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Regulation of in-vitro diagnostic devices (IVDs)

Cost recovery impact statement

20 October 2009

Revision history

Revision No. Author Date Comments
0.1 Vinod Mahajan 29/01/09 Initial draft for review by Department of Finance and Deregulation (Finance).
0.2 Vinod Mahajan 16/02/09 Update following review by Finance.
0.3 Vinod Mahajan 09/04/09 Update following receipt of revised MTAA data.
0.4 Vinod Mahajan 14/09/09 Update for Start date of March 2010
0.5 Vinod Mahajan 20/10/09 Approved by the Secretary of the Department of Health and Ageing

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1. Overview

1.1 Background

The TGA will be implementing a new regulatory system for In-vitro diagnostic devices (IVDs) in March 2010. Australian Health Ministers' Advisory Council (AHMAC) approved the development of a regulatory model in May 2001. A Regulatory Impact Statement for the regulation of in-vitro diagnostic regulation was approved by the then Office of Regulatory Review (now Office of Best Practice Regulation) in January 2004 and the framework was endorsed by AHMAC in March 2004.

Introduction of the framework was proposed for 1 July 2005, as part of the Trans Tasman joint legislative framework, but was delayed due to delays in development of the joint agency, ANZTPA. In 2007, the government announced that formation of the joint agency would not proceed, and so the IVD regulatory proposal did not go forward as expected, pending a decision on how to proceed.

In August 2008, the Parliamentary Secretary for Health, Senator Jan McLucas, announced that the new government would proceed with a package of regulatory reforms, including several which were held over from the ANZTPA proposal. One of these is the new regulatory framework for IVDs. Introduction of the new framework, through redrafting of the Therapeutic Goods (Medical Devices) Regulations 2002, is proposed for later in 2009.

A RIS was developed and approved for the ANZTPA proposal, which included the IVD framework. An additional RIS was not required for the IVD proposal at that time. Further stakeholder consultation on the IVD framework in the context of ANZTPA was undertaken when draft legislation was available.

TGA staff held talks with OBPR in October 2008, regarding the proposed legislative amendments announced by Senator McLucas, and information about the proposed changes, including the IVD proposal, was supplied.

OBPR have advised that a new RIS for the proposal is not required.

As the TGA recovers the full cost of its regulatory activities there will be regulatory costs for sponsors and manufacturers of IVDs with the implementation of this new system. While the TGA currently regulates some IVDs (see below) the introduction of a comprehensive model for the regulation for all IVDs gives rise to a significant change to existing cost recovery arrangements undertaken by the TGA. Accordingly, a Cost Recovery Impact Statement is required to be prepared in accordance with Australian Government Cost Recovery Guidelines (updated in July 2005).

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 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.

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1.2 The IVD industry in Australia

A survey1 conducted for the purposes of this regulatory proposal estimated the Australian market for IVDs to be worth about $350m a year. The Medical Technology Association of Australia (MTAA), the peak industry body representing the majority of IVD sponsors in Australia, puts the estimate of market worth at $450m. This will increase with the inclusion of newer technologies in molecular diagnostics and point-of-care testing. The European Device Manufacturers' Association estimates that the Australian market accounts for 1.25% of global sales of IVDs.

Information gathered from a survey commissioned by the TGA in 20031 supported an estimate of the number of businesses engaged in supplying IVDs and associated equipment to pathology laboratories in Australia to be about 160. Information received from MTAA in January 2009 estimates that with consolidation of companies in recent years, the number of IVD suppliers to be less than 80. The market is highly concentrated with the four main suppliers accounting for more than 80% of sales in Australia. The majority of suppliers would be classified as small business.

The Survey reported that:

  • imports account for more than 95% of the local IVD market, with imports coming predominantly from the United States and the European Union. The majority of IVD types (about 75%) are imported proprietary products
  • local manufacture of IVDs account for less than 5% of IVDs supplied to the Australian market. The survey identified 17 companies engaged in local manufacture with the majority of these firms also importing third party or proprietary products, which they distribute in the local market, and
  • Australia is a very small market and not large enough for local manufacturers to recoup all the development costs associated with marketing a product so export is essential. All companies engaged in local manufacturing have some level of exports with 3 indicating more than 75% of their sales come from exports. Two firms involved in local manufacturing indicated a turnover of between $25m and $50m, while 5 indicated a turnover of between $10m and $20m.

The MTAA have reported as at January 2009 that this situation is not expected to have changed substantially in the interim period.

1 Investigation of the IVD market in Australia, 2003 Piazza Consulting (the Survey). Survey conducted for the purpose of preparing the Regulation Impact Statement for in-vitro diagnostic devices.

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1.3 The current regulatory requirements for IVDs

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.

When it was introduced in 1991, Australia's regulatory framework for therapeutic goods was the first comprehensive national system in Australia and replaced a mixture of Federal and State responsibilities. The system, which at the time was seen as being at the cutting edge of international regulatory practice, contains four key principles:

  • the Australian Register of Therapeutic Goods (ARTG), in which all therapeutic goods imported into, supplied within, or exported from Australia must be included
  • classification of all therapeutic goods into high risk (registrable), medium risk (listable) and low risk (exempt) products. This categorisation of goods determines the degree of pre-market assessment by the TGA prior to inclusion of a product in the ARTG
  • compliance with product standards, as well as labelling and advertising requirements, and
  • compliance with manufacturing standards.

For the purposes of entry on to the ARTG the current system classifies IVDs into three categories: registrable, listable and exempt according to a list contained in the regulations. Unless specifically excluded or exempt, therapeutic goods may not be supplied to the Australian market unless included as a registered or listed good in the ARTG.

