Design of cost recovery charges

Licence and inspection fees

The characteristics of a government activity determine the type of cost recovery charge used (Cost recovery). There are two types of cost recovery charges:

• Cost recovery fees: fees charged when a good, service or regulation (in certain circumstances) is provided directly to a specific individual or organisation
• Cost recovery levies: charges imposed when a good, service or regulation is provided to a group of individuals or organisations (e.g. an industry sector) rather than to a specific individual or organisation. A cost recovery levy is a tax and is imposed via a separate taxation Act. It differs from general taxation as it is 'earmarked' to fund activities provided to the group that pays the levy.

Fees are used to recover the cost of the pre-market services performed. For licensed domestic manufacturers, the fee structure is based on the licence and inspection fees. Prior to being granted an Australian licence, a domestic manufacturer is subject to an on-site inspection to ensure it could comply with the GMP code and standards and has suitable premises to conduct the manufacturing steps it proposes. The cost of the site inspection is based on the number of on-site hours, which reflects the size and complexity of the manufacturer's facilities. The inspection fee reflects the full cost of undertaking the inspection, including travel and preparation time.

Overseas manufacturers are not able to hold an Australian licence, but they must demonstrate that they operate to an acceptable good manufacturing standard before being granted access to the Australian market. Evidence relating to manufacturing standards is accepted from equivalent international regulators or may be achieved through an on-site inspection and a GMP clearance issued.

All domestic manufacturers of medicines are required to hold a licence with the level of annual charge reflecting the risk and complexity of the products manufactured. The annual charge depends on the level of complexity of the manufacturing steps. An allowance for the cost of periodically inspecting the manufacturer's facilities is included in the annual charge, based on an estimated typical inspection required to routinely ensure compliance with the GMP code and standards. Highly compliant manufacturers are inspected less frequently and thus an incentive for compliance is built into the charges.

Overseas manufacturers are not subject to an annual licence charge. Inspections to approve overseas manufacturers attract an hourly fee for time on-site, together with ancillary costs. Approval of an overseas manufacturer through the compliance verification process attracts one or more fixed fees per clearance application.

For the 2015-16 financial year, fees and charges were indexed by 2.12 percent in conjunction with other charges as outlined in this CRIS.

In past years, TGA fees and charges increases have been based on an indexation factor combining the Wage Price Index (50 percent) and the Consumer Price Index (50 percent). If we applied this formula to 2015-16 the increase would be 2.5 percent. However, based on an assessment of our budget outlook for the 2015-16 financial year of known direct cost increases an increase in fees and charges of 2.12 percent is required.

In addition to cost recovery, appropriation funding has been received on an annual basis since 2012-13 to fund activities outside of this CRIS. For example, the function of administering compliance frameworks for controlled drugs was transferred to the TGA group of the Department of Health in August 2014 and continues to be funded from the departmental appropriation. As a result, TGA now has multiple funding sources for its activities which all contribute to Outcome 7 'Health infrastructure, regulation, safety and quality'.

Annual charges exemption scheme (ACE)

The ACE scheme replaces the low value turnover (LVT) scheme.

A sponsor of an ARTG entry that has not commenced generating turnover will be exempt from the requirement to pay an annual charge in respect of that entry, up until the first year that turnover occurs. The annual charge would then apply to the entry until it was removed from the ARTG. The rationale for this option is that, as these products have not yet generated turnover, they require minimal post-market surveillance and monitoring by the TGA. For example, if a product has not commenced sales in Australia, the TGA is not required to undertake pharmacovigilance activities related to domestic recalls, product testing or adverse drug reactions for the vast majority of these products; however must retain the capacity to do so.

We recognise that pharmacovigilance requirements apply after a product is first supplied (which could feasibly be earlier than when the product starts generating turnover), our assessment is that most products would generate turnover at the same time as they commence supply. Accordingly, no significant issue would arise from a cost recovery perspective as there are minimal administrative costs in relation to maintaining the entry on the ARTG until the entry is generating turnover.

Consultation was conducted on the previous LVT scheme and proposed alternative models. Although several submissions to the public consultation did not explicitly support a single model among those proposed for discussion, most submissions supported amendments to the LVT scheme and/or a scheme wherein exemptions from TGA annual charges be granted to those therapeutic goods which had not been supplied to the Australian market.

Several submissions proposed that a self-declaration of sales turnover of a product seeking exemption (rather than a statement of turnover certified by a third party accountant) should be sufficient for confirming a products' eligibility for an exemption. The submissions acknowledged that a move to self-declaration would need to be complemented by an audit program to deter and identify any undesired behaviour.

The ACE scheme better aligns with the CRGs, as those who create the need for post-market activities bear the costs of such activities, whilst still providing some relief to sponsors who have products which are yet to generate turnover.

It is estimated that approximately 74 percent of the ARTG entries which are expected to be exempted under the LVT scheme in 2014-15 would continue to be exempted under ACE (until first turnover). A likely impact of the implementation of the scheme is the removal of some products with low turnover from the ARTG that would no longer be exempt from annual charges. To address the risk that a public health issue is presented where the sponsor of an essential product proposes to remove that product from the ARTG due to the cost of the annual charge, a new waiver provision has been added to the Regulations in conjunction with the ACE scheme.

The benefits of the ACE scheme are:

• Reduction in the rates of annual charges for non-biological prescription medicines and medical devices class IIa and above
• No application fee (saving around $2.4m p.a. to industry)
• Automatic granting of exemption upon entry on the ARTG, until turnover first commences
• Administrative processes will be simpler as sponsors will only be required to provide a self-declaration of $0 turnover to confirm their exemption. This will particularly assist sponsors (in particular small businesses) who may not have dedicated regulatory affairs officers and third-party accountants
• A reduction in regulatory burden to industry of an estimated $30 million over the next ten years
• Relief from annual charges until the ARTG entry is generating turnover
• Annual charge invoices will only be issued for non-exempt entries
• A new waiver option will be introduced on public health/financial viability grounds.

For further information about the options considered to replace the LVT scheme please refer to the Regulation impact statement - Review of the low value turnover annual charge exemption scheme. For further information on the new ACE scheme please refer to the TGA website.

Fees and charges

Attachment 1: schedule of fees and charges from 1 July 2015.