Financial impact of the Pharmaceutical Benefits Scheme on the Commonwealth
The decision of Cabinet to defer listings of Pharmaceutical Benefits
Advisory Committee (PBAC) approved medicines in February 2011 was predicated on
budget savings and 'the need for fiscal discipline'.
The committee heard that not only is the Pharmaceutical Benefits Scheme (PBS)
an affordable investment, but that the anticipated savings from the decision
are small. It appears that the decision represents a major false economy, with
a failure to consider the broader health economic gains that could be achieved
with more appropriate medicines. The committee received evidence of more
effective ways that savings could be made.
Overall costs and growth of the PBS
The committee heard that the cost of the PBS continues to grow, and is
probably growing faster than other similar size or magnitude health programs.
The Department of Health and Ageing (DoHA) explained that:
The cost of the PBS has continued to grow over the past ten
years, averaging growth of about nine percent a year and it is estimated it
will cost about $9 billion this financial year (2010–11). This growth rate is
higher than the six percent annual increase for general hospital and medical
services, and much higher than the Consumer Price Index.
Given current fiscal circumstances, the Government is
concentrating on listing medicines that treat serious or life threatening
conditions where there are no alternative treatments.
Mr David Learmonth, DoHA, provided further detail to the committee:
In 2009–10, around 184 million PBS subsidised prescriptions
were dispensed, at a cost of $8.3 billion expenditure and, in 2010–11, it is
estimated to be around $9 billion. As reported in the portfolio budget
statements 2011–12, in 2008–09 PBS growth was 9.2 per cent. In 2009–10, PBS
growth was nine per cent. In 2010–11 and 2011–12, PBS growth is estimated to be
7.7 per cent and 6.5 per cent respectively.
The committee heard that it is to be expected that expenditure on the
PBS will increase as many medicines didn't even exist 25 years ago. A higher
level of spending is appropriate because there is more to spend it on and people
are being treated when they otherwise would not have been.
However, Medicines Australia questioned whether PBS growth is
inappropriately high and therefore a threat to the long-term sustainability of
the PBS. They submitted that:
Such assertions are rarely accompanied by any serious
analysis or questioning of what an appropriate rate of growth is for
pharmaceutical (or health care) expenditure in a highly developed and ageing
country such as Australia.
Medicines Australia also argued that the growth of the PBS is at
For 2009–2010 expenditure on the PBS grew at 9%. Whilst final
data from 2010–2011 are not yet available, Medicines Australia anticipates that
the figure is likely to fall from the 2009–10 figure to between 6% and 8%, a
view that accords with the Treasury’s own projections. Further, although
sometimes volatile and uncertain due to data lags, publically available
Medicare data show that growth has slowed during 2010–2011 relative to that
experienced during 2009–2010.
In addition, Medicines Australia contended that the most appropriate
metric for judging the appropriateness of the level of government health
expenditure is in fact Gross Domestic Product (GDP) and stated that:
By this measure, pharmaceutical expenditure in Australia has
hovered between 0.6% and 0.65% of GDP for over a decade. The Government's own
Intergenerational Report 2010 adopted this approach and projected that the PBS
as a proportion of GDP will rise only to 0.7% in the time period to 2020.
Submitters and witnesses put the view to the committee that the PBS is
The Generic Medicines Industry Association (GMiA) submitted that 'of 24
reporting OECD nations, Australia has the third lowest spend on pharmaceuticals
as a percentage of GDP'.
Mr Robert Ellis of GMiA also told the committee that:
We are providing one of the lowest cost health systems of any
OECD country. We are providing a brilliant quality of life here and a key part
of that is the PBS, with the PBS being a very affordable instrument of
government and an aspect of providing the healthcare system.
It was also argued that 'the PBS is an important investment to maintain
the current and future health of Australians that may reduce the need for more
costly acute services long term'.
Dr Brendan Shaw of Medicines Australia told the committee that that the PBS is
a sustainable, well-run program that delivers major benefits to the health of
While the general view was that the PBS is affordable, other submitters
were supportive of the need for the Government to exercise fiscal
responsibility in relation to pharmaceutical expenditure. Yet they expressed
concerns with the process to cut costs through the deferral of listings. Deakin
Health Economics elaborated:
We understand and agree that there is a limit to how much
money a government can spend on pharmaceutical products and that funds directed
to pharmaceuticals have an opportunity cost (i.e., there are always competing
priorities that need to be balanced and managed). We also appreciate that the
decision about how public funds should be allocated rests with Government. We
therefore wish to make it clear that we don't have any issues with the
principles expressed that government may need to prioritise spending within and
across various government programs. However, we have a number of concerns
around the process that the Government is using to prioritise the PBAC's
recommendations into a list of medications that should be listed on the PBS
without delay and a list of medications where listing on the PBS can be delayed.
