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Annual review of fees and charges 2008-09 - Non prescription (registered) medicines
Cost recovery impact statement
The Therapeutic Goods Administration (TGA) is a business unit within the Department of Health and Ageing responsible for evaluating the safety, quality and efficacy of medicines, medical devices and blood components available for supply in Australia and their export. The TGA is a full cost recovery agency and derives its operating income from regulatory fees and charges imposed on sponsors and manufacturers of therapeutic products.
Each year the TGA reviews its fees and charges in consultation with industry associations. Generally, fees and charges are increased in line with annual average wage and cost movements. Significant changes to regulatory arrangements of new regulatory proposals involve additional consultation with affected sectors and result in the preparation of cost recovery impact statements.
In developing the 2008-09 TGA operating budget, it was identified that fees and charges in the non-prescription (registered) medicines sector would not achieve full cost recovery. The TGA had proposed significant increases to fees and charges that would move the sector towards full cost recovery [in 2007-08], however a decision was taken to defer action and address the under recovery in the (then) upcoming joint regulatory scheme with New Zealand, the Australia New Zealand Therapeutic Products Agency (ANZTPA).
Given that the establishment of ANZTPA has been postponed for the foreseeable future, and that the non prescription (registered) medicines sector continues to under recover its costs, the TGA consulted with the Australian Self Medication Industry (ASMI) in February 2008 and notified that the ongoing under-recovery would be addressed in the 2008-09.
The TGA are proposing to increase non-prescription (registered) medicines fees and charges by 10 per cent for 2008-09. The increases are planned to take effect from 1 July 2008. As the increases exceed the consumer price index they represent a material amendment of an existing cost recovery arrangement. Accordingly, the TGA believes a cost recovery impact statement should be prepared.
The Australian community has an expectation that therapeutic products in the marketplace are safe and of high quality, to level equal to that of countries with comparable standards. The Therapeutic Goods Administration (TGA) is one of the world's front line regulators undertaking rigorous scientific and risk assessments of therapeutic products to ensure safety, quality and efficacy, without undue impact on the timely supply of essential products to consumers and patients.
Most products for which therapeutic claims are made must be assessed by the TGA and entered on the Australian Register of Therapeutic Goods (ARTG) before they can be marketed in this country. The ARTG keeps a record of products that are approved for marketing, the ingredients contained in each product, and the therapeutic claims made for medicines and the intended use of medical devices. The TGA also regulates fresh blood, blood components and banked tissues. These products are not generally included on the ARTG, their regulation is through audit and licensing of manufacturers and compliance with standards.
Australia has a risk-based system where the level of regulatory control of a therapeutic product is based on the relative safety of the product and the seriousness of the condition for which it is intended to be used. Products are reviewed by the TGA at a level consistent with the risk associated with their use in the community and subsequent entries on the ARTG are classified as either 'registered' or 'listed', or in the case of medical devices 'included'.
The TGA recovers the full cost of all activities undertaken that are within the scope of the Therapeutic Goods Act 1989 (the Act). Partial cost recovery was introduced in 1991 following the commencement of the Act, with full cost recovery being implemented in 1998.
Fees and charges are prescribed in regulations made under the Therapeutic Goods Act 1989, Therapeutic Goods (Medical Devices) Act 2002 and the Therapeutic Goods (Charges) Act 1990.
The TGA reviews its fees and charges each year in consultation with stakeholders through the TGA-Industry Consultative Committee. The Committee provides a forum to exchange information on industry trends and regulatory expectations, discuss the development of the TGA's corporate plan, annual business plans and budget, as well as consulting on fees and charges proposals.
Following turbulent fees and charges changes following the introduction of full cost recovery, the TGA and industry agreed to the adoption of an indexation model for fee increases. The model aimed to improve the predictability of fees and charges for industry budgetary planning as well as providing a guide to promote TGA's operational efficiency. Fee increases above this level would be subject to further consultation with industry. The index factor applied each year is a 50-50 composite comprising the Australian Bureau of Statistics' Consumer Price Index and the Wage-Cost Index.
