9.4 The Pharmaceutical Benefits Scheme

Background 

The Pharmaceutical Benefits Scheme (PBS) is an integral part of Australia’s health care system and plays an important role in improving the wellbeing of all Australians.

The PBS was first established in 1948, although its origins go back as far as 1919, when a limited programme was established to provide subsidised medicines to World War I veterans and their families. Since 1948 it has evolved into a broader subsidised scheme which, from 1 December 2012, provides subsidised access to over 867 medicines, available in more than 2,267 forms and strengths and marketed as 4,871 different medicine brands (Department of Finance, 2013). In 2013 it is estimated that 9.5 million Australians accessed the PBS.

Delivering safe, affordable and clinically effective medicines to all Australians should remain a key government objective, as should assuring value for taxpayers’ money. Successive Commonwealth Governments have identified opportunities to improve the PBS. In September 2010, for example, the then Government signed a Memorandum of Understanding (MoU) with Medicines Australia to, inter alia, promote a more efficient PBS, provide a stable pricing policy environment and a viable and responsible medicines industry in Australia. The MoU is effective until 30 June 2014.

Australian generic (contestable) PBS medicine prices are lagging behind prices paid by many other advanced countries. Recent research (Duckett et al, 2013a) claims that Australians paid more than $1 billion a year too much for prescription drugs.

While continuation of the PBS is consistent with the Commission’s principle of protecting the truly disadvantaged, public assistance should be targeted at those most in need and there is an opportunity to rely on a greater degree of personal responsibility and choice and make better use of competitive markets to bring benefits to users of the pharmaceuticals.

The Commission considers that changes to the PBS are essential elements of broader reforms to the health care system.

Rationale for government intervention 

There is a strong rationale for government subsidies for medicines. By ensuring that medicines are affordable and widely available, consumers are more likely to make decisions on medicine use based on clinical need, rather than cost. This creates wider benefits, such as improved health outcomes, therefore helping to minimise the incidence of hospitalisation – a much more expensive intervention.

Subsidy schemes for medicines are in place in many countries around the world including most European countries as well as Canada and New Zealand.

Another key rationale is that the government is able to bargain more effectively on behalf of consumers with large multinational suppliers for new patented medications. It can also use its single buyer status to tender for generic medicines at more favourable prices.

Another reason for intervention is that those with the highest medical need often have the least capacity to purchase medicines — particularly high cost medicines.

Current structure of the Pharmaceutical Benefits Scheme 

The Commonwealth lists selected subsidy medicines on a legislative schedule covered under the National Health Act 1959. The Commonwealth negotiates an agreed listed price for medicines with manufacturers prior to listing (i.e. the ex-manufacturer price).

Consumers pay a co-payment for each PBS medicine purchase. Currently, there is a concessional ($6.00) and a general (up to $36.90) rate. Concessional access is determined by eligibility for a range of welfare payments. There are also safety nets, so that when a concessional patient reaches the concessional threshold of $360.00 their PBS patient contribution is zero. Similarly, when a general patient reaches the threshold of $1421.20, their PBS patient contribution is $6.00 (Department of Health, 2014).

Pharmacies in Australia are the primary retail outlets for dispensing prescription medicines. The Commonwealth pays pharmacies a dispensed price for every medicine they dispense to patients that is part of the PBS. This price includes the ex-manufacturer price, plus a wholesale mark-up, a retail mark-up, a dispensing fee, plus any other relevant additional fee that may apply to each medicine. The current flat dispensing fee (not the dispensed price) charged for each prescription provided is $6.63 and is indexed annually.

The dispensed price is separate from the price the Commonwealth negotiates with manufacturers. This is determined through negotiations with wholesaler suppliers and pharmacies through National Pharmacy Agreements. Pharmacists pay suppliers (wholesaler and/or the manufacturers) for PBS medicine purchases, not the Commonwealth. The government reimburses the pharmacist by paying them the dispensed price.

The Commonwealth spent $9 billion on the PBS in 2012-13 (Parliamentary Budget Office, 2013), with notionally 72 per cent spent purchasing medicines from manufacturers, while 23 per cent was provided in the form of remuneration to pharmacists and 5 per cent as remuneration to wholesalers (Department of Finance, 2013).