  • Only two types of IVDs are classified as high risk "registrable" - Human Immunodeficiency Virus (HIV) and Hepatitis C Virus (HCV). Sponsors of registrable devices must demonstrate compliance with Good Manufacturing Practice (GMP) requirements and provide detailed information on manufacturing processes, clinical performance and labelling. Registrable IVDs are subject to rigorous performance evaluation by the National Serology Reference Laboratory (NRL)
  • IVDs for home use, IVDs included on the Pharmaceutical Benefits Scheme and IVDs that include materials of human origin are all "listable". Listable IVDs undergo an administrative review for compliance with labelling, advertising and GMP requirements but no assessment of performance
  • the majority of IVDs currently supplied in Australia are exempt from TGA pre-market scrutiny. Exempt products are subject to compliance with standards, labelling and advertising provisions. However, there are virtually no prescribed standards. There is no additional State/Territory legislation related to pre-market requirements, and
  • consumer protection for IVDs that fall outside of the TGA's regulatory purview is provided through the Trade Practices Act 1974.

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1.4 Problem with the current system

Deficiencies with the existing IVD regulatory framework include:

  • inadequate pre-market assessment of new technologies (eg can't ensure the protection of the Australian public through high quality IVDs to detect emerging threats such as Bird Flu, SARS and West Nile Virus)
  • the level of protection afforded consumers is not commensurate with the level of risk, particularly for a number of IVDs used for mass screening of blood and tissue donations for infectious agents such as Hepatitis B
  • lack of regulatory oversight for a large number of exempt IVDs, and
  • a unique regulatory framework that is out of step with international best practice, (including Europe and the USA):
    • often results in an increased regulatory burden for industry
    • raises the possibility of dumping of inferior quality IVDs in Australia, and
    • involves significant numbers of recalls; up to 35% of all medical device recalls relate to IVDs, mainly due to performance or quality control issues. In addition for IVDs there are often problems with the manufacturer's timeframes for implementing corrective action.

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1.5 The New IVD Regulatory System

In May 2001 the Australian Health Ministers' Advisory Council (AHMAC) endorsed the development of a new IVD regulatory framework, aligned with international best practice, agreeing that the project would:

  • ensure a much safer, collaborative and rigorous approach to the regulation of IVDs, thereby increasing public confidence in the IVDs available
  • bring together a number of initiatives that reach across State/Territory and Commonwealth boundaries including:
    • the HIV and Hepatitis C (HCV) strategies as they relate to the accurate detection and diagnosis of HCV and HIV infection
    • the review of the Australian Blood Banking and Plasma Product Sector
    • the need to address the burgeoning array of IVDs intended for home-use
    • the need for increased public confidence in the quality of IVDs available in Australia, and
  • consider the issues surrounding the use of in-house IVD test kits which are currently unregulated.

The new system is aligned with international best practice as defined in the GHTF proposed framework:

  • all IVDs undergo pre-market assessment in line with their risk classification
  • in line with the level of regulatory control in Europe and the USA
  • ensures no importation of inferior quality IVDs (no dumping)
  • no additional regulatory burden for Australian manufacturers who already export to Europe and the USA, and
  • strong requirements for post market monitoring including detection of batch variations by the NRL and mandatory reporting timeframes for serious adverse events.

It is proposed that there be a 4 year transition period for all IVDs.

The proposed system was endorsed by the Australian Health Minister's Conference on 31 July 2003 and by AHMAC on 4 March 2004. Since AHMAC's endorsement the TGA has worked to finalise the details of the regulatory requirements in consultation with the IVD Working Group set up under the auspices of the National Coordinating Committee on Therapeutic Goods (NCCTG) and negotiated the cost model for commercial IVDs with industry. The agreed framework is aligned with the proposed framework under development by the Global Harmonisation Task Force.

The implementation of the framework was delayed initially due to the decision to incorporate the new requirements into the legislation implementing the proposed Trans-Tasman regulatory framework under the Australia-New Zealand Therapeutic Products Agency (ANZTPA). However, the formation of ANZTPA did not proceed, due to the failure of the New Zealand Government to achieve support for a joint agency.

In August 2008, the Parliamentary Secretary for Health announced that the new Australian government would proceed with a program of regulatory reforms, which included the proposed IVD regulatory framework.

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2. Australian Government Cost Recovery Policy and Guidelines

In December 2002 the Australian Government adopted a formal cost recovery policy to improve the consistency, transparency and accountability of Commonwealth cost recovery arrangements and to promote the efficient allocation of resources.

These guidelines apply to all Financial Management and Accountability Act 1997 (FMA Act) agencies and those Commonwealth Authorities and Companies Act 1997 (CAC Act) bodies-collectively referred to as 'agencies' for the purposes of these guidelines-that have been notified of the cost recovery policy under sections 28 or 43 of the CAC Act.

While all cost recovery arrangements must comply with the cost recovery policy and these guidelines, only significant arrangements need to document compliance with the policy through a Cost Recovery Impact Statement (CRIS).

2.1 What is a significant cost recovery arrangement?

To determine whether a cost recovery arrangement is considered 'significant', both the revenue generated, and the impact of cost recovery on stakeholders, needs to be taken into account.

A significant cost recovery arrangement is one where:

  • an agency's total cost recovery receipts equal $5 million or more per annum-in this case every cost recovery arrangement within the agency is considered, in the first instance, to be significant, regardless of individual activity totals, or
  • an agency's cost recovery receipts are below $5 million per annum but stakeholders are likely to be materially affected by the cost recovery initiative, or
  • Ministers determine the cost recovery arrangement to be significant on a case-by-case basis.