From time to time the TGA will also undertake a more detailed review of its fees and charges structure and will involve affected industry stakeholders in the development of fees and charges proposals. In 2003 a review of the prescription medicines fees and charges structure was completed to simplify the scheme, realign fees to reflect the cost of the activities performed and to address compounding under-recovery. In 2006 the TGA completed a cost recovery impact statement for the introduction of a regulatory model for in-vitro diagnostic devices; and a cost recovery impact statement for the regulation of the non-prescription (registered and listed) medicines sector.
In 2004 the TGA completed a comprehensive review of its fees and charges. The review was triggered by the promulgation of the Australian Government's cost recovery policy and found that the TGA's cost recovery arrangements complied with the Government's cost recovery guidelines. Notwithstanding, the review noted the need to reform the fees structure for non-prescription medicines in consultation with industry associations and stakeholders. The review also coincided with the commencement of development of a fees and charges framework for the planned joint regulatory scheme being developed with New Zealand.
Given the completion of a mandatory comprehensive review of cost recovery arrangements, and that the proposals that have triggered this cost recovery impact statement do not change the basis of the fee structure, a policy review has not been conducted.
There has been no change to the policy underpinning the TGA's fees and charges arrangements, nor at this time are there any proposals to alter the design of the fees and charges structure. These matters were discussed in detail in the 2004 cost recovery impact statement for the regulation of therapeutic products, which were found to be compliant with the Government's cost recovery guidelines.
- Companies (product sponsors and manufacturers) that give rise to the need for regulation should pay cost recovery charges, as it is not cost effective to impose fees on individuals. The cost of regulation is expected to be incorporated in pricing decisions for products.
- Fees and charges should be structured to ensure full cost recovery for the regulated sector - there is no inconsistency with other government policies, and there is no evidence that the proposed fee increases would result in a reduction in industry innovation or impact on competition.
- Fees are used for pre-market services performed. These should reflect as closely as possible the underlying cost of the activities performed. Annual charges (a levy) are used to recover costs that cannot be reasonably assigned to individual firms.
- The fees and charges are set by regulation pursuant to the Therapeutic Goods Act 1989, Therapeutic Goods (Medical Devices) Act 2002 and the Therapeutic Goods (Charges) Act 1990.
- The administrative arrangements for cost recovery are simple and are cost-effective (online payment has improved efficiency).
- Fees and charges will continue to be monitored by the TGA-Industry Consultative Committee to find the appropriate balance between fee predictability/stability and full cost recovery in the most cost-effective manner. The Committee meets twice annually and is supplemented with structured bilateral industry meetings.
This cost recovery impact statement deals with TGA's proposals for significant increases to fees in industry sectors that have not met the requirement to recover the full cost of regulation.
The fees and charges for non-prescription (registered) medicines, together with other fees and charges currently imposed by the TGA, will be subject to a further comprehensive review in 2009, with a full cost recovery impact statement to be prepared.
Current regulatory arrangements for non-prescription medicines
Therapeutic products are regulated in Australia under the provisions of the Therapeutic Goods Act 1989 (the Act). Therapeutic products regulation is achieved through a risk management approach to pre-market evaluation and approval of therapeutic products intended for supply, licensing of manufacturers and post-market monitoring and surveillance. The principal activities of the regulatory scheme include:
- Scientific evaluation of medicines, medical devices and blood and tissue products for supply in Australia;
- Licensing and audit of manufacturing standards;
- Monitoring compliance with standards, including testing of products, auditing product data, analysing reportable incidents, investigating complaints, and recalling non-compliant products from the market;
- Surveillance, investigation and enforcement of the provisions of the Act;
- Industry support activities, including the development of guidelines and promoting international harmonisation; and
- Services to Government to support the objects of the Act.
Most non-prescription medicines (mostly over the counter pharmacy medicines) and complementary medicines are subject to a lower level of evaluation and have lesser data requirements. These products are intended for use for the treatment of minor self-limiting conditions and are subject to assessment of quality and safety only, not effectiveness. Data requirements for complementary medicines reflect the fact that comprehensive scientific data may not be available for herbal and alternative medicines, but that other evidence may be available to demonstrate a long history of safe use. These products are 'listed' on the ARTG.