Trends 

There has been some recent success in reducing PBS expenditure, with payments under the Scheme expected to be $526 million lower in 2013-14 than previously forecast, largely reflecting higher than estimated savings resulting from existing pricing policy and lower than anticipated ongoing growth in demand for certain macular degeneration medicines (Australian Government, 2013). The introduction of improved price disclosure arrangements – which require manufacturers to reveal the actual prices they charge for medicines – and PBS listed prices then being adjusted to reflect the average actual prices, has seen the overall growth in the PBS at 6.0 per cent in 2011‑12, falling for the first time in decades by 3.4 per cent in 2012‑13.

There are, however, ongoing concerns regarding price disclosure. The lengthy price disclosure process, for example, means that consumers do not benefit from reduced prices until at least a year later (Duckett et al, 2013b).

The Commission considers that the medium to longer term expenditure outlook is for further expenditure growth, as the impact of price disclosure moderates and the fundamental drivers of demand, such as an ageing population, the increasing incidence of chronic disease and increasing demands for new pharmaceutical products, again take control.

Notwithstanding recent successes in reducing prices, annual growth in PBS expenditure over the last decade averaged 7.6 per cent in nominal terms or 4.7 per cent per year in real terms. The Commission anticipates that on current policy settings PBS expenditure will continue to rise, with nominal growth of 5.4 per cent per year projected (Chart 9.4.1) to 2023-24.

 

Chart 9.4.1: Projected spending on the Pharmaceutical Benefits Scheme

This chart shows expenditure on the Pharmaceutical Benefits Scheme growing from around $9 billion in 2013-14 to around $16 billion in 2023-24.

Source: National Commission of Audit.

Drivers 

There are a number of key drivers regarding the PBS’s expenditure growth. These include:

  • new PBS medicine listings and technological change;
  • the rise in the incidence of chronic conditions; and
  • demographic change in Australia.

The listing of new medicines on the PBS schedule is one of the largest contributors to increasing expenditure. Since 2007-08, new medicines costing $6 billion over their respective forward estimates have been listed on the PBS. Between 30 September 2011 and 1 July 2013, government approved new, amended or extended listings for 156 medicines and price adjustments for 76 PBS-listed medicines. Future listing cost pressure will also be exacerbated by the emergence of a new class of biologic medicines, made using biological rather than chemical processes, which are more complex to produce and cost more per unit as a result.

Many previously acute conditions are now able to be managed over time as a chronic condition using medication. Reflecting both the increasing prevalence of the diseases (such as cancers) and the long-term nature of their treatment, the medicines used to treat these conditions rank as some of the most prescribed and the highest cost to government on the PBS. This influence is compounded by the fact that many of these new medicines are biologics.

The ageing population is expected to add significantly to PBS costs. According to the Treasury projections associated with the Intergenerational Report (Australian Government, 2010), the proportion of people over 65 is set to reach nearly 25 per cent of the population by 2050. Older people use a relatively high proportion of PBS medicines, with people aged over 65 accounting for approximately 60 per cent of script volume and 53 per cent of the total PBS expenditure in 2010-11.

Concessional patients also account for the bulk of PBS expenditure — with 78 per cent of PBS expenditure in 2011-12 attributed to concessional patients and approximately 45 per cent of concessional card holders either on an age related Pensioner Concession Card (40 per cent) or a Commonwealth Seniors Health Card (5 per cent). Concessional card holders on average receive $1,060 in general pharmaceutical benefits (Section 85) per year, compared to $97 for general recipients.

Many of these trends are also occurring in other developed countries. However, as expenditure on pharmaceuticals has been at a much higher rate in Australia than the OECD average (Chart 9.4.2) and per capita consumption is one of the highest in the developed world (OECD, 2008), there is a need to address issues that are driving up costs in Australia.

 

Chart 9.4.2: Average annual growth in pharmaceutical expenditure per capita, in real terms 2000 to 2011 (or nearest year)

This chart shows the average annual growth in expenditure on pharmaceuticals from 2000 to 2009 and 2009 to 11 for OECD countries.

Source: OECD, 2013a.