Financial impact of the Government decision to defer listings
The Government has stated in the Portfolio Budget Statements 2011–12
that the listing of some medicines would be deferred till fiscal circumstances
permit. The minister has stated that 'our government makes commitments to
ensure that every bit of expenditure is balanced by savings'.
In relation to the financial impact on the Commonwealth Budget of deferring the
listing of medicines, DoHA submitted that:
The cost of individual measures considered by the Cabinet,
including potential PBS listings are Cabinet in Confidence.
As has been previously publicly advised, the total cost of
the PBS medicines deferred is over $100 million.
However, submitters provided other estimates of the savings from the
deferrals and argued that it was a relatively small amount. Dr Shaw of
Medicines Australia told the committee that it is difficult to estimate savings
as a result of the decision to defer listing:
...but our back-of-the-envelope calculation is about $20
million to $25 million a year per year for the four-year period, which in
a scheme of $8 billion or $9 billion a year seems to me to be a relatively
small percentage of that scheme for the impact that it is going to have on the
future listing of new medicines.
The Australian Medical Association (AMA), Consumers Health Forum of
Australia (CHF) and Deakin Health Economics also commented that the cost of a
new medicine must also take into account any decrease in the use of an alternative
medicine already listed.
Ms Liliana Bulfone of Deakin University explained:
If they use the new drug, they are not using the old drug.
The cost of one is just transferred to the other, so that is a false saving.
For that reason the government is trying to say that it is having it both ways
and that is just not possible.
In addition, it was argued that Australia's financial position is not so
dire that the listing of the deferred medicines would have a catastrophic
impact. The Council of Social Service Network for example, stated that:
We do not believe that the current economic outlook is so
exceptional[ly] dire that funding the medicines would jeopardise Australia's
financial position or that funds could not be made available from other areas
of the budget.
While there may be savings to the Government in this Budget cycle, many
submitters argued that deferring listing on the PBS was a false economy in the
longer-term. It was noted that the medicines considered by Cabinet have already
been rigorously assessed by the PBAC and recommended on the basis of their cost-effectiveness
so that the additional costs to the PBS are justified by improvements in
health. The Council of Social Service Network commented that the Government has
not challenged the PBAC's assessment of cost-effectiveness of the deferred
The Western Australian Government also commented:
...in its decision making process, PBAC does take into account,
the net costs and benefits of a new medicine and adopts a principle of cost-effectiveness
or value for money. For these reasons, it would be reasonable to expect that
the cost impact of introducing these drugs onto the PBS would be marginal.
Submitters commented that the PBS is an important investment in
maintaining the current and future health of Australians which may reduce the
need for more costly acute care in the future. It was argued that it appears
that the Government has not considered the broader health economic gains that
could be achieved with timely access to appropriate medicines.
The AMA, for example, stated:
Access to a range of proven medicines funded under the PBS
allows medical practitioners to make decisions about the optimal medical
treatment of the patient, based on the patient’s particular clinical
circumstances, without patients having to make decisions about what they can
As a result, short-term savings of deferring the listings may therefore
be mitigated by the longer-term negative financial impact on the Budget.
Ms Carol Bennett of CHF articulated these concerns to the committee:
...consumers have rejected the argument that deferring
listing of medicines on the PBS will bring the budget back into surplus. Quite
aside from the fact that the PBAC already considers whether these medicines are
cost-effective, there are considerable savings to be made across the budget if
people have access to the right medicines that meet their treatment needs.
Consumers receiving the right treatment will require fewer hospitalisations,
fewer appointments with health professionals and fewer treatments to address
side-effects. And, beyond the health budget, consumers receiving effective
treatments are more likely to be able to participate more fully in society,
contributing to the workforce and as taxpayers. 
These concerns were echoed in a joint submission from Cancer Council
Australia, the Clinical Oncological Society of Australia and the Medical
Oncology Group of Australia:
Drugs that the PBAC recommends for PBS listing have been
assessed as both effective and cost-effective against existing treatments so
they represent equivalent or better efficacy and value than existing drugs. If
the new drugs are not listed on the PBS then medical practitioners will need to
continue prescribing existing medications. This means that costs will still
accrue to the PBS. In addition, if the existing drugs are less effective or
more toxic than the new drugs, then cost savings from the new drugs will not be
realised, such as reduced medical or hospital costs through better management
The committee was provided with an example of how the timely access to
medicines can have a broader positive economic effect. Although the effective
treatment of HIV/AIDS is dependent on new and emergent medicines, there are
significant public health benefits from treatment, which in turn accrues
savings. This was stressed by the National Association of People Living with
As the health of a person with HIV is improved the amount of
virus they carry is reduced to very low levels, thus making onward transmission
of the virus very difficult.