Non Prescription (Registered) Medicines
Non prescription (registered) medicines are predominantly 'over the counter' medicines but also include some complementary medicines.
- Pre-Market activities for non prescription (registered) medicines comprise the evaluation of new products (processing, scientific evaluation, expert committee consideration, delegate approval and product registration on the ARTG) and the evaluation and processing of variations submitted by product sponsors for an existing approved product.
- In financial 2006-2007, the TGA received some 641 new product applications for evaluation, (including 10 complementary medicine products). This level of activity is expected to be maintained in the medium term.
- 259 variations and 495 notifications (variations that do not require evaluation) were also received in 2006-2007 with the number expected to remain constant.
- Once available on the ARTG, the TGA performs routine and targeted monitoring of products drawing in the expertise of the TGA's laboratories, issues arising from periodic manufacturing inspections and matters raised with the TGA by consumers, industry associations and expert committees.
- As at 31 March 2008, there were 3,118 non prescription (registered) medicines products registered on the ARTG, 6 percent higher than compared with March 2007.
Method for determining fees and charges
The TGA's method for the derivation of activity costs, and therefore fees and charges, was outlined in the 2004 review of cost recovery arrangements (a summary of which is available on the TGA Website).
The TGA uses an activity based costing methodology for the assignment and allocation of all direct, indirect and overhead costs to activities undertaken. The methodology allows costs to be allocated to activities based on their consumption at each stage of the process through to the final product or service. Activity based costing facilitates product costing and pricing, cost analysis and management, resource planning and industry reporting.
The TGA's ABC model is maintained using a proprietary product. A two-stage process is used to firstly attribute costs for corporate activities to each business unit, then a second step is used to assign these costs to activities and services (cost objects). The following diagram provides a representation of the costing model.
Overhead costs are allocated to Business Units based on a number of cost drivers to match the consumption of the resource. For example, accounts processing costs were allocated to business areas on the proportion of payments made on their behalf. Similarly, indirect recruitment costs were assigned on the proportion of recruitment cases over the previous year. For other costs, effort data was used following a survey of staff time.
The cost model is used in budgeting by substituting the actual costs with the budgeted figures TGA has developed based on its business plans and forecasts of activity volumes. Specific fees and charges are determined by dividing the cost pool for each product group (cost object) by the number of applications/products expected to be received.
After completing the 2004 Cost recovery review, the revised ABC model was adopted and used for the allocation of costs. This model has continued to be applied, with minor modifications since that time, with all drivers (including staff efforts) being updated periodically.
Shortfall in cost recovery for non prescription (registered) medicines
Non prescription (registered) medicines have been found to be consistently under-recovering for the past three, and the current, financial years. A significant change in 2004-05 resulted from a significant increase in post market monitoring and surveillance activities which coincided with the update of the ABC model from the 2004 cost recovery review.
The under-recovery was highlighted ahead of the 2005-2006 budget, however due to the TGA's overall fiscal position and the development of the joint regulatory scheme, action was not taken to address the shortfalls and the deficits were off-set against TGA's retained surpluses. At the time, it was expected that a new fee structure would be developed with industry for the evaluation of non prescription (registered) medicines that would address under-recovery as part of the joint scheme.
The Government approved a 20 per cent increase to all application, processing and evaluation fees; and annual product charges for the 2006-2007 budget. This moved the sector closer towards to full cost recovery, however did not fully address the under recovery, with a net operating deficit of $489k recorded for 2006-2007. Contrary to the Australian Government Cost Recovery Guidelines, the sector continued to be cross subsidised by other stakeholders within the medicines sectors.
The shortfalls in cost recovery for the previous three years and the forecast projection for 2007-08 and 2008-09 (before fee increases) are set out below:
Drawing on the activity based costing data as at March 2008 the following shortfalls in cost recovery were identified. For this analysis, revenues for pre-market authorisation (application and evaluation fees) have been grouped. Monitoring and scheme support costs are recovered from annual charges imposed on all registered and listed products on the ARTG and any low turnover declaration processing fees.
