Loopholes must be closed to improve the value of pharmaceutical care in Australia

Editor: Jennifer DoggettAuthor: Jon Karnon, Laura Edney and Michael Sorichon: In: health financing and costs, Pharmaceutical Benefits Scheme, pharmaceutical industry

The Pharmaceutical Benefits Scheme (PBS) is one of the key planks of the Australian health system.  Pre-dating Medicare by around 40 years, it has widespread public support and is often held up as a model for other countries to follow.

However, while there is no doubt that the PBS plays an important role in supporting universal access to prescription medicines, evidence is emerging that in some areas it is failing to deliver good value to the Australian community.

A 2015 Grattan Institute Report found that poor implementation of the therapeutic group premium policy was costing the PBS around $320 million a year and argued for the establishment of an independent pharmaceutical pricing body, such as PHARMAC in New Zealand.

In the following piece, Professor Jon Karnon and Dr Laura Edney from the University of Adelaide and Associate Professor Michael Sorich from Flinders University describe a related area in which the PBS pays more than it should for medicines due to a failure to match price reductions in patented drugs, when a comparator product goes off patent.

Tightening up this loophole would save an estimated $500 million a year or more, which the authors argue could then be used to fund high value care elsewhere in the health system.

This proposal should be of great interest to the Federal Government which is currently in the process of developing the 2017/18 Federal Budget.


Jon Karnon, Laura Edney and Michael Sorich write:

Politicians and health care systems around the world are starting to push back against the exorbitant pharmaceutical prices that have been making headlines across the world. NHS England’s Chief Executive has identified current approaches to pharmaceutical pricing as a priority area for change.

In Canada, the Health Minister is planning changes to force lower prices for patented drugs and to negotiate harder on generic drug prices. Even in the US, Donald Trump has expressed a preference for allowing the government funded Medicare and Medicaid programs to negotiate drug prices (a process that is currently prohibited).

Role of PBAC

In Australia the Pharmaceutical Benefits Advisory Committee (PBAC) are instructed to ensure that pharmaceuticals listed on the Pharmaceutical Benefits Scheme (PBS) provide value for money to the Australian taxpayer, but the extent to which value is achieved can be questioned. Price disclosure has led to significant reductions in the prices paid for pharmaceuticals as they come off patent.

Further reductions in the price of generic pharmaceuticals could be achieved by following New Zealand’s approach and tendering for the right to be the sole provider of off patent pharmaceuticals.

However, once a drug is listed on the Pharmaceutical Benefits Schedule its price is not reviewed until it comes off patent. Many new pharmaceuticals demonstrate value for money by establishing equal effectiveness to a listed pharmaceutical and requesting the same price as this comparator.

When the comparator moves off patent, the price of the still patented pharmaceutical is protected whilst the off patent drug is subject to price disclosure and reductions in price.

Price equivalence

Our recent review and analysis revealed that the direct comparators of 68 pharmaceuticals listed on the PBS between 2008 and 2011 have since come off patent and moved onto the price disclosure list. We estimate that annual savings of at least $500 million per year could be achieved if price equivalence is maintained between pharmaceuticals of equivalent effect as older pharmaceuticals come off patent.

A similar process can be described for pharmaceuticals judged to be more effective than their comparator when listed on the PBS. These pharmaceuticals are priced higher than their comparator at the time of listing on the basis that additional health benefits justify a price premium. As the comparator comes off patent and its price reduces the price premium increases. Savings to the PBS from price reductions to maintain the original price premium would also be significant.

In some cases new data may be generated beyond the listing of a pharmaceutical that support updated analyses of the value of patented pharmaceuticals. As an example, the patented pharmaceutical, denosumab for postmenopausal osteoporotic women was listed at the equivalent price to alendronate based on equivalent health effects. However, a recent cost-effectiveness analysis reported greater effectiveness of denosumab over alendronate based on longer term follow-up data and new data from a head-to-head comparison.

In the absence of such data, we would argue that denosumab should be subject to the same price reductions as alendronate. The updated analyses suggested that whilst denosumab was likely not cost-effective at current prices, it would need to fall by at least 50% to approach value for money, less than the 65% price reduction that alendronate has experienced since coming off patent.

Removing F1 and F2 categories

We propose the government introduces legislation to remove the existing F1 and F2 categorisation of listed pharmaceuticals that precludes price referencing between on and off patent pharmaceuticals. In the absence of additional evidence, the price differential between patented pharmaceuticals and their accepted comparator at the time of their listing should be automatically maintained when the price of the comparator pharmaceutical falls.

In cases where new data are available to update the estimated value of patented pharmaceuticals, as in the case of denosumab, sponsors should be able to make a resubmission to the PBAC to support claims for an increased larger price differential.

Current pricing mechanisms are constrained by legislative amendments made back in 2007. A lot has happened since 2007 and the increasing global focus on pharmaceutical prices provides an important opportunity to review the extent to which high value pharmaceutical care is being achieved in Australia.

The government should move quickly to close loopholes that are preventing significant cost savings in the pharmaceutical budget. These cost savings can be achieved without impact on patient outcomes and could be re-directed to the provision of high value health care in other areas of the healthcare system.

Professor Jon Karnon is a health economist working at the School of Public Health, University of Adelaide.  He is also President of the Health Services Research Association of Australia and New Zealand. Dr Laura Edney is a Research Fellow with the Adelaide Health Economics Research Group and Michael Sorich is Associate Professor of Pharmacology at Flinders University.

• Read more of their work in the Australian Health Review.