Issues 

As mentioned above Australian generic (contestable) PBS medicine prices are lagging behind prices paid by many other advanced countries. While the price disclosure arrangements are reducing prices, this is not occurring as quickly as in other countries such as New Zealand, the United Kingdom and Canada. For example:

  • The price to the PBS for a box of thirty 40 mg tablets of the drug Atorvastatin - used to reduce the risk of heart attack was A$51.00. In New Zealand the price is A$5.80 for a box of 90 tablets (Department of Finance, 2013; Duckett et al, 2013a).
  • In the case of Simvastatin – used for purposes such as cholesterol reduction – the price per tablet while under patent was A$2.00 in Australia and almost A$3.00 in England. However, after the patent expired it took almost four years for the Australian price to gradually decrease to around A$1.00 per tablet, whereas the price in England decreased much faster — so that the Australian price was approximately four times higher than in England (Productivity Commission, 2013).

The challenge of further expected growth remains in the medium to long-term, particularly given the likely emergence of new classes of high cost, highly individualised medicines, e.g. biologics. There is a need to take a holistic approach to managing PBS medicine listings and price negotiations. Comparatively little effort is put into ‘creating room’ for new PBS medicine listings by rationalising existing listings or re-negotiating new prices.

Under current arrangements, once a medicine is recommended by the Pharmaceutical Benefits Advisory Committee, the Commonwealth is expected to list it. Little consideration is given to whether this can be afforded or what else can be done to accommodate the new listing, e.g. de-listing existing medicines, reducing the prices of existing listings through tenders, negotiating bundled packages with manufacturers and/or working within a pre-negotiated annual budget.

The current pharmacy rules have a significant impact on the operation of the PBS as pharmacies are protected by ownership and location rules that limit competition. State governments restrict ownership to pharmacists and the Commonwealth administers pharmacy location rules that control where pharmacies can operate.

The Australian Community Pharmacy Agreements are made exclusively between the Pharmacy Guild of Australia and the Commonwealth, setting out mark-up prices for medicines, dispensing fees and other related remuneration under the PBS. The most recent Community Pharmacy Agreement is due to expire in June 2015.

The PBS subsidises retail pharmacies by paying a mark-up on the wholesale cost of drugs and a dispensing fee. Notionally the remuneration paid to the pharmacy retail sector accounts for around 23 per cent of total PBS spending. However, the actual payments retained by pharmacies are typically much higher. For example, while the ex-manufacturer price for Simvastatin was $13.15, under the price disclosure survey in 2012-13 it was found that pharmacies on average paid $7.28 (ex-manufacturer), representing a mark-up to pharmacies of 80 per cent (or a mark up of 190 per cent when added to mandatory dispensing fees) (Department of Finance, 2013).

Allowing a wide range of new competitors to enter the market would provide greater access and choice for consumers and, over time, place greater downward pressure on pharmaceutical prices. This could involve non-pharmacists owning pharmacies and relaxing location rules allowing pharmacies to collocate in other retail outlets such as supermarkets.

This has been happening internationally, where many countries have reduced or removed rules that prevent non-pharmacists from owning pharmacies, while retaining the requirement for pharmacists to dispense medicines. This has opened up new pharmacy retail business models that allow greater choice for customers, while ensuring the safe and appropriate dispensing of medicines.

High PBS expenditure is also being driven by high medicine usage of concession card holders. This includes Age Pensioners, Commonwealth Senior Health Care recipients, Parenting Payment recipients and veterans. For most drugs on the PBS, patients pay up to $36.90, or $6.00 for concession card-holders. The government pays the balance and if an individual spends more than the Safety Net threshold, their co-payment is reduced. As a result, the government pays more than 80 per cent of the cost of PBS drugs.

Potential areas for reform 

While opportunities to improve efficiency in both the PBS and the pharmacy sector have been identified in previous industry and government reviews and have been subject to ongoing yet incremental improvements, the Commission considers that substantial reform is needed if the cost drivers are to be effectively and fairly addressed.

The Commission considers that fundamental reforms to the PBS and the pharmacy sector will drive innovation and competition, increase consumer choice and contain costs to the Commonwealth.

There are options within the PBS to reduce cost pressures such as freezing expenditure at the current level (or within a predetermined funding envelope), reducing PBS subsidies, increasing co-contributions or reducing the coverage of drugs prescribed under the PBS. However, these approaches are short to medium term fixes.

In the absence of wider reform simply freezing expenditure at current levels would mean that any new pharmaceuticals would be listed only if existing drugs are removed from the PBS, or better prices are negotiated for pharmaceuticals currently listed.

