The PBS deserves reform – but perhaps not the Government’s “blunt axe” treatment

The Government has been taking some heat recently over its decision to defer listing of new medicines on the Pharmaceutical Benefits Scheme (PBS).

Perhaps it’s time that some wider reforms of the PBS were considered, suggests Rebecca de Boer from the Commonwealth Parliamentary Library. (And thanks to the Library’s FlagPost blog for allowing republication of this piece).

Rebecca de Boer writes:

In a recent speech, Prime Minister Gillard warned that there would be ‘painful’ cutbacks in the forthcoming Budget. There was no indication of where these cuts might be but it appears that the Government has already made decisions that will slow government expenditure in some programs.

Recently, the Government has deferred the listing of products on the Pharmaceutical Benefits Scheme (PBS) until ‘circumstance permit’ and imposed a requirement that all pharmaceuticals that receive a positive recommendation from the Pharmaceutical Benefits Advisory Committee(PBAC) must be considered by Cabinet prior to listing on the PBS.

This post explains the recent changes to the process for listing medicines on the PBS and discusses some of the implications of the Government’s decision to defer listing of some medications on the PBS.

Under the National Health Act 1953, pharmaceuticals may not be listed on the PBS without a positive recommendation from the PBAC. The PBAC is an independent expert committee which makes a recommendation based on clinical effectiveness, safety and cost-effectiveness (or value for money). For a product to be listed on the PBS (at a higher price than an equivalent or similar product), it must offer a comparative benefit to what is already listed. This process of economic evaluation determines whether a product offers ‘value for money’ to the Australian taxpayer. Irrespective of the price paid by Government, consumers pay a fixed copayment, $5.60 for concession card holders and $34.20 for general patients.

Once a product receives a positive recommendation from the PBAC, pricing negotiations with the Pharmaceutical Benefits Pricing Authority (PBPA) commence. These negotiations are based on the recommendation from the PBAC. Once the price and any risk sharing agreements are resolved the Minister for Health makes a determination about whether a product is listed on the PBS.

Until recently, this was a routine process and it was rare for a product that received a positive recommendation from the PBAC not to be listed on the PBS. An exception to this was in 2002 when the then Minister for Health (Senator Patterson) declined to list Viagra on the PBS, despite a positive recommendation from the PBAC. The advice from the PBAC contained a clear warning that the listing of this product on the PBS may cause a significant budgetary impact on the PBS. This prompted outcry from the pharmaceutical industry who argued that the PBAC was not basing its recommendations on ‘evidence’.

In response to the Government’s decision to defer the listing of products on the PBS, some commentators in the medical and drug industries have argued that the Government was ‘ignoring’ the advice of experts and undermining the role of the PBAC. The announcement to defer the listing of seven products was made together with the announcement to list seven new medicines and vaccines on the PBS from 1 April 2011 as well as 52 new and amended listings. It was noted that the deferred products had existing treatments that were already available on the PBS, although this has been disputed.

When making this announcement, the Government noted that it had complied with the strict timeframes for listing (and Cabinet consideration) as set out in the Memorandum of Understanding (MOU) signed with Medicines Australia (the peak lobby group for the patented pharmaceutical sector in Australia). Delays in the listing of products on the PBS have long been criticised by Medicines Australia.

The requirement for Cabinet consideration of products that cost more than $10 million in any of the first four financial years of being listed on the PBS was first introduced in 2001. This has led to delays in the listing of some products on the PBS. Medicines Australia has estimated that the requirement for Cabinet consideration has led to delays of up to ten months. One of the arguments against Cabinet consideration is that drugs which have received a positive recommendation from the PBAC have already been subject to rigorous scrutiny and economic evaluation, in contrast to many other areas of government expenditure.

Expenditure on the PBS has long been of concern to successive governments. The most recent statistics suggest that the PBS expenditure increased 9.2 per cent from June 2008 to June 2009 with a total expenditure of around $7.7 billion for that year. The last Budget estimated that expenditure would increase by 10.6 per cent in 2009-10.

PBS prescription volumes only increased by 6.2 per cent and the smaller rise in prescription volumes compared to expenditure was attributed to doctors prescribing newer, more expensive drugs.

Both the Howard and the Rudd-Gillard government have introduced measures to curb PBS expenditure such as one-off price cuts, statutory price reductions and the extension of price disclosure arrangements. It is too early to tell whether the most recent reform (signing of MOU with Medicines Australia) will result in considerable savings to Government, although early indications suggest that savings from the 2006 reforms (on which the MOU is based) will not be realised.

The Gillard Government has promised to return the Budget to surplus by 2012-13. Further, there have been reports that Minister Roxon has told the pharmaceutical industry that new drugs will not be listed unless off-setting savings can be found. If true, this combined with the requirement for Cabinet to consider all products that receive a positive recommendation from the PBAC and subsequent deferral of listing most likely will slow PBS expenditure in the short term. It also will have significant implications for access to medicines for Australians.

But is this using a blunt axe when a surgeon’s scalpel might be more appropriate?

Australia led the world with the introduction of principles of economic evaluation for pharmaceuticals but is it now time to consider other approaches?

The concept of ‘value based pricing’ may warrant further consideration. This approach takes into account the health ‘benefit’ and attempts to calculate the price at which the health benefits are no less than the health services foregone to fund it. It implies that there is an opportunity cost associated with the funding of additional pharmaceuticals (or any additional health services).

Although the Government and Medicines Australia have recently committed to series of price cuts to generic medicines under the MOU, it may be that more innovative ways of pricing generic medicines will be required into the future. Specific programs directed towards prescribers and consumer education campaigns may also be required, particularly as pharmaceuticals come off patent and generic medicines are available. Finally, remuneration arrangements for pharmacists could also be reviewed to identify savings.

In an era of budget austerity and proposed health reform, the financing arrangements for the health care system warrant further consideration. The PBS is an area of health policy that has served the taxpayer well, and, overall, it has provided Australians with timely access to a wide range of prescription pharmaceuticals at a cost individuals and the community can afford.

But the changing landscape may present opportunities to strengthen the PBS, improve access to prescription pharmaceuticals and ensure better value for money of PBS expenditure.

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Further reading

As mentioned in this Croakey post last year, researchers have calculated that Australia is spending many millions of dollars more than comparable countries on the generic versions of cholesterol-lowering drugs called statins.