A CRIS should be prepared for all significant cost recovery arrangements.

The cost recovery guidelines must be applied to review cost recovery activities:

  • under an agreed schedule of reviews announced by the Australian Government, or
  • whenever there is a change to the cost recovery arrangements, or
  • where new cost recovery arrangements are to be introduced.

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2.2 What is cost recovery?

Cost recovery is the recovery of some or all of the costs of a particular activity. Australian Government cost recovery charges fall into two broad categories:

  • Fees for goods and services, and
  • Cost recovery taxes (primarily levies, but also excises and customs duties).

Cost recovery is different to general taxation. Some levies or taxes are used to raise cost recovery revenues. The direct link or 'earmarking' between the revenue and the funding of a specific activity distinguishes such cost recovery taxes from general taxation.

General taxation, on the other hand, is a compulsory extraction of money by a public authority for public purposes, enforceable by law, and which is not a payment for services rendered.

2.3 Why have cost recovery?

Used appropriately, cost recovery can provide an important means of improving the efficiency with which Australian Government products and services are produced and consumed.

Charges for goods and services can give an important message to users or their customers about the cost of resources involved. It may also improve equity by ensuring that those who use Australian Government products and services, or who create the need for regulation, bear the costs.

2.4 Principles underpinning cost recovery arrangements

Regulatory and non-regulatory agencies undertake a range of activities. Cost recovery may not be appropriate for some of these activities. For example, cost recovery may not be warranted where:

  • it is not cost effective, or
  • it would be inconsistent with government policy objectives, or
  • it would stifle competition and industry innovation unduly (for example through 'free rider' effects).

The guidelines require the following regulatory activities to be assessed for cost recovery:

  • registration and approvals
  • issuing exclusive rights, licences and privileges
  • monitoring ongoing compliance with regulations, and
  • investigation and enforcement.

The Australian Cost Recovery Guidelines require that cost recovery arrangements be assessed against cost recovery principles contained in the Guidelines. These principles can be broadly grouped into:

  • economic efficiency
  • design principles
  • operational principles
  • efficiency principles, and
  • overarching principles.

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2.5 Economic efficiency

The general principles relating to economic efficiency support cost recovery as an important means of improving economic efficiency, by:

  • sending an important pricing messages to users or customers about the costs of resources involved
  • reducing the call on general taxation revenue and avoiding the high efficiency losses from higher taxation revenue
  • improving horizontal equity by ensuring that consumers or beneficiaries of products pay for the costs, and
  • improving agency performance through transparency of costs and increased cost-consciousness in both the agency and users.

2.6 Design principles

Design principles require that cost recovery arrangements:

  • do not cross-subsidise across user groups
  • be subject to the same public administration principles that apply to all government activities, and
  • incorporate an appropriate level of industry consultation to help drive agency efficiency.

2.7 Operational principles

Operational principles require that:

  • all cost recovery arrangements should have clear legal authority
  • cost recovery charges should be linked as closely as possible to the actual costs of activities or products
  • costs recovered should relate to specific activities, not the agency that provides them
  • targets should not be set for the level of costs recovered
  • over-recovery is inappropriate
  • outputs, or activities that have 'public good' characteristics, may be taxpayer funded
  • costs recovered may exclude activities undertaken for government where they are not integral, or directly related, to the provision of regulatory activities, and
  • partial cost recovery is generally not appropriate.

2.8 Efficiency principles

A key principle is that cost recovery should be based on 'the efficient costs' of the activity and should avoid:

  • regulatory creep, where additional regulation is imposed without adequate scrutiny
  • gold plating, where unnecessarily high standards or facilities are adopted or there is simply over-regulation, and
  • cost padding, where costs are artificially inflated in the knowledge that all costs can be recovered.

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3. Application of principles underpinning IVD cost recovery arrangements

The TGA recovers the full cost of its regulatory activities within the scope of the Act through fees and charges for services provided to product introducers (sponsors) and manufacturers. Fees and charges are prescribed in regulations made under the Therapeutic Goods Act 1989, Therapeutic Goods (Medical Devices) Regulations 2002 and the Therapeutic Goods (Charges) Act 1990.

In 2003 the TGA engaged consultants to work with TGA officers to develop a fees & charges model for the new regulatory system for IVDs. The IVD fees and charges model was developed in close consultation with industry in line with the Australian Government's cost recovery policy. The regulatory model was designed to reflect the risks of IVD's to individual and public health and build on the infrastructure and processes already developed by the TGA for the regulation of medical devices. IVDs will be regulated as a subset of medical devices and the IVD fees and charges model has been based on the medical devices fees and charges model.

The Medical Industry Association of Australia (MIAA) indicated their support for the final version of the IVD cost model on 9 November 2005. The model was updated in January 2009 to take into account indexed increases in fees and other changes necessary to ensure adequate cost recovery.

3.1 Registration and approval activities

The regulatory activities for IVDs that are undertaken by the TGA involve the following registration and approval activities:

  • Receiving and registering application electronically for in-vitro diagnostic devices of all classes
  • Variation to amend an inclusion that contains incomplete or incorrect information
  • Conformity assessment- all procedures and changes for class 2, 3 and 4
  • Technical File Reviews
  • Examination of product design dossier for class 4, and
  • Surveillance audits of manufacturer's quality management system

The Cost Recovery Guidelines recommend that an assessment of activities be made against a set of questions that will assist in determining whether cost recovery would be appropriate.

Principle Discussion
Would cost recovery unduly stifle competition and industry innovation (for example, through "free rider" effects)?

