PBS savings: two sides of the coin

The Pharmaceutical Benefits Scheme (PBS) is the tenth largest Commonwealth Government program, now costing over $9 billion a year. Taki Steve/Flickr, CC BY-SA

When it comes to pharmaceuticals expenditure, the National Commission of Audit’s proposals rate highly on any policy change scale.

Its two main recommendations are designed to reduce the overall cost to the government by reducing the overall price paid for pharmaceuticals and to increase the out-of-pocket expenditure for patients. If implemented, the first could make the second unnecessary.

The Pharmaceutical Benefits Scheme (PBS) is the tenth largest Commonwealth Government program, now costing more than A$9 billion a year. It’s an important element of the health-care system as it provides people access to drugs with a maximum co-payment of A$6.60 for concession-card holders and A$36.90 for others.

The scheme also has a “safety net”, which reduces, and in many cases removes, out-of-pocket costs for people with significant health problems who have reached certain expenditure thresholds. This means people holding concession cards get drugs free after they spend $360 in a calendar year.

Previous policy reforms, such as the introduction of accelerated price disclosure, which sped up the rate at which the government takes advantage of falls in the market price of generic drugs, has resulted in slowing the real rate of the PBS growth over forward estimates. But the Commission of Audit predicts the scheme will cost over $15 billion in ten years.

A more efficient scheme

Economists like ourselves have been arguing for many years that Australia pays too much for older, off-patent medications and this explicitly recognised in the report:

For example in the case of Atorvastatin, currently the most highly prescribed and highest cost to government medicine in Australia, New Zealand pays $2.01 in comparison to the price paid in Australia of $38.69.

The Commission’s main recommendation is to cap the budget for pharmaceuticals and have this managed by a new independent authority, known as the “PBS Entity”. This body would manage price negotiations, as well as the listing and de-listing of pharmaceutical drugs on the PBS.

Currently, the Pharmaceutical Benefits Advisory Committee (PBAC) provides advice on the cost-effectiveness of medicines to be listed on the PBS, but it’s ultimately the health minister and the government that decides to list a drug. And there’s no routine process for actively managing the PBS budget to ensure it remains an efficient scheme.

This can lead to significant problems, such as the one recently highlighted about combination therapies, where it costs over $30 a month extra to combine aspirin with another drug, for instance.

A benefit of a capped budget is that it provides incentives to end this type of wasteful expenditure; the authority would have to make savings either through price reductions or delistings in order to list new drugs. An independent authority could also depoliticise the decision-making about which pharmaceuticals get listed, as this will be largely based on their cost-effectiveness.

The proposal would result in a significant transfer of decision-making power from the political sphere to technocrats running the authority. This model currently operates in New Zealand where [Pharmaceutical Management Agency](http://www.pharmac.health.nz/](http://www.pharmac.health.nz) (PHARMAC) preforms this role.

While there are some examples of Australian politicians ceding power, such as the creation of an independent Reserve Bank board, they are relatively rare. For the authority to be successful, it would be necessary to build up its capacity for evaluating drugs and for the Australian community to explicitly accept rationing of some pharmaceuticals.

If the proposal were adopted, it would represent the most significant change to the PBS since its introduction in the late 1940s.

Increasing out-of-pocket costs

The commission’s other main recommendation is to change the level of co-payments for most medicines under the Pharmaceutical Benefits Scheme. The main change is a $5 increase in co-payment, from $36.90 to $41.90, for people who don’t have a concession card.

There would be no change to the co-payment of $6 for people who do have concession cards, but they’d be required to contribute $2 to the cost of their medicines when they reach the safety net.

These changes are less radical but more problematic. The Commission says it’s seeking to increase price signals for medicines, but a uniform increase in co-payment fails to signal differences in the real price of drugs.

And for people with concession cards, the $36.90 co-payment is already quite high by world standards. A 2011 international comparison, for instance, showed Australia ranked fourth-highest of the 15 countries examined for such out-of-pocket costs.

An even bigger problem with high co-payments is that it may discourage use of beneficial medications and has the potential to increase downstream costs, for instance, through increased hospitalisations.

A better approach would be a co-payment that’s proportional to the actual cost of the drug up to a maximum level, as this would encourage doctors and patients to consider cheaper drugs. This is particularly important for conditions such diabetes and cardiovascular disease where there are a large number of therapy options available – and there’s long-term drug use.

Indeed, there’s a case for actually reducing the current levels of co-payment for some drugs, as a way of passing on some of the savings of buying cheaper drugs to consumers.

Likelihood of change

What are the odds of the Commission’s recommendations on pharmaceuticals being adopted by the government? Given that previous Australian governments seem to take on only one major policy change in the health sector a decade, the chances don’t appear to be very high.

Nonetheless, the Commission has made a significant contribution by putting the need to tackle waste and inefficiency in our pharmaceutical expenditure on the political agenda.

Significant gains could still be made by simply refining the current system – by improving the price disclosure policy and closing loopholes in pricing policy and decisions.

We can only hope this report has its intended effect of shaking up the pharmaceutical benefits scheme to increase efficiency and to ensure that cost-effective drugs are always available at low cost for Australians. Reform would produce efficiency dividends that reduce the need for higher out-of-pocket costs.