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Annual review of fees and charges 2009-10 - Blood, blood components and human tissues

Cost recovery impact statement

10 June 2009

1 Overview

1.1 Purpose

The Therapeutic Goods Administration (TGA) is proposing to increase blood, blood components and human tissues annual licence charges by 12.8 per cent; whilst inspection and evaluation fees will increase by the general 4.3 per cent index (only) for 2009-2010. The increases are planned to take effect from 1 July 2009.

The Department of Finance and Deregulation (DoFD) new cost recovery guidelines stipulate that if an agency with gross cost recoveries over $10 million were to increase fees by more than CPI, they are required to complete a Cost Recovery Impact Statement (CRIS). TGA's budgeted gross cost recoveries for 2009-2010 are $99.9 million.

1.2 Background

The TGA is a business unit within the Department of Health and Ageing (DoHA) 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.

The Australian community has an expectation that therapeutic products in the marketplace are safe and of high quality, to a level equal to that of countries with comparable standards. The 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 Australia. The ARTG keeps a record of products that are approved for marketing, the ingredients contained in each product, the therapeutic claims made for medicines, and the intended use of medical devices. The TGA also regulates fresh blood, blood components and banked human tissues. These products are not generally included on the ARTG; their regulation is through audit and licencing 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. Subsequent entries on the ARTG are classified as either 'registered' or 'listed', or in the case of medical devices 'included'.

The TGA recovers the cost of all activities undertaken that are within the scope of the Therapeutic Goods Act 1989 (the Act).

Fees and charges are prescribed in regulations made under the Therapeutic Goods Act 1989, 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 (TICC). The TICC provides a forum to exchange information on industry trends and regulatory expectations, discuss the development of the TGA's corporate plan and annual business plans and budget, as well as consulting on fees and charges proposals.

TGA and Industry have an agreed indexation model based on the application of an index factor each year. The factor is a 50-50 composite comprising the Australian Bureau of Statistics' Consumer Price Index (CPI) and the Wage-Cost Index (WCI). The composite index for 2009-2010 was calculated based upon the CPI/WCI for the 12 months to September 2008. 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 or charge increases above this level are subject to further consultation with industry.

In 2005 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. The TGA will undertake another "whole of agency" review of its fees and charges in the second half of 2009 which will include the completion of an agency CRIS.

1.3 Australian Government cost recovery policy

In December 2002, the Australian Government adopted a formal cost recovery policy to improve the consistency, transparency and accountability of its cost recovery arrangements and promote the efficient allocation of resources. The underlying principle of the policy is that entities should set charges to recover all the costs of products or services where it is efficient and effective to do so; where the beneficiaries are a narrow and identifiable group; and where charging is consistent with Australian Government policy objectives. Cost recovery policy is administered by the DoFD and outlined in the Australian Government Cost Recovery Guidelines (Cost Recovery Guidelines).

The policy applies to all Financial Management and Accountability Act 1997 (FMA Act) agencies and to relevant Commonwealth Authorities and Companies Act 1997 (CAC Act) bodies that have been notified. In line with the policy, individual portfolio ministers are ultimately responsible for ensuring entities' implementation and compliance with the Cost Recovery Guidelines.

2 Policy review - analysis of TGA's activities

This CRIS deals with the TGA's proposal to increase annual licence charges in the blood, blood components and human tissues sector above the agreed rate of indexation.

There has been no change to the policy underpinning the TGA's fees and charges arrangements, nor at this time there any proposals to alter the design of the fees and charges structure. These matters were discussed in detail in the 2005 CRIS for the regulation of therapeutic products, which were found to be compliant with the Government's cost recovery guidelines. The key attributes of the frame work are as follows:

  • 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 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 product or licence charges (a levy) are used to recover costs that cannot be reasonably assigned to individual firms;
  • The fees and charges are set by regulations pursuant to the Therapeutic Goods Act 1989 and the Therapeutic Goods (Charges) Act 1990;
  • The administrative arrangements for cost recovery are simple and are cost-effective (online payment has improved efficiency); and
  • Fees and charges will continue to be monitored by the TICC to find the appropriate balance between fee predictability/stability and full cost recovery in the most cost-effective manner. The TICC meets twice annually and is supplemented with structured sectoral (industry) bilateral meetings.

3 Design and implementation

3.1 Basis of charging - fee or levy

Fees are used for pre-market services performed. These reflect as closely as possible the underlying cost of the activities performed.

Annual product charges (a levy) are used to recover costs that cannot be reasonably assigned to individual firms. No change is being made to the current basis of charging.

3.2 Legal requirements for the imposition of charges

The TGA recovers the full cost of all activities undertaken 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 implemented in 1998.

Fees and charges are prescribed in regulations made under the Therapeutic Goods Act 1989 and the Therapeutic Goods (Charges) Act 1990, specifically the Therapeutic Goods Regulations 1990 (the TG Regulations); the Therapeutic Goods (Medical Devices) Regulations 2002 (the TG (Medical Devices Regulations); and the Therapeutic Goods (Charges) Regulations 1990 (the TG (Charges) Regulations).