Pre-market approval of an IVD will permit the sponsor to supply products in Australia. The benefits of market approval are limited to the applicant - none of the assessment work will benefit other sponsors. As costs can be identified for the activities undertaken, fees are considered to be an appropriate cost recovery mechanism.

The calculation of the fee ensures all applicants are treated equitably and does not confer advantage on one applicant over another. That is, by imposing the charge on the IVD industry, this should not stifle competition in the industry's delivery of its end product.

The cost recovery arrangements, therefore, will not impact on industry competition.

Would cost recovery be inconsistent with government policy objectives? Cost recovery arrangements for IVDs are consistent with Government policy and are not inconsistent with other policies.
Is cost recovery cost-effective and cost-efficient?

The administrative rules for cost recovery for IVDs will be the same as other medical devices.

Sponsors will be required to submit fees at the time of application, although fees for conformity assessments will be notified following validation of the path of conformity and the scheduling of quality system audits.

  • Applications will be lodged via the TGA's online electronic lodgment system which permits an invoice to be created at the time of processing. Companies may pay fees by cheque, credit card or via online payment systems; and
  • Fees for conformity assessment are payable prior to commencement of the assessment.

Annual charges relating to the maintenance of an inclusion on the ARTG will be invoiced each year in July. Companies may pay the amount by cheque, credit card (up to $10k) or via online payment systems.

The cost recovery arrangements are considered to be cost effective - they are simple, well understood by Sponsors, require payment at the time a service is to be performed, and have low administrative and debt recovery costs.

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3.2 Economic efficiency

Principle Discussion
Sends important pricing messages to users or customers about the costs of resources involved. The imposition of a fee sends an important pricing signal to applicants, ensuring that only companies seeking approval of an IVD to genuinely enter Australia market will apply for one. This discourages frivolous or vexatious demand without a genuine need.
Reduces the call on general taxation revenue and avoids the high efficiency losses from higher taxation revenue. Expenses incurred by the TGA are recovered through an appropriate, targeted, usage charge. As such, all costs of providing the service is fully recovered so there is no need for government funding.
Improves horizontal equity by ensuring that consumers or beneficiaries of products pay for the costs. The cost recovery arrangements improve horizontal equity by ensuring the beneficiaries (IVD industry) of the TGA's activities pay for the costs of those activities.
Improves agency performance through transparency of costs and increased cost-consciousness in both the agency and users.

As part of TGA's Stakeholder consultation on the Model in Sydney led to the establishment of a TGA/industry working group to assist the TGA to refine the model. Working Group membership included representatives from MIAA and members from the IVD industry who represented both large and smaller IVD suppliers.

A further assessment of the efficiency and effectiveness of cost recovery arrangements will be undertaken in preparing the TGA's Cost Recovery Impact Statement which is expected to be completed in the 2009-10 financial year. A further costing review will be completed within three years of the commencement of the scheme once more reliable demand data has been captured.

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3.3 Design principles

Principle Discussion
Do not cross-subsidise across user groups.

Pre-market approvals involve different regulatory processes based on the risk of the IVD to individuals and to public health. Therefore, separate fees have been prescribed for class 1, 2, 3 and 4 IVDs.

Post market, scheme support and regulatory administration costs are driven by the regulated industry. The beneficiaries of the industry are the companies that sponsor and promote IVDs. As costs cannot be specifically tied to individual companies, a levy on the regulated industry would be an appropriate form of cost recovery.

Be subject to the same public administration principles that apply to all government activities. The regulation of IVDs mirrors the arrangements for the regulation of other medical devices. Accordingly, the design of the cost recovery model is similarly based on these arrangements. The TGA's cost recovery model is detailed in the Cost Recovery Impact Statement that was completed in 2004-05.
Involve a degree of industry consultation to help drive agency efficiency.

A discussion paper, "A New Regulatory Framework for In Vitro Diagnostic Devices" developed by the IVD working group was circulated to over 1200 stakeholders seeking their comment on a number of specific options;

The TGA conducted numerous presentations and consultation sessions for stakeholders in all States, and presented papers to a number of ministerial advisory and Commonwealth/State liaison committees such as the National Coordinating Committee on Therapeutic goods (NCCTG), the Australian Health Ministers' Advisory Committee (AHMAC) and the Australian Health Ministers' Conference (AHMC); and

Articles on the regulatory proposals have been published in the Australian Therapeutic Device Bulletin, the TGA News and on the TGA's website, which are distributed to industry and other stakeholders.

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3.4 Operational principles

Principle Discussion
All cost recovery arrangements should have clear legal authority.

TGA's authority to set fees is included in the Regulations forming part of the Therapeutic Goods Act 1989. Legal authority for the annual charges is included in the Therapeutics Goods (Charges) Act 1989.

The legislation establishes clear legal authority to collect fees and charges.

Cost recovery charges should be linked as closely as possible to the actual cost of activities or products. Cost recovery charges are directly linked to the actual cost of undertaking the regulatory activities. Refer to section 5.1 for detailed costs.
Costs recovered should relate to specific activities, not the agency that provides them. Proposed charges have been calculated with reference to the actual activities that need to be performed to process applications.
Over-recovery is inappropriate Fees have been set to recover estimated costs.
Costs recovered may exclude activities undertaken for government where they are not integral or directly related to the provision of regulatory activities. The proposed charges do not include the costs for any activity or any services to government that are not integral or directly related to the regulatory activity.
Partial cost recovery is generally not appropriate. The TGA costs of regulating IVDs will be fully cost-recovered.

