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Annual review of fees and charges 2009-10 - Non-prescription medicines

Cost recovery impact statement

10 June 2009

1 Overview

1.1 Purpose

The Therapeutic Goods Administration (TGA) is proposing to increase non-prescription (registered) medicines fees and charges by 13.3 per cent for 2009-2010. The increases are planned to take effect from 1 July 2009.

The Department of Finance and Deregulation new cost recovery guidelines stipulate that if an agency with gross cost recoveries over $5m were to increase fees by more than CPI, they are required to complete a cost recovery impact statement. 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 for significant increases to fees and annual product charges in the non-prescription medicines sector.

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

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).

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 and the Therapeutic Goods (Charges) Act 1990.

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 TGA has advised industry of the following direct, corporate and support cost allocations for 2008-2009 and 2009-2010 forecasts.

$(m) 2008-09 Forecast 2009-10 Forecast
Direct Cost (Employee and Supplier cost) 3.965 3.700
Corporate Cost (ABC allocation of rent, POE, computer exp, depreciation) 1.085 0.975
Support Cost (ABC allocation of Executive, HR, Finance, Legal, Enforcements, Labs and other business areas cost) 2.530 2.322
Total Industry Cost 7.580 6.997

3.4 Reasons for fees and charges increase

The TGA have 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 this budget cycle, with detailed analysis of the TGA expenditure budgets, every effort was taken to reduce cost 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 non-prescription (registered) medicines fees and charges by 13.3 per cent 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 non prescription medicines sector under recovered its costs between 2004-05 and 2007-08 by a total of $5.764 million. The sector is expected to under recover by an additional $1.8 million in 2008-2009 which will result in total loses of $7.564 million over the last five years. The TGA has previously sought to address under recovery in the sector by increasing fees and charges by greater than indexation (20 per cent in 2006-07 and 10 per cent in 2008-2009), however due to historical circumstances, the under recovery of costs in the sector has persisted. These circumstances include:

  • enhanced post market monitoring and surveillance activities;
  • the TGA's previous fiscal positions; and
  • an expectation that a new fee structure would be developed with industry for the evaluation of non prescription medicines that would address under-recovery as part of the (now) suspended joint regulatory scheme with New Zealand.

When setting the fees and charges for 2008-2009, the TGA estimated that a 19 per cent increase was required to achieve full cost recovery in the sector, however after further consultation with the sector and the Government, it was agreed to limit the increase to 10 per cent and that full cost recovery would be phased in over the 2008-2009 and 2009-2010 financial years.

For 2009-2010, the TGA has identified that increases of 21 per cent are required for the non prescription medicines sector to finally achieve full cost recovery. The TGA believes that whilst increases of this magnitude would be consistent with the agreement to phase in full cost recovery, the TGA acknowledges that increases of 21 per cent in 2009-2010 [in the current global financial environment] may be too high. The TGA has therefore proposed a 13.3 per cent increase (comprising a 9 per cent catch-up increase from 2008-2009 plus the 4.3 per cent general indexation increase) to all non prescription (registered) medicines application, processing and evaluation fees; and annual product charges.

If the TGA is to both meet its obligations for cost recovery, and at the same time avoid additional costs for members of the non prescription medicines sector in future years, it believes that a fundamental examination of the resources and processes applied to regulation of non prescription medicines is required to determine if the regulatory framework can be offered at lower cost. To that end, the TGA will engage with representatives of the Australian Self Medication Industry (ASMI) during the 2009-2010 financial year to discuss options for regulatory reform.

The revenue and expenditure for 2008-2009 and 2009-2010 forecasts including a nil increase in fees and charges, 4.3 per cent increase in fees and charges and a 13.3 per cent increase in fees and charges 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 13.3% increase in fees and charges
Revenue 5.790 5.786 6.034 6.555
Expense 7.580 6.997 6.997 6.997
Net Operating Result (1.790) (1.211) (0.963) (0.442)

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)
Non-Prescription (Registered) Medicines (1.600) (2.308) (0.489) (1.367)

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 per cent 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.

In 2009-2010, the TGA expects to issue annual charges invoices for (approximately) 3,628 non prescription medicine products which are registered on the ARTG. The revenue from these invoices will however be offset by 1,161 non prescription medicines products which are likely to qualify for LVLV exemption and therefore only be subject to the $130 LVLV application fee, not the $1,140 annual product charge.