The committee was also provided with an example of how the listing of a
specific medicine, Targin®,
could actually save the Government money, contrary to claims made by DoHA. Dr John
Whitlam explained that 'in answer to a question, the deputy secretary of
Department of Health and Ageing had said that there will be no savings from the
reduction of opioid induced constipation'. Dr Whitlam went on to explain that
this is actually not correct, 'In fact, we agreed with the department itself
that there will be a saving of $6.5 million over five years'.
Dr Whitlam went on to argue that by listing Targin® there would also be cost-savings
to the Government through the reduction in abuse and diversion of OxyContin. He
noted that in answer to a question regarding such savings 'the deputy secretary
responded that he was not aware that the Government would have those figures'.
Once again, Dr Whitlam stated this was a 'misrepresentation':
... we agreed with his department that there would be a cost
saving of $8.4 million over five years. Therefore, inherently, Targin is not
just oxycodone containing a laxative if we are getting cost savings of that
The view was also put to the committee by the Chronic Illness Alliance
that the deferral decision represents a change in priority from timely access
to affordable medicines to budgetary considerations, and represents a cost
shift to patients. Similarly, Multiple Sclerosis (MS) Australia submitted:
Where people with MS are concerned the most important aspect
of this deferral relates to budgetary considerations seeming to outweigh the
established operations of the PBS evaluation system.
It was also submitted that the deferral decision shifted costs from the Commonwealth
Government to the Northern Territory Government Department of Health:
As cost could represent a significant barrier to access of
some medicines, where clients are unable to meet the cost, these medicines are
funded by the Department until they are PBS listed. For this interim period,
until the Australian Government effectively subsidises the medicine, the cost
is typically borne by the Department.
The committee notes that the Government's decision does indeed represent
a false economy, failing as it does to take into consideration that patients
receiving appropriate treatment will require fewer hospitalisations, fewer
appointments with health professionals and fewer treatments to address
side-effects. While comparatively small short-term savings may be found, the longer-term
costs of this policy will outweigh any savings.
Other possible savings measures
A number of industry organisations explained to the committee that they
had been responsive to government concerns about ensuring the financial
sustainability of the PBS. As an example, Mr Andrew Bruce of Medicines
Australia told the committee that:
One of the things is that when the government came and
expressed anxieties around the fiscal elements of the PBS we sat down with
them. We tried to put in long-term policy settings which would get ongoing
efficiencies to the market.
The committee heard that savings flowing from the Memorandum of
Understanding (MOU) between Medicines Australia and the Commonwealth Government
in November 2010 were estimated to be at least $1.9 billion. Dr Shaw of
Medicines Australia noted that 'these savings are yet to flow through the
system, and we expect still more savings in addition to these, going forward'.
These large savings could be contrasted with estimated savings of $20 to
25 million per year, over four years, as a result of the decision to defer
The AMA provided a number of suggestions that they argue could reduce
unnecessary PBS outlays with the potential to provide significant savings. They
submitted that the Government should:
maximise use of the Personally Controlled Electronic Health
Record (PCEHR) by prescribers in order to reduce PBS outlays for duplicate
scripts, and reduce adverse events;
cease implementation of the ‘continued dispensing’ measure in the
5th Community Pharmacy Agreement that allows pharmacists to
dispense PBS medicines without prescription or reference to a medical
practitioner. This will address the continued dispensing of medicines that are
no longer required, providing for significant savings;
withdraw prescribing rights under the PBS from non-medical practitioners;
ensure the mandatory price disclosure rules are fully implemented
including in cases of one-off discounting, and by prohibiting bulk purchasing in
the first month of the price disclosure year.
The GMiA noted that the recent reforms to the PBS were designed to
achieve greater value for money paid by the Commonwealth for medicines subject
However, they submitted that 'the Government is not fully leveraging the
savings opportunity stemming from the reforms'.