Revenues have also been adjusted to include annual charges for new products that had yet to be billed at 31 March 2008. These estimates are indicative and will not be certain until annual charges billing is completed and low turnover declarations have been processed to exempt products from the annual charge on the grounds of low sales turnover (low turnover exemptions for new products are usually high for the first year of marketing).
|Application and evaluation fees||$2.143m||$2.874m||$731k||25%|
|Monitoring and scheme support||$1.820m||$2.021m||$201k||10%|
Allowing for normal variations in monthly data for application and evaluation fees, the under-recovery in non prescription (registered) medicines appeared to span both pre-market activities and post-market monitoring and scheme support activities.
Contributing factors for under recovery in the non prescription (registered) medicines sector
Previous action by TGA that would have moved the sector towards full cost recovery was deferred as a new fees and charges model had been proposed for implementation under the (then) upcoming joint regulatory scheme with New Zealand. The new fees and charges model proposed for the Australia New Zealand Therapeutic Products Authority (ANZTPA) would have fully addressed the under recovery. It is expected that the new model for non prescription (registered) medicines fees and charges will be implemented in 2009-2010, regardless of whether the ANZTPA proceeds or not.
Other contributing factors for the under recovery include:
- the increased complexity in applications received and associated increased workload associated with down-scheduling of medicines (previously regulated as prescription-only medicines); and
- increases in market monitoring and regulatory support activities that have arisen from greater government and community expectations for the safety and quality of medicines, including market surveillance, additional laboratory testing and investigations into problem reports.
Agency (TGA) cost recovery - forecast 2008-09 outcomes
The TGA have forecast an overall $1.3m net cost recovery deficit for 2008-09. The forecast deficit will require the TGA to call on its retained surpluses, which are expected to accumulate to $22m by 30 June 2008.
To achieve full (not partial) cost recovery in the non prescription (registered) medicines sector, the TGA would need to increase fees and charges by 19 per cent; however, to limit the impact of such an increase, the TGA believes that it would be better for all affected stakeholders to phase in full cost recovery of non prescription (registered) medicines over two (not one) years.
For 2008-09, the TGA proposes a 10 per cent increase to all non prescription (registered) medicines application, processing and evaluation fees; and annual product charges. The cost recovery arrangements for non prescription (registered) medicines are likely to be subject to greater than indexation (again) for 2009-2010, however TGA will confirm the requirement when setting fees and charges for 2009-2010.
- The TGA's stakeholders are aware of, and agree too, the TGA aim of maintaining retained surpluses which are the equivalent of (up to) three months of operating expenses.
- Including the 2007-08 financial year, the TGA has generated surpluses for four out of the last five years resulting in expected reserves of $22m by 30 June 2008. This retained surplus will be used to off set the forecast 2008-09 deficit of $1.3m.
- As the medicines stakeholder group [comprising prescription medicines and non prescription (registered) medicines sponsors and manufacturers] are represented principally by the same or similar industry associations (specifically the Australian Self Medication Industry, the Complementary Healthcare Council of Australia, Medicines Australia and the Generic Medicines Industry Association), the cross subsidisation which is likely to arise in 2008-09 is recognised and generally agreed between the medicines stakeholders.
- All issues around cross subsidisation will be addressed directly and completely when the TGA undertakes a full cost recovery review in 2009.
Low volume turnover declaration application fees
Low volume turnover application fees apply to any therapeutic product (including registered) where the product annual charge exceeds 6.8% of the estimated or actual value of wholesale sales turnover of a product. The exemption aims to reduce the regulatory cost for products with very low circulation.
For 2008-09, the low value low volume application processing fee will remain unchanged at $120, as the fee is common across all sectors.
Impact assessment on product sponsors
The TGA is aware that the increases proposed are significant, though not unexpected in light of cost recovery trends shared with industry over recent years.