For 2009-2010, the low value low volume (LVLV) application processing fee will be increased by 4.3 per cent (up from $120 to $130 rounded), as the fee is common across all sectors.

3.5 Proposed fees and charges

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

Fees and Charges Current Fee $ Proposed Fee $ Forecasted Volumes for 2009-10 Forecasted Revenue for 2009-10
New registered medicine application $1,090 $1,230 279 $343,170
Concurrent registered medicine application $480 $540 36 $19,440
Processing fee for a variation to an existing registered medicine $1,090 $1,230 740 $910,200
New product not involving clinical or toxicological evaluation $7,230 $8,190 88.5 $724,897
Variation not involving clinical or toxicological evaluation $2,610 $2,960 48.0 $142,110
Evaluation fees (1-50 pages) $7,230 $8,190 71.0 $581,490
Evaluation fees (51-250 pages) $9,260 $10,500 13.0 $136,500
Evaluation fees (251-500 pages) $12,700 $14,400 11.0 $158,400
Evaluation fees (501-1000 pages) $16,900 $19,100 4.0 $76,400
Evaluation fees (1001-2000 pages) $25,300 $28,700 6.0 $172,200
Evaluation fees (2001-3000 pages) $33,800 $38,300 2.0 $76,600
Evaluation fees (> 3001 pages) $50,600 $57,300 1.0 $57,300
Annual Charge – registered medicine $1,010 $1,140 2,467 $2,812,380
Other Revenue (LVLV, interest and other minor revenue) $343,730
Total Non Prescription (Registered) Medicines Revenue $6,554,816

3.6 Registered non prescription medicines fees - sponsor impacts

The 13.3 per cent increase in registered non prescription medicines application and evaluation fees will represent between an additional $1,100 (i.e. $140 application fee plus $960 evaluation fee) and $6,840 (i.e. $140 application fee plus $6,700 evaluation fee) per application, dependent on the size of the data package provided for clinical and or toxicological evaluation.

  • 92 per cent of evaluations forecasted to be performed in 2009-2010 are for packages of 500 pages or less, (i.e. evaluation fees which are subject to modest increases of between $960 and $1,700 each) - Table 1 refers.
Table 1. Registered Non Prescription Medicines Fees
Fees Current Fee Proposed Fee Variance Forecasted Volumes 2009-2010 %
New registered medicine application $1,090 $1,230 $140 279
Concurrent registered medicine application $480 $540 $60 36
Processing fee for a variation to an existing registered medicine $1,090 $1,230 $140 740
New product not involving clinical or toxicological evaluation $7,230 $8,190 $960 88.5
Variation not involving clinical or toxicological evaluation $2,610 $2,960 $350 48
Evaluation fees (1-50 pages) $7,230 $8,190 $960 71 66%
Evaluation fees (51-250 pages) $9,260 $10,500 $1,240 13 12%
Evaluation fees (251-500 pages) $12,700 $14,400 $1,700 11 10%
Evaluation fees (501-1000 pages) $16,900 $19,100 $2,200 4 4%
Evaluation fees (1001-2000 pages) $25,300 $28,700 $3,400 6 6%
Evaluation fees (2001-3000 pages) $33,800 $38,300 $4,500 2 2%
Evaluation fees (> 3001 pages) $50,600 $57,300 $6,700 1 <1%
Note. less than 1 per cent of evaluations forecasted will be subject to the $6,840 increase

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.

3.7 Registered non prescription medicines charges - sponsor impacts

The 13.3 per cent increase in annual charges for registered non prescription medicines is not expected to make any significant impacts on the number of products entered on the ARTG, nor on product pricing. As shown in the Table 2, the availability of the low turnover exemption from annual charges limits the impact of the annual charges increase to no more than 0.8 per cent of the product shelf price per unit.

Table 2. Registered Non Prescription Medicines Charges
Annual Charge Low Turnover Threshold Units ($5ea) Units ($10ea) Units ($15ea) Units ($20ea)
Current $1,010 $14,853 2971 1485 990 743
Proposed $1,140 $16,765 3353 1677 1118 838
Fee increase per unit $0.04 $0.08 $0.12 $0.16
Percent of price 0.8% 0.8% 0.8% 0.8%
Note. There is no impact on price where sales volume is 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 table 3, the maximum increase for the price of each product is 1.4 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).