3.3 Costs to be included in charges

For regulatory products or services, cost recovery fees and charges ideally should reflect as closely as possible the costs of undertaking individual activities.

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.

A two-stage process is used to firstly attribute costs for corporate services, such as rent and information technology, to each business unit, including support services. Then a second step is used to assign these costs to regulatory activities.

The TGA's total expenses are broadly categorised in to the following three categories to ensure costs are 'materially' allocated correctly and to provide transparency:

  1. Direct Costs;
  2. Corporate Costs; and
  3. Support Costs.

Direct Costs: These are expenses that are directly related in performing the regulatory activity and mainly include labour costs. Labour costs are based on the current DoHA Certified Agreement, plus appropriate allowances for on-costs.

Corporate Costs: Corporate costs, such as rent and information technology, are costs that Business Units can control the 'consumption' of, but not the unit price. For example, a Business Unit controls the total floor space occupied, but not the unit cost. The allocation of corporate costs (including amortisation and depreciation costs related to capital assets) use a range of drivers, including the number of transactions processed, staff numbers, workstations, or floor-space.

Support Costs: Support costs include costs for providing support services such as laboratory services, human resources, and financial services. Business Units have very limited or no control over these expenses. For example, accounts payable costs are allocated based on the number of invoices processed for the Business Unit as a percentage of the TGA total.

diagram showing TGA cost allocations

The following direct, corporate and support costs were allocated for 2008-2009 and 2009-2010 forecasts:

$(m) 2008-09 Forecast 2009-10 Forecast

Direct Cost (Employee and Supplier cost)

2.036 2.166

Corporate Cost (ABC allocation of rent, POE, computer exp, depreciation)

0.358 0.341

Support Cost (ABC allocation of Executive, HR, Finance, Legal, Enforcements, Labs and other business areas cost)

0.447 0.405
Total Industry Cost 2.841 2.912

3.4 Reasons for fees and charges increase

The TGA has forecast an overall $0.4 million net cost recovery deficit for 2009-2010 after the proposed fees and charges increases. The forecast deficit would require the TGA to call on its retained surpluses, which are expected to be $19 million by 30 June 2009.

The TGA has undertaken a detailed budgeting exercise for 2009-2010 after reviewing its business plan for the same period. Throughout the budget cycle, with detailed analysis of the expenditure budgets, the TGA has taken every effort to reduce costs where possible without significantly affecting the ability to deliver the TGA business plan.

The TGA's stakeholders are aware of the TGA aim of maintaining retained surpluses which are the equivalent of (up to) three months of operating expenses. Including the expected deficit of $3.3 million in 2008-2009, the TGA forecast reserves of $19 million at 30 June 2009. This retained surplus will be used to offset the 2009-2010 forecasted deficit of $0.4 million.

The TGA is proposing to increase blood, blood components and human tissues annual licences by 12.8 per cent; whilst inspection and evaluation fees will increase by the general 4.3 per cent index (only) for 2009-2010. The increases are planned to take effect from 1 July 2009.

The TGA expects the 2009-2010 revenue volumes to remain (approximately) at 2008-2009 forecast levels.

The TGA 2009-2010 budget forecast is a net cost recovery deficit of $0.4 million; with revenue forecast to increase by $8.6 million; whilst expenditure is forecast to increase by $5.9 million.

The industry and TGA has agreed that a CRIS should be prepared if the proposed price increases are above the agreed composite indexation rate. The agreed indexation rate for 2009-2010 is 4.3 per cent.

If the TGA applies a 4.1 per cent increase to 2008-2009 forecasted employee expenses (in accordance with the DOHA Certified Agreement); and a 3.6 per cent increase to non employee expenses; the resulting cost increases for 2009-2010 will be (approximately) $3.8 million. Notwithstanding these forecasted increases, the TGA also expects to incur a further $1.5 million increase in expenditure in 2009-2010 [above 2008-2009 forecast levels] resulting directly from the implementation of the following range of initiatives:

  • transparency initiatives to increase publicly available information about regulatory decision making, improved monitoring of product safety;
  • simplification and/or deregulation of many existing requirements (such as the fit and proper person test, default pharmacopoeial requirements, suspension of registration, civil infringements regimen);
  • additional resources will be recruited into the manufacturing quality and assessment program to meet the growing demand from industry for domestic and international on-site audits and inspections; and
  • enhancing the robustness of administrative decision-making within the TGA.

The TGA consulted with the industry on these new initiatives as part of its business planning process in November 2008. Industry was generally supportive of the initiatives.

In addition to the above mentioned cost pressures, the TGA expects to incur additional legal costs related to an increase in case work related to Freedom of Information requests (FOI); the Administrative Appeals Tribunal (AAT); and other Federal Court actions. These increases will be partially off-set by a reduction in information technology (IT) business as usual costs because the TGA was required to reduce these costs by 2.5 per cent [or $0.2 million] in 2009-2010 as part of the Gershon savings. The TGA has complied with this requirement.