The GMiA submitted three key recommendations that they argued would
'ensure that Australians continue to have access to essential medicines through
counter market strategies deployed by holders of intellectual
property for PBS listed medicines that inappropriately impede the market entry
of follow-on generic medicines;
ensure sponsors have the opportunity to successfully obtain price
increases for specific medicines granted under the rigorous PBPA review
direct new policies at doctors, pharmacists and consumers to ensure
that further savings accrue to the Government from increased usage of follow-on
The GMiA also noted that restrictive medicines pricing policy can lead
to increased prices over time and stated:
The Federal Government's decision to defer indefinitely price
increases recommended by the PBPA on the basis of demonstrated commercial
grounds, for PBS listed medicines with a demonstrated cost-effective, medical
need and no alternative substitute medicine, significantly jeopardises the ongoing
supply of these essential medicines to patients.
Price increases are generally only recommended by the PBPA
where the sponsor can demonstrate a clear commercial need AND where there is no
alternative medicine available at a more competitive price.
...Restrictive prescription medicine pricing policy can
result in the exit of major generic players, reduced competition in the market
place and eventual increased prices of generic medicines over time.
Finally, the GMiA explained why new policies directed at doctors,
pharmacists and consumers would ensure that further savings accrue to the Government
from increased usage of follow on generic medicines:
Every time a follow-on generic medicine is dispensed in
Australia, in place of the initial brand, savings are delivered to the national
economy. However, the Government is missing out on making significant savings
because the opportunity to use a follow-on generic medicine occurs only about half
as often as it does in, say, the US. Further, on more than one in every four of
those occasions, a follow-on generic medicine - the only kind that drives
savings to the national economy - is not dispensed. These savings are lost
because of an absence of policies – commonly applied in comparable economies
overseas – that promote the timely availability, dispensing and usage of follow-on
Mr John Latham of Pfizer Australia commented on medicines coming off
patent and noted that over the next five years $2.4 billion worth of products
currently on the PBS will come off patent. He explained:
That is going to be a major savings for the government. Once
these drugs come off patent you have competition, you have prices coming
down—you have a mechanism for that. Unfortunately, the government is not
allowed to put into forward estimates the savings, unless they have a price
agreement, which is the reason that they got a guarantee for us. When PBS
reform came in originally, when we split generics away from these innovative
new products, we thought there was going to be a $3 billion saving. The latest
estimate is that there is going to be $6 to $8 billion worth of savings to the
government. Those savings are coming through. The government is not allowed for
accounting reasons to look at those, but they are there, they are tangible and
they will start as early as 2012. We are already seeing now in price disclosure
price reductions of 31 per cent and 71 per cent in some of the Pfizer drugs
that we have in hospitals. So the system is in place and is working.
The Chronic Illness Alliance noted that there are other means of saving
PBS costs, and pointed to the systems in Canada, New Zealand and the
Netherlands. Whereas in Australia regulation provides a price cut of 16 per
cent when a generic competitor enters the market, in Canada the price cut when
a medicine comes off patent is 75 per cent, while in New Zealand and the
Netherlands a tender system is in place to deliver cheaper medicines.
The committee heard that many areas of Government expenditure are not
subject to a rigorous economic evaluation. In contrast, medicines which have
received a positive recommendation from the PBAC have already been subject to a
rigorous process that includes effectiveness, safety and cost-effectiveness. Ms
With a lot of other government expenditure programs there is
not that level of rigour in determining whether they are cost effective, so you
do not know how cost effective they are. I think the example we gave in the
submission is of the bowel cancer screening program. That program may or may not
be a cost-effective use of funds. We do not know, because it has not been
evaluated in the way that a drug has been evaluated. So to say, 'We are going
to direct our funds from something we know is cost effective to something we do
not know is cost effective' is potentially putting less money into an area that
gives you less return, less bang for your buck, effectively.
Similarly, the committee heard from Mr Mark Glover of Allergan Australia
Of the $50 billion that is spent on health each year, $9
billion of it is drugs. We get thoroughly reviewed. We know that. For the other
$41 billion I would suggest there is room for improvement.
These sentiments were echoed by GlaxoSmithKline Australia (GSK):
Indeed, it is difficult to name any other program across
Government that can lay claim to equivalent rigour in assessing the economic
value of government expenditure or where an equivalent level of program
overspending risk is borne by the private sector.
For this reason GSK firmly believes that Government should
find any necessary budget savings from other less cost effective, less evidence
based areas of government spending.
The committee noted that, unusually, both the Generic Medicines Industry
Association and Medicines Australia were both of the same mind in opposing the Government's
position that they were not going to list new medicines until someone finds the
money, and that this is not the way to fund or manage the PBS.
A number of far more significant savings that the Government could
leverage from existing reforms were provided by submitters.
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