Table 3. Impact per Product - Sales Volume
Sales volume Charge increase Charge per Unit Units ($5ea) Units ($10ea) Units ($15ea) Units ($20ea)
2000 units $130 $0.07 1.40% 0.70% 0.47% 0.35%
5000 units $130 $0.03 0.60% 0.30% 0.20% 0.15%
10000 units $130 $0.01 0.02% 0.10% 0.07% 0.05%
Note. The increase for the price of each product varies between 0.05 per cent and 1.4 per cent (maximum)

4 Ongoing monitoring

4.1 Monitoring and consultation

The primary mechanism used to monitor TGA activities, performance and costs is the TGA-Industry Consultative Committee (TICC). The TICC meets twice each year to examine the budget and progress on the business plan, with industry associations consulted separately on regulatory matters and cost impacts relating to specific sectors. Industry associations are also consulted in the process of regulatory development and reform, which are taken into account in regulatory impact statements, and in developing cost recovery arrangements.

Due to the uncertainty surrounding the estimated revenue for 2008-2009 and 2009-2010 caused by the Global Financial Crisis the TGA met with individual industry sectors twice (late 2008 and mid March 2009) to discuss its draft business plans and budgets. At the meeting between TGA and ASMI on the 16 March, ASMI were advised of the TGA proposal to increase fees and charges by 13.3 per cent.

The TGA is very aware that in these economic times caused by the Global Financial Crisis, increases in regulatory costs are undesirable.

Industry submissions

The TGA received two submissions (from ASMI and Johnson and Johnson Pacific (JJP) respectively) responding to the non-prescription medicines draft CRIS published on the TGA web site.

Submission 1

On 9 April 2009, an industry body wrote to the TGA to express their dissatisfaction with the proposed 13.3 per cent increases to fees and charges for the sector. However, whilst the industry body was dissatisfied with the proposed increases, they were similarly concerned about the continuous under recovery in the sector which results in higher than expected increases to fees and charges. The industry body advised that it supports any TGA proposal to engage with industry to discuss options for regulatory reform for the regulation of non prescription medicines, with a view to addressing the issue in the longer term.

TGA reply

The TGA has advised the industry body that if it is to meet both its obligations for cost recovery, and at the same time avoid additional costs for industry in future years, a fundamental examination of the resources and processes applied to regulation of non-prescription medicines is required to determine if the regulatory framework can be offered at lower cost.

  1. the TGA has agreed to actively engage with industry associations (i.e. ASMI) during the 2009-2010 periods to discuss options for regulatory reform for the regulation of non prescription medicines.
Submission 2

On 9 April 2009, a non prescription medicines manufacturer wrote to the TGA and expressed their dissatisfaction to the proposed increases. The manufacturer did not support the increases because the manufacturer expected to incur an additional $0.1 million in registration costs whilst the TGA had not committed to any new or immediate efficiencies for the evaluation of non prescription medicines. The manufacturer further stated that the current fee structure needs urgent review to ensure that the underlying costs of activities performed for non prescription medicines are commensurate with the level of risk of the products.

TGA reply

The TGA has calculated the impact of the proposed increases on product sponsors [as detailed in 3.6 "Sponsor Impacts Fees" and 3.7 "Sponsor Impacts Charges"]. While the total dollar increase for the manufacturer may be $0.1 million per annum, the TGA believes the actual cost of the increases only represents a very marginal increase of between 0.05 per cent and 1.4 per cent to the price of each product. In addition, the TGA reminds the manufacturer that:

  1. the TGA proposal to increase fees and charges by 13.3 per cent defers proposals for full cost recovery in the sector.
    1. industry has previously been informed that increases of 21 per cent (not 13.3 per cent) are required in 2009-2010 to achieve full cost recovery in the complementary medicines sector.
    2. the TGA's 13.3 per cent proposal is intended to reflect the uncertainty of the current global economic climate and limit the immediate impact on industry and consumers.
  2. The TGA will engage with industry (through the ASMI) in 2009-2010 to discuss options for regulatory reform for the regulation of non prescription medicines.
    1. The industry engagement will include a review of the current schedule of TGA fees and charges for non prescription medicines.

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

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.