Statutory price reduction of pharmaceutical items and applying the 12.5% Test

Greg Williams, Sheena McKie and Carla Rank
11 Jul 2024
4.5 minutes

The Federal Court has dismissed an application by Arrotex Pharmaceuticals and others seeking clarification of the proper construction of section 99ADH(6) of the National Health Act, namely, the application of the 12.5% average unadjusted price reduction test (the 12.5% Test) in determining whether a price disclosure price reduction will apply (Arrotex Pharmaceuticals Pty Limited v Minister for Health and Aged Care [2024] FCA 522).

This judgment is important because it is the first time the Court has considered the price disclosure regime since the most recent Strategic Agreement amendments. The Court has confirmed that, consistent with the words of the statute and Explanatory Memorandum, data in the price disclosure cycle immediately before a reduction day (as defined) can be used to inform the 12.5% Test. It may surprise industry participants to know that the Strategic Agreement has no further part to play in interpreting the legislation, once relevant amendments have been passed.

On 24 May 2024, the Applicants filed a Notice of Appeal set for hearing on 8 August 2024. We will watch that appeal with interest.

The dispute between Arrotex and the Minister

Arrotex Pharmaceuticals Pty Limited, Apotex Pty Ltd and Arrow Pharma Pty Ltd (together, the Applicants) commenced proceedings in April 2024 against the Minister for Health and Aged Care (the Minister).

The Applicants claimed that price disclosure price reductions applied to 84 of their pharmaceutical items on 1 April 2024 contravened the Strategic Agreements between the Federal Government and Medicines Australia and between the Federal Government and the Generic and Biosimilar Medicines Association (GBMA). The Applicants argued that, for these pharmaceutical items, there had not been three data collection periods immediately before 1 April 2024 where a price reduction had not been made, and therefore the price reduction on 1 April 2024 was invalid.

The Applicants sought declaratory relief from the Court as to the correct interpretation of the 12.5% Test. The question for the Court was: what is meant by the phrase in section 99ADH(6)(b) “this section did not apply to the brand of the pharmaceutical item in relation to any of those data collection periods”? [emphasis added]

The 12.5% Test and statutory price reductions

The Act requires that Responsible Persons for multi-branded medicines listed on the F2 Formulary, comply with the price disclosure requirements.

The price disclosure obligations are intended to ensure that the subsidy paid by the Commonwealth under the Pharmaceutical Benefits Scheme (PBS) more closely reflects the price actually paid for a medicine by a pharmacist or other dispenser. The Act and regulations prescribe the method for calculating the "weighted average disclosed price" (WADP)[1] of a brand of a pharmaceutical item, including having regard to information disclosed under the price disclosure regime.

The percentage difference between the WADP and the applicable approved ex-manufacturer price (AEMP or list price) for the brand of a pharmaceutical item is known as the "unadjusted price reduction". The size of the unadjusted price reduction determine whether a price disclosure price reduction will be applied following a price disclosure cycle. The thresholds for a price disclosure price reduction are in section 99ADH. The 12.5% Test, found in section 99ADH(6), is one such threshold test. It applies to brands which would ordinarily need to have an unadjusted price reduction of 30% before they are subject to a price disclosure price reduction.

The 12.5% Test means that a price reduction occurs if there have been three consecutive price disclosure data collection periods (DCPs) in which the total of the unadjusted price reductions divided by 3, is at least 12.5%, but where the unadjusted price reduction never exceeded 30%. The DCPs are six-month periods, measured on a rolling basis each year from 1 April to 30 September and 1 October to 31 March.

Price disclosure price reductions are actioned on 1 April and 1 October (a Reduction Day). There is a time lag between the DCPs and a Reduction Day because it takes time for the Commonwealth to analyse the data. So, the 1 April price reduction day depends on data from the DCPs of 1 April to 30 September of the previous year. In the same way, the 1 October price reduction day depends on data from 1 October to 31 March of the previous year.

The Applicants' argument & the Strategic Agreements

The Applicants relied on the Strategic Agreements and the definition of "Price Disclosure Cycle" introduced in those documents to argue that the 12.5% Test should be interpreted such that there needed to be at least 24 months between a price reduction and the next price reduction, if it resulted from the application of the 12.5% test.

The Minister argued that the 12.5% Test could result in a price reduction 18 months after the last price reduction.

Federal Court's findings

Justice Rofe rejected the Applicants' construction of section 99ADH(6)(b) and dismissed the Applicants' case, having regard primarily to the text of the legislation. While the Court accepted that the Strategic Agreements include a definition of "Price Disclosure Cycle" in the Strategic Agreements which supported the Applicants' construction of section 99ADH(6)(b), that was not sufficient to displace the clear meaning of the legislation.

The Court observed that the Applicants' "heavy reliance" on the Strategic Agreements was "misplaced"; confirming that these agreements are "contractual documents… [which] cannot prevail over the language of the text of the statute to the extent of any inconsistency". In any event, the Court found that the Strategic Agreements do not unambiguously support one party's construction over the other, and the Minister's construction was not dependent on the Strategic Agreements.

The Applicants' reliance on purpose to prefer a two-year period (with no price reductions) to an 18-month period did not assist their construction. The text and context of the Act did not provide weight to this argument. As the Court observed, the intention of the statutory price disclosure price reductions under the Act is to ensure the subsidised price of a medicine aligns with its market price. Ignoring data in the 6 months immediately prior to a Reduction Day, would create "zombie" periods (which would never be counted, under the Applicants' construction) and therefore interrupt the "rolling, cyclical approach to price reductions that is set up by section 99ADH where every data collection period can be used to inform the 12.5% test". The Minister's construction was "harmonious with the rolling data collection and price reduction schemes" facilitated by the Act.

Key takeaways

The Federal Court has confirmed, consistent with ordinary principles of statutory construction, the text of the Act (and to the extent relevant, its explanatory memorandum) is to be preferred and will be read without regard to the Strategic Agreements. Industry participants are likely to get more mileage from the Strategic Agreements in those parts of pricing negotiation which are founded in Government policy (eg. reference pricing policy).

This case acts as a reminder to industry in preparation for future negotiations with the Commonwealth over Strategic Agreements (and in engaging with consultation processes) to seek to clearly articulate expectations of the industry at the outset. In particular, if the wording of the Act is clear it will prevail over arguments based on purpose as discerned from the Strategic Agreement.

On a practical level, the Court has confirmed that price disclosure price reductions are designed to ensure that the subsidised price of medicine is aligned with the market price and that all data collected for these provisions (including the data in the six months immediately prior to a Reduction Day) will be "counted" at some point to determine the size and timing of appropriate price reductions.

[1] Weighted average disclosure price or WADP means an amount calculated using a formula prescribed in section 99ADB(4) of the Act and regs 70-81 of the National Health (Pharmaceutical Benefits) Regulations 2017 (Cth).

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