Sectorally, the blood, blood components, and human tissues sector under recovered its costs between 2004-2005 and 2007-2008 by a total of $2.049 million. The ongoing under recovery of costs was due principally to the exemption scheme for Not-for-Profit Hospital Supply Units (prescribed in subsection 59(3) of the Therapeutic Goods Act) which exempts qualifying Hospital Supply Units from paying annual licence charges to the TGA.

For 2008-2009 (alone), the TGA was required to waive in excess of $0.32 million in annual licence fees to a total of 39 separate blood, blood component and human tissue manufacturing sites that qualify as "not for profit". The TGA had previously expected that the not for profit exemption scheme would be discontinued under the planned joint regulatory agency with New Zealand. This would have mostly resolved the cost recovery issues in the sector; however, since the joint agency establishment was suspended in 2007, the status quo has continued for Australian blood and human tissue sites, with the not for profit exemption scheme continuing to limit the TGA's ability to fully recover costs in the sector. The greater than indexation increases proposed for 2009-2010 are anticipated to move the sector towards addressing the shortfalls arising from the not for profit exemption scheme. The TGA will separately address the future viability of the scheme during the regulatory reform programs.

The revenue and expenditure for 2008-2009 and 2009-2010 forecasts, including a nil increase in fees, 4.3 per cent increase in fees, and the proposed increase in fees (12.8 per cent increase in annual licenses and a 4.3 per cent increase in inspection and evaluation fees), are set out below:

$(m) 2008-09 Forecast 2009-10 Forecast with nil increase in fees and charges 2009-10 Forecast with 4.3% increase in fees and charges 2009-10 Forecast with proposed price increase
Revenue 2.370 2.517 2.601 2.712
Expense 2.841 2.912 2.912 2.912
Net Operating Result (0.471) (0.395) (0.311) (0.200)

The actual results for 2004-2005 to 2007-2008 are set out below:

$(m) 2004-05 Actual Surplus/(Deficit) 2005-06 Actual Surplus/(Deficit) 2006-07 Actual Surplus/(Deficit) 2007-08 Actual Surplus/(Deficit)
Blood (0.760) (0.819) (0.110) (0.360)

3.5 Proposed fees and charges

The current and proposed fees and charges are shown in the table below:

Fees and Charges Basis of Charge Current Fee $ Proposed Fee $ Forecasted Volumes for 2009-10 Forecasted Revenue for 2009-10
Annual Licence Charges - Primary Site Per License $111,400 $125,700 8 $1,005,600
Annual Licence Charges - Secondary Site Per License $5,480 $6,180 76 $469,680
Annual Licence Charges - Single step and single human tissue/Haematopoietic Progenitor Cells Per License $4,800 $5,410 5 $27,050
Annual Licence Charges - Two or more steps Per License $9,300 $10,500 8 $84,000
Inspection Fees - Primary Site Per inspection Hour $680 $710 265 $188,150
Inspection Fees - Secondary Site Per inspection Hour $500 $520 199 $103,480
Inspection Fees - Human tissue/Haematopoietic Progenitor Cells Site Per inspection Hour $500 $520 356 $185,120
Blood plasma & Technical File Evaluation 1-10p Per application $990 $1,030 8 $8,240
Blood plasma & Technical File Evaluation 11-50p Per application $8,500 $8,870 5 $44,350
Blood plasma & Technical File Evaluation 51-100p Per application $18,900 $19,700 2 $39,400
Blood plasma & Technical File Evaluation 102-1000p Per application $25,400 $26,500 2 $53,000
Other Revenue (interest and HCT revenue) $504,023

Total Blood Revenue

$2,712,093

4 Ongoing monitoring

4.1 Monitoring and consultation

The TGA derives the large majority of this sectors revenue from one (1) organisation, which represents approximately 90 per cent of the total sector revenue. The remaining revenue is shared among the other customers, numbering up to fifteen (15). The next largest customer represents approximately 3 per cent of the total sector revenue.

The TGA consulted with the Australian Red Cross Blood Service (ARCBS) on 24 April 2009 regarding the CRIS and the proposed increases. No responses have been received.

4.2 Periodic review

The Cost Recovery Guidelines require that all cost recovery arrangements are subject to periodic review no less frequently than every five (5) years. A TGA wide review of cost recoveries for all products will be conducted in 2009-2010. The TGA believes the review will move industry sectors towards full cost recovery in future years.

5 Certification

I certify that this CRIS complies with the Australian Government Cost Recovery Guidelines.

Secretary
Department of Health and Ageing
Date: 10 June 2009

6 Reference

Cost recovery links

The Australian Government Cost Recovery Guidelines and the accompanying Finance Circular are available on the Department of Finance and Deregulation Website.

For proposals that involve regulations or amendments to regulations that affect business, a Regulation Impact Statement (RIS) is required. Further information regarding RIS is available from the Office of Best Practice Regulation.