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4. Design and implementation

Charges can be collected in a variety of ways and based on different measures of costs. The design of the cost recovery arrangement should aim to:

  • identify who should pay regulatory charges
  • link charges as closely as possible to the costs of activities performed
  • have clear legal authority
  • be cost-effective to calculate, collect and enforce
  • ensure compliance costs of paying the charges are not excessive, and
  • there is a balance between fee certainty and flexibility (monitoring charge levels).

As noted previously, the regulation of IVDs mirrors the arrangements for the regulation of other medical devices. Accordingly, the design of the cost recovery model is similarly based on these arrangements. The cost recovery model is detailed in the Cost Recovery Impact Statement for Therapeutic Products that was completed in 2004-05.

4.1 Basis for charging

Individuals or groups that give rise to the need for regulation should pay cost recovery charges. As charging individual consumers of IVDs is impractical, the charges are proposed to be recovered from the Sponsors of IVD products. Nonetheless, the cost of regulation is expected to be incorporated into the pricing decisions made in relation to IVD products.

Cost recovery charges can be introduced using:

  • a fee that charges Sponsors directly for the costs of providing the activity; or
  • a levy on a group of Sponsors (legally a form of taxation). Levies need to be established using a tax Act.

Fees are proposed in the cost recovery arrangement for IVDs where the activities are undertaken for a single Sponsor. These include application for inclusion on the Australian Register of Therapeutic Goods (ARTG), application audits, technical file reviews, conformity assessment and surveillance audits of quality systems, testing controls and design dossiers (as applicable). The costs are driven by the applicant and the benefits that arise from these activities (the right to continue to manufacture and/or market an IVD) are limited to the applicant.

Some costs will be recovered on an as-incurred basis. This includes travel costs associated with initial conformity assessment and surveillance audits. Overseas travel costs are advised to the Sponsor in writing prior to the performance of an audit setting out the relevant charges. Reimbursement of costs is simple to administer, is transparent (no hidden costs), and ensures that fees for domestic and overseas services are treated equitably.

The cost recovery arrangements include an annual levy to be applied to all Sponsors of an IVD inclusion on the ARTG in relation to post approval monitoring, product problem reporting and analysis, random testing of devices and auditing of technical files, and the costs of maintaining the regulatory framework and supporting industry compliance with the scheme. These costs are driven by the regulation of the market and may not relate to activities performed for one or other Sponsor. The costs are proposed to be allocated evenly across all IVD product inclusions in the ARTG (with lower risk IVDs being heavily grouped per inclusion).

IVD regulation is being phased in over four years during which time Sponsors may arrange to apply for inclusion on the ARTG. To avoid the transition disincentive that would otherwise apply, no Sponsor will be charged an annual levy until the final year of transition (2012/13). Application fees have been set to cover costs associated with initial listing, with monitoring and surveillance programs coming on stream in later years when most products have been registered.

4.2 What are the legal requirements for the imposition of charges?

TGA's authority to set fees is included in the Regulations forming part of the Therapeutic Goods Act 1989. Legal authority for the annual charges, which is considered as tax, is included in the Therapeutics Goods (Charges) Act 1989.

The legislation establishes clear legal authority to collect fees and charges.

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5. Costs to be included in charges

For regulatory products or services, cost recovery 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.

The TGA's ABC model is maintained using a proprietary product. 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
  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 Health and Ageing's Certified Agreement, plus appropriate allowances for on-costs.

Corporate Costs: Corporate costs, such as rent and information technology, are 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, HR and Finance. Business Units have very limited or no control over these expenses. Eg, Accounts payable costs are allocated based on the number of invoices processed for the Business Unit as a % of the TGA total.

The TGA cost allocation is depicted in the below diagram.

diagram showing TGA cost allocations

5.1 Costs for IVD framework

In developing the cost of services performed for IVD regulation, the TGA developed a cost model based on the regulatory effort used for other medical devices. The 5-year forecasts in the model were developed in consultation with the industry working group to refine proposals for fee levels. The estimated total costs in the first 5 years of IVD regulation is summarised in the below table.

Summary Year 1 Year 2 Year 3 Year 4 Year 5
TGA direct costs $634,652 $1,059,863 $1,723,531 $2,060,246 $974,488
External costs (NRL) $801,640 $833,706 $867,054 $901,736 $127,883
Support costs $155,107 $236,881 $356,006 $465,266 $470,356
Corporate overheads $381,393 $636,922 $1,035,751 $1,238,099 $585,616
Industry information and education $250,000 $250,000 $0 $0 $0
Total costs $2,222,793 $3,017,372 $3,982,342 $4,665,347 $2,158,342

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5.2 TGA direct costs

For each service, the cost model tallies the staff time usually incurred to perform tasks associated with each service, which is then costed for the direct salary, plus on-cost to provide a cost per activity. The total cost is then derived by multiplying the total number of regulatory activities performed by the cost of each activity.

5.3 External costs (NRL)

Class 4 IVDs are the highest risk group and have additional requirements relating to design dossier examination. In order to undertake this examination, a full performance testing will be carried out by National Serology Reference Laboratory (NRL). Costs of performance testing by NRL are included in external costs.

5.4 Support costs

Other support costs associated with application entry, monitoring compliance, surveillance, recall management, testing and regulatory management were allocated based on the total number of IVDs on the ARTG as a % of total medical device.

5.5 Corporate costs

Corporate costs include rent, POE, information technology, and amortisation and depreciation costs related to capital assets. The total TGA overheads are calculated as a % of total direct expenses, and then the same % is applied to the direct IVD costs to include overheads in the IVD cost recovery model.

