Prescription medicine

Is the government’s unsavvy spending on prescription medicines costing consumers millions of dollars more per year than they need to pay?
Learn more

01 .Getting a bad deal

Prescription medicine

Shopping for pharmaceutical products to be dispensed to consumers at subsidised rates as part of the Pharmaceutical Benefits Scheme (PBS) cost the federal government more than $7.5bn last year. With much media attention focused on this spending, we decided to take a look at the murky issues surrounding PBS spending.

Of particular concern is the high price Australians pay for medicines compared with other countries, possibly the result of a likely conflict of interest within the Pharmaceutical Benefits Pricing Authority (PBPA)

This key concern, put forward by Stephen Duckett, health program director at the Grattan Institute, highlights the government’s poor shopping skills. According to Australia’s bad drug deal, a report released by the institute in March this year, government spending on pharmaceutical products is far from savvy. Duckett suggests the government is paying at least $1.3bn a year more than it needs to – amounting to 14% of the entire PBS spend. 

At present, the government buys all PBS drugs at a price it negotiates with individual pharmaceutical companies. Consumers without a health care concession card pay up to $36.10 for a prescription, with the government topping up any further cost from its own coffers. However, the Grattan report suggests changes to the way the government does business that could bring the cost of many pharmaceuticals below the $36.10 co-payment. It is unlikely that the changes would make much difference for those with a health care card who pay a reduced co-payment of $5.90.


Sign up to our free

Receive FREE email updates of our latest tests, consumer news and CHOICE marketing promotions.


02.Who decides which drugs make the PBS list?


The PBPA, a non-statutory body, was established to negotiate with drug companies and make price recommendations to the Minister for Health and Ageing about pharmaceutical items recommended for listing on the PBS. If the total cost of listing a new drug is estimated at less than $10m a year, the PBPA price is agreed. Anything in excess of this amount is referred to cabinet. 

The authority consists of an independent chairperson, two government representatives – including one from the Department of Industry, who is tasked with the responsibility of advancing the pharmaceutical industry – one consumer nominee and two industry nominees who represent the pharmaceutical companies. 

Dr Brendan Shaw is one of these industry nominees. He represents the interests of Medicines Australia, the pharmaceutical companies’ industry group. Medicines Australia member companies supply 86% of the medicines available to Australian patients through the PBS. One of these brands is Pfizer, the multinational pharmaceutical giant that is paid more than $700m a year through the PBS for the supply of Australia’s number one-selling pharmaceutical product, Lipitor, a drug used to manage high cholesterol. 

And here lies a key conflict of interest. Shaw negotiates prices on behalf of the government with the actual companies he represents, so cheaper drug prices for the government (and in turn, consumers) may not be at the forefront of negotiations. 

Also of concern is that there appears to be good money for the government in being kind to the pharmaceutical companies. Last year, Medicines Australia donated $84,636 to political parties – with almost $60,000 of it going to federal Labor. Pfizer also donated – $129,100 to both major political parties in the 2011-12 financial year and $123,100 in the year to June 2011. 

Joining Shaw to represent the drug companies is Kate Lynch from the Generic Medicines Industry Association, as well as a representative from the Department of Industry, who are tasked with advancing industry interests in Australia, including that of the pharmaceutical industry. 

Australia’s system is in stark contrast to New Zealand’s, where politics have been eliminated from the panel and independent experts are appointed to make decisions. New Zealand’s prices for wholesale drugs are now more than six times lower than ours and, in some cases, more than 20 times lower. 

Leading consumer health advocate Dr Ken Harvey from the School of Public Health at La Trobe University says that while industry deserves a place at the negotiation table, the consumer perspective must be equally represented. “As a general principle, there should be two consumer representatives,” he says. “When there are two, it is harder for industry and government departments to dismiss them.”

Price comparison

The PBPA says it takes a number of factors into account when determining prices, including the price of items containing the drug in other comparable countries. What it doesn’t necessarily have to consider, though, is just how much public hospitals in our own country are paying. 

The Australian government not only pays more than the NZ government for the same drugs, but also far more than Australian public hospitals do. Public hospitals manage their own budgets and negotiate independently with the pharmaceutical companies. This less-than-ideal situation in which the government negotiates means greater costs for consumers in many situations. 

As an example, the price of antipsychotic medication Olanzapine costs the PBS $160m each year – 64 times more than it costs West Australian public hospitals. Olanzapine was just one of 40 drugs the Grattan Institute analysed as part of its report. They found it would cost consumers without a concession card less if the government were to adopt “benchmark prices” – as determined by the lowest price available when comparing PBS, public hospital and NZ prices. 

For 12 other drugs investigated, the consumer saving would be more than $10 for each box of medicine. In four other cases, including atorvastatin (Lipitor), the saving would be more than $20.

Capping the budget?

The shopping budget for the PBS isn’t capped and is growing fast. The good news is that uncapped spending means more medicines can be bought and made available to consumers. But on the flipside, it also discourages thrifty spending on the part of the PBPA. 

The past decade has seen a 20% increase in the number of PBS prescriptions dispensed in pharmacies. Yet the uncapped spending isn’t something Medicines Australia sees as a concern. In response to Duckett’s report recommending capping, Shaw argued that this could kill consumer access to new therapies, with the potential to turn our health system into that of a “third-world country”. 

The general price increases granted by the PBPA for medicines in the 2011-12 financial year is collectively estimated to add $25.17m to the cost of the PBS and associated schemes over five years, based on volume for each item at the time of review.

Generic drugs

Many governments around the world mandate prices for generics – as a proportion of the price of the original patented drug – to prevent overcharging by companies that are essentially replicating a formula. Harvey says that while it is reasonable to pay good money for innovative drugs, the price of generics is a problem. 

The issues surrounding the use of generic drugs in Australia is twofold. According to the Grattan report, Australian prices for generics are extremely high – on average, more than seven times higher than New Zealand’s. Generics generally cost much less to produce than patented medicines as the research and development phase to invent the drug – the costliest stage of the process – has already been completed. 

But despite mandatory price reductions for generic medicines introduced in Australia in 2005, the price we pay for them is generally higher when compared to other countries. The current Australian off-patent price reduction sits at just 16% below that of the patented product. Duckett says we should be aiming for at least a 50% drop in price. Canada mandates an 80% price drop. 

The second issue is the manner in which government embraces generic medicines. While 27% of medicines on the PBS are no longer protected by patent, only 11% of the drugs on the PBS are generics. 

Harvey says that, from a consumer perspective, it is important to be aware of “scurrilous propaganda [from the pharmaceutical companies] that doesn’t tell the full story” when it comes to making a decision between original and generic brands. “Prices would never fall without generics,” he argues, emphasising the importance of generics in driving prices down during the negotiation phase, which he believes could then flow on to make more expensive drugs available to consumers in the PBS. 

CHOICE recommends discussing generic options with your doctor and pharmacist wherever possible.

Your say - Choice voice

Make a Comment

Members – Sign in on the top right to contribute to comments