A more effective approach to negotiation and management of the listings could be implemented by reducing the current role of government and establishing an independent entity. This would introduce a significantly new approach to negotiating on prices, similar to the Pharmaceutical Management Agency (PHARMAC) established in New Zealand.

While the new body could also be charged with addressing community service obligations – such as access to pharmaceuticals in regional and remote areas – for greater transparency these could be directly Budget funded and provided by the Department of Health.

The PBS Entity would be accountable for the whole of PBS performance, including the rationalisation of the current multi-stage decision-making process. Given the highly specialised and technical skills required for this role, the PBS entity would draw on the relevant expertise from within government, industry and the research community, similar to the Pharmaceutical Benefits Advisory Committee (PBAC) which currently assesses applications for listing of medicines on the PBS.

To ensure that there was a strong incentive to achieve further price reductions, the PBS entity would operate within a fixed funding envelope set for a defined duration of seven years. Between the seven year funding cycles, a detailed review would take place with recommendations subsequently made to government about the size of the following funding envelope. This would ensure that the funding envelope keeps pace with community expectations, demographic change and developments in pharmaceutical technology.

Crucially, the PBS Entity would operate under a clear objective to provide reliable and affordable access to a wide range of necessary pharmaceuticals within the defined budget. To meet this objective, the PBS Entity would manage the funding of new and currently listed medicines; negotiate prices for existing drugs; and make decisions about de-listing drugs.

The resource impacts on the PBS would need to be considered should the government seek to list a medicine that the PBS entity found to have low cost effectiveness. A mechanism would also be required to permit the government to have items added to the PBS list in exceptional circumstances by introducing a disallowable instrument into Parliament. The process would require receipt of advice from the PBS Entity regarding which items are to be de-listed in order to offset the additional cost.

While allowing the PBS entity to manage the listings of pharmaceuticals may mean less certainty for consumers, as some pharmaceuticals could be de-listed, new pharmaceuticals could also be listed more quickly than under current arrangements as specific Cabinet decisions would not be required to list a pharmaceutical.

A number of submissions to the National Commission of Audit (e.g. Medicines Australia, 2013) indicated possible risks associated with the New Zealand or similar systems, such as the potential for shortages (Labrie, 2013) and fewer listed drugs (Wonder and Milne, 2011). However, the relatively high rate of growth of per capita pharmaceutical expenditure in Australia (Chart 9.4.2) as well as the recent success in reducing prices under the price disclosure model illustrate that more could be achieved without necessarily reducing availability.

The number of brands available in New Zealand has been scaled back as a matter of policy choice and PHARMAC has only recently commenced a transition to an expanded role covering hospital pharmaceuticals in New Zealand. Accordingly some care is needed in making international comparisons on lists of available medicines. In particular comparing lists of pharmaceuticals available in either country was open to misinterpretation (Moodie et al, 2011).

It also appears that New Zealand has been less lenient than Australia or the UK in approving drugs (Raftery, 2008). Setting a fixed budget for the PBS entity at current levels does not mean that outcomes would be the same as in New Zealand, where there is considerably lower expenditure per capita.

Such risks could also be addressed by undertaking further improvements to PBS regulatory processes. The Therapeutic Goods Administration (TGA) assesses new drugs for safety, quality and efficacy, before they can be supplied on the Australian market. As well as adding to the cost of drugs in Australia, there can also be delays in getting products through the TGA process.

Further reductions to the cost of pharmaceuticals could result from recognising approvals made by overseas agencies, including the Food and Drug Administration (USA) and the European Medicines Agency (EU). This arrangement would not only reduce the estimated annual cost pharmaceutical companies incur by having to win separate approvals from the TGA but also it would provide better outcomes to consumers as the latest drugs could be brought to the market without being delayed by a lengthy approval process.

The Commission is considering a range of areas where co-contributions would reflect an appropriate price signal to users of the health care system. The Commission considers that co-payments should be increased for pharmaceuticals and that some level of contribution should be paid for all medicines under the PBS, including for concessional medicines that are currently free.

For general patients with costs below the safety net, the co-payment could rise by $5.00 (from up to $36.90 currently to up to $41.90) while above the safety net it could also rise by $5.00 (from $6.00 currently to $11.00). To ensure individuals made a greater contribution to meeting their own pharmaceutical needs and to ensure that the Budget was not adversely impacted by the rise in the co-payments, the general patient safety net should increase from $1421.20 currently to $1613.77.