5.6 Industry information and education

As with all regulatory arrangements, the TGA will provide information and support to the regulated industry and consumers and will be responsible for the maintenance of the regulatory framework (including regulatory development and advice concerning the operation of the scheme). The IVD cost model includes $0.5m over a two year period for such expenses. The cost of activities associated with the development of the coding nomenclature and standards through international fora and the provision of advice regarding the operation of the regulatory scheme to the Parliament are driven by the requirement to regulate IVDs and are considered integral to regulation and appropriate for inclusion in cost recovery arrangements.

5.7 Recommended fee for 2009-10

As noted previously, IVDs will be regulated as a sub-set of medical devices. Many of the activities and business processes are common to medical devices, and so the fees that are applicable have been set to be consistent with other medical devices. In some cases, the resource model estimated costs above, or below, the fees applicable to other medical devices. This may reflect slight differences in assumptions for staff effort as well as the different methods for allocating overheads (actual ABC effort drivers used for other medical devices is more likely to be accurate).

The proposed fees and charges applicable to IVDs are summarised in the following table.

# Fee type Method of recovery Basis of charge Fee ($)
A Application fees
Application fees - In-vitro diagnostic devices - all classes Fee for service Per kind of device 760
Variation to amend an inclusion that contains incomplete or incorrect information Fee for service Per inclusion 340
Conformity assessment - all procedures and changes Fee for service Per application 760
B Technical file reviews
Class 2 and 3 IVDs Fee for service Per audit 5,290
Annual charges
All classes (note 1) Levy Per kind of device 640
C Conformity assessment procedures
Full quality management system Fee for service Per assessment 23,000
Examination of product design Fee for service Per assessment 49,000
Type examination Fee for service Per assessment 31,700
Production quality assurance Fee for service Per assessment 20,200
Abridged assessments - immunohaemotology reagents Fee for service Per assessment 12,000
Surveillance audits of manufacturer's quality management system Fee for service Per audit 6,700
Supplementary assessment time, including assessor preparation/travel time associated with assessments conducted outside of Australia Fee for service Per hour 320
Reasonable travel, accommodation and allowance costs Actual cost   At cost
  1. Annual charges will not be introduced until 2012/13
  2. Reassessment of conformity assessment of manufacturers management and quality system and examinations of product design attract the full initial fee
  3. Changes to conformity assessments will be charged at 60% of the initial fee, and
  4. All charges are expressed in 2009-10 prices having regard to average price and wage movements. Charges may be subject to minor adjustment to align with other medical devices.

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5.8 Contribution

The below table summarises revenue, costs and net contribution over a five year period. The significant under-recovery in initial years is due to the inclusion of $0.5m for industry information and education costs and not charging an annual charge until the fourth year of the introduction of IVD framework.

Summary Year 1 Year 2 Year 3 Year 4 Year 5
Revenue $2,052,389 $2,822,039 $3,623,029 $5,321,556 $2,211,092
Costs $2,222,793 $3,017,372 $3,982,342 $4,665,347 $2,158,342
Net contribution ($170,404) ($195,333) ($359,313) $656,209 $52,750

The residual net contribution in the cost model reflects a conservative approach to the introduction of cost recovery for IVDs and recognises the uncertainty in the estimates of the number and classification of IVDs on the market and the route of conformity assessment to be undertaken.

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5.9 Contribution by Class

The below tables summarise contribution by each class and also show overall marginal contribution.

Class 1 Initial price Year 1 Year 2 Year 3 Year 4 Year 5
Application fee (Entry ARTG)
Revenue $760 $20,520 $36,792 $63,696 $65,607 $5,132
Direct costs   ($6,060) ($10,970) ($19,177) ($19,944) ($1,575)
    $14,460 $25,821 $44,519 $45,663 $3,557
Post market reviews
Annual charges $640 $0 $0 $0 $154,555 $157,031
Direct costs   $0 ($5,202) ($27,419) ($59,613) ($87,366)
    $0 ($5,202) ($27,419) ($94,942) ($69,665)
Contribution Class 1   $14,460 $20,620 $17,100 $140,605 $73,222
 
Class 2 Initial price Year 1 Year 2 Year 3 Year 4 Year 5
Application fee (Entry ARTG)
Revenue $760 $113,240 $210,573 $349,121 $349,629 $29,083
Direct costs   ($33,440) ($62,787) ($105,109) ($106,284) ($8,927)
    $79,800 $147,786 $244,012 $243,345 $20,156
Application fee (Conformity Assessment)
Revenue $760 $5,320 $10,959 $17,738 $18,270 $1,711
Direct costs   ($1,571) ($3,268) ($5,340) ($5,554) ($525)
    $3,749 $7,691 $12,398 $12,716 $1,186
Conformity assessment
Revenue
  Part 1 $23,000 $23,000 $71,070 $122,004 $125,664 $0
  Part 4 $20,200 $20,200 $62,418 $107,151 $110,365 $0
  Abridged $12,000 $60,000 $98,880 $152,770 $157,353 $27,012
Direct costs   ($73,293) ($156,956) ($268,113) ($275,229) ($19,532)
    $29,907 $75,412 $113,811 $118,152 $7,480
Technical file reviews
Revenue $5,290 $148,120 $283,332 $477,034 $474,003 $35,724
Direct costs   ($85,251) ($164,656) ($279,914) ($280,837) ($21,371)
    $62,869 $118,677 $197,119 $193,167 $14,353
Surveillance
Revenue $6,700 $0 $20,703 $35,540 $36,606 $0
Direct costs $0 $0 ($6,997) ($12,129) ($12,614) $0
    $0 $13,706 $23,411 $23,992 $0
Post market reviews
Annual charges $640 $0 $0 $0 $675,568 $685,750
LVLV application fees $125 $0 $0 $0 $32,918 $33,343
Direct costs   $0 ($29,072) ($152,287) ($325,581) ($476,506)
    $0 ($29,072) ($152,287) $382,905 $242,587
Contribution Class 2   $176,325 $334,200 $438,464 $974,278 $285,762
 
