Looking for an easy $260 million in savings? Reform the PBS

The Australian government pays $50 a month for a drug that costs $2 a month in New Zealand. e-MagineArt.com/Flickr

A government-appointed committee makes a recommendation that would save taxpayers $260 million within a year, but it’s ignored. And people at risk of heart attacks lose out.

Let me explain via a ripping yarn of non-evidenced-based policy making.

It all started back in 2010, when the government signed a four-year deal with Medicines Australia, the peak drug industry body, over the price of medications listed on Australia’s Pharmaceutical Benefits Scheme (PBS).

In return for some modest price cuts and a mechanism for slowly decreasing the price of older medications, the government agreed to no further price reductions of any PBS medications until July 2014.

It was a great deal for some parts of the pharmaceutical industry and for Australian pharmacists – at taxpayers' and consumers' expense. I wrote an analysis of the deal at the time, highlighting its shortcomings

The end of a blockbuster

The deal came at a time when many “blockbuster” drugs, such as statins, were coming off-patent. Blockbuster drugs are those that generate more than a billion dollars a year in revenue for their manufacturer.

Drug patents last for 20 years in Australia and statins are some of the most widely-prescribed drugs because they are effective at preventing cardiovascular disease.

The most popular type of statin has been atorvastatin, which has the brand name Lipitor. It has topped the list of highest expenditure drugs on the PBS for the last decade, costing Australian taxpayers more than $7 billion in total, which has gone to Pfizer, the company holding its patent.

But the expiry of this patent last year means that Pfizer no longer has an exclusive right to sell atorvastatin; many other firms can now produce equivalent formulations of the drug, which are known as generics.

In most countries, governments have moved to make large savings by using low-cost generics. For a widely used drug such as atorvastatin, generics can cost 95% less than the price of the original drug.

A typical dose of atorvastatin (40 milligrams), which went off patent in many countries last year, now costs just a few dollars a month in England, Sweden and New Zealand. In fact, the generic form of atorvastatin is exclusively provided in New Zealand by Pfizer for around $2 a month.

But wait…

Not in Australia. The pricing agreement with the government specified a reduction of only 16% (to around $50 per month for a 40mg dose) and that this price would fixed for 18 months.

As the price of these drugs internationally is so much lower, generic manufacturers offer large discounts on the wholesale price of the medications to pharmacists. And pharmacists get to pocket the difference.

Each time a script for atorvastatin is dispensed, the government pays $50 to a pharmacist to cover the wholesale cost of the drug. If the pharmacist actually purchases generic atorvastatin for $10, she keeps the extra $40 per script flowing from discounts.

The windfall gains from discounts come on top of the $600,000 (on average) the government pays every pharmacy each year for dispensing medications and other incentives, through its agreement with the Pharmacy Guild.

Enter the committee

But where does the government committee enter the story? Well, the legislation enabling the pricing agreement had to pass through parliament. To get the support of independent Senator Nick Xenophon, the government agreed to a motion seeking a review of newer statins by the independent Pharmaceutical Benefits Advisory Committee (PBAC).

PBAC assess medicines applying to be listed on the PBS and makes a recommendation based on their efficacy, safety and cost-effectiveness.

The terms of the review sought to clarify if drugs such as atorvastatin were more effective than older, much cheaper cholesterol-lowering medications, such as simvastatin (which will shortly costs less than $10 per month).

The Committee reported last July and had a clear set of recommendations based on an extensive review of recent clinical studies. Yes, atorvastatin was more effective, but the evidence indicated that its price should be set at only 12.5% higher than the equivalent dose of simvastatin.

If implemented, this recommendation should have produced substantial cuts to the price of atorvastatin (from $50 to around $21 a month). And if the price of atorvastatin is linked to that of simvastatin, after August 1 this year, the price would need to be cut by a further 40%, producing even greater savings for taxpayers and consumers.

Government silence

After seeing the report, one of the pharmaceutical manufacturers cut the price of atorvastatin but only by 25%, so the official wholesale price of atorvastatin 40mg is now around $38. While these cuts produced some savings for the government, it was only half the story.

The untold half is that cut was not sufficient to bring the price in line with PBAC recommendations. In a recent article in the Medical Journal of Australia, I estimated that this would cost taxpayers $260 million over the coming year.

The government has said nothing.

Besides foregoing large savings, this whole episode establishes a bad precedent: the evidence-based pricing recommendations of a peak government advisory body have effectively been ignored by both the government and the pharmaceutical industry.

It’s difficult understand the rationale for this, particularly as it comes at a time when the government is struggling to find the money to list new cost-effective pharmaceuticals.

Implementing the recommended cuts should only be the first step to Australia paying world prices for its generic medications. If we paid $2 rather than $38 a month for a drug such as atorvastatin (as New Zealand does), there would be a strong case for greatly expanding its use.

A large meta-analysis that combined evidence from all statin studies last year indicated that people at much lower levels of cardiovascular risk would also benefit from taking these drugs regularly.

These are the types of evidence-based opportunities that the government must pursue if it wants to further improve the health of Australians. Spending too much on generic drugs could cost lives as well as money.