specific price continues to exist and is the price used in any future indication-specific reference pricing actions. This price will be shared with any new sponsor upon a positive PBAC recommendation.

For example, consider Drug X listed currently for Indication I at a published price (AEMP) of $100.000. A new indication, Indication II, has been recommended for listing, at an indication-specific price (AEMP) of $75.00. At the time of its listing, the projected annual expenditure for Indication II is $15,000,000, while the average annual expenditure based on Medicare Benefits for Indication I is estimated to be $10,000,000. The following steps show how a weighted price may be calculated.

Step 1

Calculate total annual expenditure for Drug X across all indications:

Table - Calculate total Annual expenditure for Drug X across all indications

Indication

Average annual expenditure

I

$10,000,000.00

II*

$15,000,000.00

Total

$25,000,000.00

*projected annual expenditure

Step 2

Work out the weighting for each indication, based on its percentage proportion of expenditure as follows:

  • Indication I:
    (15,000,000 ∕ 25,000,000)*100 = 40%
  • Indication II:
    (15,000,000 ∕ 25,000,000)*100 = 60%

Step 3

Apply the weighting worked out in Step 2 to the indication-specific prices (AEMP) for Drug X as follows:

  • Indication I: $100 x 40% = $40
  • Indication II: $75 x 60% = $45

Step 4

Add the resulting prices in Step 3 to arrive at a weighted price across all indications:

  • Indication I: $40
  • Indication II: $45
  • Total: $85

The weighted price of $85 (AEMP) will become the basis for the published price of Drug X on the PBS. 

In the event of a new product seeking reimbursement for Indication I on a cost-minimisation basis, the price of $100 will be the resultant price for the new product. 

In the event of a new product seeking reimbursement for Indication II on a cost-minimisation basis, the price of $75 will be the resultant price for the new product.

Pricing of combination products

A combination product is a product that is made up of more than one active moiety.  The approved ex-manufacturer price of combination products where both or all components are PBS listed is usually, but not always, based on the sum of the approved ex-manufacturer prices of the individual components at the time of listing (in accordance with PBAC guidelines).  Advice from the PBAC in relation to cost-effectiveness and relativity is also taken into account.  For example, the combination tablet containing enalapril maleate 20 mg plus hydrochlorothiazide 6 mg was recommended on a cost minimisation basis compared with enalapril maleate 20 mg and hydrochlorothiazide 12.5 mg as individual items, and the combination products containing the drug fluticasone with vilanterol were recommended on a cost-minimisation basis with the combination products containing the drug fluticasone with salmeterol.

Where a new combination product contains a formulation where one component is not represented by an actual listed strength, the guidelines applying to new strengths of listed drugs may be invoked in order to work out a theoretical component price.  For example, where the new combination product has a 100 mg – 2.5 mg formulation, but the listed component drugs are 100 mg and 5 mg, the price of the new combination product might be the sum of the approved ex-man price for the 100 mg component drug and two-thirds of the approved ex-man price for the 5 mg component drug.

Single brand combination products where at least one drug in the combination is PBS listed, are not included in F1 or F2, but are set out in an administrative list, the Combination Drug List (CDL).

Changes to the price of one or more of the component drugs are generally ‘flowed on’ to the price of the relevant combination drug:

  • for drugs on the CDL – the flow-on occurs under section 99ACCC of the National Health Act 1953 (the Act). This applies for the 16% ‘first new brand’ reduction and other statutory price reductions, including price disclosure. For more information about flow-on of F1 5% Statutory Price Reductions commencing 1 April 2016 please see the Fact Sheet.  Drugs on the CDL are also generally subject to administrative reference pricing, but any F1 5% flow on reductions are not being reference priced.
  • for drugs on F2 – the flow-on of price disclosure reductions occurs under section 99ADHB of the Act.  For more information about flow-on of price reductions to F2 combination items, please see the 2015 Price Disclosure Changes – Fact Sheet. Drugs on F2 are not subject to administrative reference pricing.

If the combination product has PBAC advice on significant improvement over alternative therapies under s101(4AC) of the Act, there is a discretion not to flow on the statutory price reduction.

Factors considered by the Pricing Section in making a recommendation to the Minister

In considering the price of items recommended for listing and in reviewing the price of items already listed on the PBS, the Pricing Section takes account of the following factors:

(a)   PBAC advice on clinical and cost-effectiveness;

(b)   prices of alternative brands;

(c)   comparative prices of items containing drugs in the same Anatomical Therapeutic Chemical (ATC) groups;

(d)   cost information provided by the responsible person;

(e)   prescription volumes, economies of scale, special storage requirements, product stability, special arrangements;

(f)    prices of items containing the drug in reasonably comparable overseas countries;

(g)   other factors the applicant may wish the Pricing Section to consider;

(h)   any directions of the Minister.