Class 3 Initial price Year 1 Year 2 Year 3 Year 4 Year 5
Application fee (Entry ARTG)
Revenue $760 $122,360 $242,668 $373,309 $339,663 $30,794
Direct costs   ($36,134) ($72,357) ($112,391) ($103,254) ($9,452)
    $86,226 $170,311 $260,918 $236,409 $21,342
Application fee (Conformity Assessment)
Revenue $760 $6,080 $9,394 $9,675 $9,966 $5,988
Direct costs   ($1,795) ($2,801) ($2,913) ($3,029) ($1,838)
    $4,285 $6,593 $6,762 $6,936 $4,150
Conformity assessment
Revenue
  Part 1 $23,000 $23,000 $23,690 $24,401 $25,133 $0
  Part 4 $20,200 $20,200 $20,806 $21,430 $22,073 $0
  Part 2 $31,700 $31,700 $32,651 $33,631 $34,639 $0
  Abridged $12,000 $72,000 $123,600 $127,308 $131,127 $94,543
Direct costs   ($57,338) ($86,950) ($103,541) ($101,838) ($30,710)
    $89,562 $113,797 $103,229 $111,135 $63,833
Technical file reviews
Revenue $5,290 $81,519 $164,278 $255,690 $232,377 $19,946
Direct costs   ($70,027) ($142,490) ($223,932) ($205,490) ($17,809)
    $11,492 $21,788 $31,758 $26,887 $2,137
Surveillance
Revenue $6,700 $0 $6,901 $7,108 $7,321 $0
Direct costs   $0 ($2,332) ($2,426) ($2,523) $0
    $0 $4,569 $4,682 $4,798 $0
Post market reviews
Annual charges $640 $0 $0 $0 $712,633 $723,207
LVLV application fees $125 $0 $0 $0 $34,694 $35,172
Direct costs   $0 ($16,424) ($100,376) ($245,274) ($251,278)
    $0 ($16,424) ($100,376) $502,053 $507,101
Contribution Class 3   $191,564 $300,633 $306,974 $888,218 $598,563
 
Class 4 Initial price Year 1 Year 2 Year 3 Year 4 Year 5
Application fee (Entry ARTG)
Revenue $760 $31,160 $42,271 $43,539 $38,202 $4,277
Direct costs   ($9,202) ($12,604) ($13,108) ($11,613) ($1,313)
    $21,958 $29,667 $30,431 $26,589 $2,964
Application fee (Conformity Assessment)
Revenue $760 $1,520 $2,348 $2,419 $2,491 $855
Direct costs   ($449) ($700) ($728) ($757) ($263)
    $1,071 $1,648 $1,691 $1,734 $593
Review of design dossier
Revenue $49,000 $1,248,450 $1,321,624 $1,361,273 $1,380,005 $192,462
Direct costs   ($252,552) ($271,533) ($282,394) ($288,088) ($41,613)
Performance testing   ($801,640) ($883,706) ($867,054) ($901,736) ($127,883)
    $194,258 $216,385 $211,825 $190,181 $22,967
Conformity assessment
Revenue
  Abridged $12,000 $24,000 $37,080 $38,192 $39,338 $13,506
Direct Costs   ($7,541) ($11,763) ($12,234) ($12,723) ($4,411)
    $16,459 $25,317 $25,959 $26,615 $9,095
Post market reviews
Annual charges $640 $0 $0 $0 $106,300 $110,210
LVLV application fees   $0 $0 $0 $5,054 $5,346
Direct costs   $0 $0 $0 $0 $0
    $0 $0 $0 $111,354 $115,556
Contribution Class 4   $233,746 $273,017 $269,905 $356,473 $151,175
 
Summary Year 1 Year 2 Year 3 Year 4 Year 5
Gross contribution $616,096 $928,470 $1,032,444 $2,359,574 $1,108,722
Industry information & education costs 250,000 250,000 $0 $0 $0
Marginal contribution $366,096 $678,470 $1,032,444 $2,359,574 $1,108,722
Branch overhead
ODBT Management $21,932 $22,809 $23,721 $24,670 $25,657
App Entry & Coord $17,326 $18,019 $18,740 $19,490 $20,269
Business Monitoring $8,416 $8,753 $9,103 $9,467 $9,846
Manufacturer Assessment $7,492 $7,792 $8,104 $8,428 $8,765
Medical Devices Info $6,474 $6,733 $7,002 $7,282 $7,573
Policy & Regulatory Liaison $38,515 $40,055 $41,658 $43,324 $45,057
Recalls & Sec $12,979 $13,498 $14,038 $14,599 $15,183
TGAL $41,149 $116,879 $229,050 $331,364 $331,364
Surveillance $825 $2,343 $4,591 $6,642 $6,642
Total support costs $155,107 $236,881 $356,006 $465,266 $470,356
Corporate overheads $381,393 $636,922 $1,035,751 $1,238,099 $585,616
Total overheads $536,500 $873,803 $1,391,757 $1,703,365 $1,055,972
Net contribution ($170,404) ($195,333) ($359,313) $656,209 $52,750

The TGA has committed to review cost recovery for IVDs on a regular basis through the TGA-Industry Consultative Committee and to consult further with industry on charge levels after two years to take account of the actual number of applications received and products entered on the ARTG.