For concession card holders, there would be no increase to the co-payment (currently $6.00) below the existing threshold (of $360.00). However, the Commission considers that introducing a co-payment would be an important step in providing a signal to users about the cost of their care and place greater value on these medicines (potentially reducing the incentive that users face to not take their medicines). Accordingly, above the $360.00 threshold, concession card holders should pay a co-contribution of $2.00.

There remains limited retail choice and competition in the Pharmacy sector, with a reliance on community pharmacies to dispense medicines. This is further complicated by State and Commonwealth restrictions that control who can own a pharmacy and where pharmacies can be located.

The delivery of pharmaceuticals to Australians could be made more efficient through the opening up of competition and deregulation of the community pharmacy sector. This would include reforming ownership and location rules in order to promote the introduction of new business models focussed on expanding consumer choice of both services and products. In 2005, the Productivity Commission’s Review of National Competition Policy Reforms called for a broad review of all the restrictions on competition in the pharmacy sector.

While such reforms to pharmacy regulation would be likely to have an impact on the current business models of existing businesses, offsetting this impact would require consideration of a number of issues, including providing pharmacists with opportunities to provide a greater range of services to their customers. The Commission’s proposals in relation to Australia’s arrangements for the scope of professional practices could provide new opportunities for pharmacists in a broader range of settings.

In another area of potential reform, the Government could withdraw involvement in medicine provision and facilitate the introduction of private health insurance that offers individuals the option to insure themselves against the risk of ill health. This would require a major reform in the health insurance industry to expand options and/or introduce new business models incorporating pharmaceutical insurance cover.

References 

Australian Government 2010, Intergenerational Report 2010, Australian Government, Canberra.

Australian Government 2013, Mid-Year Economic and Fiscal Outlook 2013-14, Australian Government, Canberra.

Daley, J, McGannon, C, Savage, J, and Hunter, A 2013, Balancing Budgets: Tough Choices We Need, Grattan Institute, Melbourne.

Department of Finance 2013, Strategic Review of Pharmaceutical Benefits Scheme, unpublished report, Canberra.

Department of Health 2014, Fees, Patient Contributions and Safety Net Thresholds, viewed December 2013, <http://www.pbs.gov.au/info/healthpro/explanatory-notes/front/fee>.

Duckett, S, Breadon, P, Ginnivan, L and Venkataraman, P 2013a, Australia’s Bad Drug Deal: High Pharmaceutical Prices, Grattan Institute, Melbourne.

Duckett, S, Breadon, P, Ginnivan, L, and Nolan, J 2013b, Poor Pricing Progress: Price Disclosure Isn’t the Answer to High Drug Prices, Grattan Institute, Melbourne.

Labrie, Y 2013, Wrong Prescription - The Unintended Consequences of Pharmaceutical Cost Containment Policies, Montreal Economic Institute Research Paper, Montreal (Quebec).

Medicines Australia 2013, Submission to the National Commission of Audit 2013, Canberra.

Moodie, P, Metcalfe, S and Poynton, M 2011, Do Pharmaceutical Score Cards Give Us the Answers We Seek? New Zealand Medical Journal, 2011; 124 (1346).

OECD 2008, Pharmaceutical Pricing Policies in a Global Market, Health Policy Studies, OECD Publishing, Paris.

OECD 2013a, Health at a Glance 2013: OECD Indicators, OECD Publishing, Paris.

OECD 2013b, Value in Pharmaceutical Pricing, Health Working Paper No. 63, OECD Publishing, Paris.

Parliamentary Budget Office 2013, Australian Government Spending: Historical Trends From 2002-03 to 2012-13, Canberra.

Productivity Commission 2005, Review of National Competition Policy Reforms, Report no. 33, Canberra.

Productivity Commission 2013, An Ageing Australia: Preparing for the Future, Research Paper, Canberra.

Raftery, J 2008, Paying For Costly Pharmaceuticals: Regulation of New Drugs in Australia, England and New Zealand, Medical Journal of Australia 2008; 188 (1): 26-28.

Wonder, M and Milne, R 2011, Access to New Medicines in New Zealand Compared to Australia, New Zealand Medical Journal, 124 (1346).