The proposed 10% increase in registered medicine evaluation fees will represent between $660 and $4,600 per application, dependent on the size of the data package provided for clinical and/or toxicological evaluation. 81 per cent of evaluations performed in 2006-2007 were for packages of 500 pages or less (evaluation fees which are subject to increases between $660 and $1,200 each). The increased evaluation fees are likely to represent only a small fraction of the cost of bringing the product to market and are not expected to impact on the development of products introduced into Australia.
The 10 per cent increase in annual charges for non prescription (registered) medicines are not expected to make any significant impacts on the number of products entered on the ARTG, nor on product pricing. As shown in the following table, the availability of the low turnover exemption from annual charges limits the impact of the annual charges increase to no more than 0.6 per cent of the product shelf price per unit.
|Low turnover threshold||Charge Level||Sales Value||Units ($5ea)||Units ($10ea)||Units ($15ea)||Units ($20ea)|
|Fee increase per unit||$0.03||$0.06||$0.09||$$0.12|
|Percent of price||0.6%||0.6%||0.6%||0.6%|
|Note: There is no impact on price where sales are less than the low turnover threshold.|
The impact per product reduces based on the total sales volume (as many products sell well above the low-turnover threshold) as well as the price of each product. As shown in the following table, the maximum increase for the price of each product is 0.6 per cent. The increase falls sharply when the sales volume per product rises above 5,000 units (to as little as 0.05 per cent based on a $20 unit price per product).
|Sales volume||Fee increase||Fee per Unit||Units ($5ea)||Units ($10ea)||Units ($15ea)||Units ($20ea)|
Proposed fees and charges
|Fees and Charges||Basis of Charge||Current Fee
|New registered medicine application||Per application||$990||$1090||10%|
|Concurrent registered medicine application||Per application||$440||$480||10%|
|Processing fee for a variation to an existing registered medicine||Per variation||$990||$1090||10%|
|New product not involving clinical or toxicological evaluation||$6,570||$7230||10%|
|Variation not involving clinical or toxicological evaluation||$2,370||$2610||10%|
|Evaluation fees (1-50 pages)||Per application||$6,570||$7,230||10%|
|Evaluation fees (51-250 pages)||Per application||$8,420||$9,260||10%|
|Evaluation fees (251-500 pages)||Per application||$11,500||$12,700||10%|
|Evaluation fees (501-100 pages)||Per application||$15,400||$16,900||10%|
|Evaluation fees (1001-2000 pages)||Per application||$23,000||$25,300||10%|
|Evaluation fees (2001-3000 pages)||Per application||$30,700||$33,800||10%|
|Evaluation fees (> 3001 pages)||Per application||$46,000||$50,600||10%|
|Annual Charge - registered medicine||Per registration||$920||$1,010||10%|
As in previous years, the TGA consulted with industry associations on its business priorities draft budget, and fees and charges proposals under the auspices of the TGA-Industry Consultative Committee (TICC).
The TGA met with the Australian Self Medication Industry Association (ASMI) on 13 February 2008 and provided written details of the budgetary position and fees and charges outlook. This included a proposal to increase non prescription (registered) medicines fees and charges by 19 per cent to enable the TGA to provide advice to the Government on changes to its fees and charges for 2008-09. The TGA advised ASMI that the non prescription (registered) medicines sector had successive years of under recovery and proposed two alternate options to address under recovery in the sector:
- Cut costs by reducing resources, however this would impact on evaluation time and post market monitoring; or
- Increase fees and charges suitably to achieve full recovery.
ASMI agreed in principal to increase fees and charges by more than the general indexation formulae, however sought some additional information for reasons for increase in costs in the previous years. TGA agreed to provide this information before an ASMI meeting with its members on 26 February 2008.
Subsequent to the meeting [between TGA and ASMI], TGA provided detailed justifications for costs and reasons for increases in the past.
The outcome of the February 2008 sector specific bilateral meeting was that industry (as represented by ASMI) recognised the ongoing under recovery, however did not agree to 19 percent increases.
The TGA proposal to phase in full cost recovery over the next two successive years provides for the ASMI concerns by limiting the immediate impact of the increases, whilst still addressing the over-arching problem of under recovery.