5.10 Historical Information

The majority of IVDs currently supplied in Australia are exempt from TGA pre-market scrutiny and are not regulated except for limited post market surveillance. Only a very small number of IVDs are regulated as a sub-set of medical devices. More than 28,000 medical devices are currently entered on the ARTG that include about 350 IVDs (around 1% of total medical devices). Whilst TGA's ABC model captures total costs for medical devices, separate data for IVDs for previous years is not available.

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6. Ongoing monitoring

The cost recovery arrangements should be balanced to provide predictability to the regulated industry for budget and product planning purposes, yet remain responsive to changes in either cost-model forecasts (over/under-estimation), or structural changes in the regulated industry itself.

6.1 Monitoring mechanisms

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.

To constrain budget growth and promote efficiency, the TICC agreed to the establishment of an indexation model to adjust fees and charges each year. Should the TGA seek to increase fees above this level, specific proposals would be brought to TICC for discussion to justify required increases. Material changes to specific cost recovery arrangements or significant changes to the level of cost recovery will be assessed and documented in accordance with the cost recovery policy and guidelines.

Through stakeholder engagement, the TGA has undertaken to closely monitor and report on the take-up of IVD inclusions and related regulatory activities to the affected industries. This will be achieved through the TGA-Industry Consultative Committee (TICC), which includes membership of all three major industry associations (the Medical Technology Association of Australia, Ausbiotech and the Dental Industry Association of Australia). The TICC meets twice each year and undertakes separate industry meetings each year ahead of finalising the TGA's business plan, budget and fees and charges proposals.

The TGA has agreed that annual charges for inclusions will not be introduced until 2012/13, as to do otherwise may create a disincentive for early transition to the scheme. This approach will be reviewed annually, with the final annual charge to be reviewed during 2011/12 when the likely number and classification of IVDs will be better understood.

6.2 Consultation with stakeholders

The key elements of the consultation process on the regulatory framework included:

  • The establishment of an expert advisory group under the auspices of the National Coordinating Committee on Therapeutic Goods (NCCTG), that included representatives from State and Territory governments, relevant areas of the Commonwealth Department of Health and Ageing and also the following key stakeholder organisations:
    • the Medical Industry Association of Australia (MIAA)
    • the Royal College of Pathologists of Australasia (RCPA)
    • the Australian Association of Pathology Practices (AAPP)
    • the Public Health Laboratory Network (PHLN)
    • the National Pathology Accreditation Advisory Committee (NPAAC)
    • the Human Genetics Society of Australasia (HGSA), and
    • the National Serology Reference Laboratory (NRL), Australia.
  • A discussion paper, "A New Regulatory Framework for In Vitro Diagnostic Devices" developed by the IVD working group was circulated to over 1200 stakeholders seeking their comment on a number of specific options
  • The TGA conducted numerous presentations and consultation sessions for stakeholders in all States, and presented papers to a number of ministerial advisory and Commonwealth/State liaison committees such as the National Coordinating Committee on Therapeutic goods (NCCTG), the Australian Health Ministers' Advisory Committee (AHMAC) and the Australian Health Ministers' Conference (AHMC), and
  • Articles on the regulatory proposals have been published in the Australian Therapeutic Device Bulletin, the TGA News and on the TGA's website, which are distributed to industry and other stakeholders.

In relation to the Cost Recovery Model TGA consultation included:

  • A consultancy to undertake a survey to assess the impact of the proposed new regulatory framework on businesses manufacturing and/or distributing IVDs in the Australian market and on public and private sector pathology laboratories
  • Stakeholder consultation on the Model in Sydney led to the establishment of a TGA/industry working group to assist the TGA to refine the model. Working Group membership included representatives from MIAA and members from the IVD industry who represented both large and smaller IVD suppliers.

Issues raised by stakeholders during the development of the model included:

  • The need for financial support for smaller/start up companies to assist them to meet the new regulatory requirements. It was agreed that it is not the TGA's role to provide or identify potential funding opportunities for industry and that MIAA might like to assist industry with this.
  • The impact of the new regulatory requirements on cash flow particularly for suppliers of previously exempt IVDs and the smaller companies, This issue was addressed by extending the transition period for the majority of IVDs from 3 to 4 years to give companies an extended time to meet the regulatory requirements.
  • Incentives for managing the transition period. It was agreed to waive annual charges for the first three years following implementation to ensure there is no financial disincentive for those who want to transition to the new regulatory system in the first few years after implementation.
  • That there are a large number of IVDs that may only be required occasionally but that access to these IVDs is essential for public health and safety. It was agreed that the TGA's low value/low volume provisions would apply to all IVDs to ensure ongoing supply of crucial IVDs.
  • The TGA also worked closely with the industry to develop an appropriate grouping system for all classes of IVDs and to ensure that the application fees and annual charges would result in an equitable sharing of the cost for regulation across all classes of IVDs.

The Medical Industry Association of Australia (MIAA, now MTAA) indicated their support for the final version of the IVD cost model in November 2005, particularly supporting the incentives for the transition period which they indicated would ensure the transition period was manageable for most sponsors, including the smaller companies. MIAA have also commended the TGA on their collaborative approach in the development of the IVD regulatory model and their proposal to work with industry to conduct fee reviews as the transition period progresses.

6.3 Periodic Review

A further assessment of the efficiency and effectiveness of cost recovery arrangements will be undertaken in preparing the TGA's Cost Recovery Impact Statement which is expected to be completed over the next twelve months. A further costing review will be completed within three years of the commencement of the scheme.

7. Certification

This Cost Recovery Impact Statement was certified by the Secretary of the Department of Health and Ageing on 20 October 2009.

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