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7.4 The Pharmaceutical Benefits Scheme

The Pharmaceutical Benefits Scheme is an integral part of the health system in Australia, providing consumers with affordable and timely access to over 857 medicines. These medicines are available to all Australians regardless of location at a universal and accessible price.

The rationale for governments subsidising medicines through the Pharmaceutical Benefits Scheme remains strong. By ensuring that medicines are affordable and widely available, consumers are more likely to make decisions on medicine usage based on medical need rather than cost, leading to improved health outcomes.

The benefits flow not only to the individual but also to the community at large through lower demand for more costly acute care interventions in hospitals as well as to better workforce participation from having healthy workers.

A key rationale is that the government is able to bargain more effectively on behalf of consumers with large multinational suppliers for new patented medications. It can also use its single buyer status to tender for generic medicines at more favourable prices. Another reason for intervention is that those with the highest medical need often have the least capacity to purchase medicines.

Government spending on pharmaceuticals has risen substantially since the scheme was introduced and has more than doubled in the last 10 years alone. It has historically been one of the fastest growing areas of government expenditure and is expected to be so in the medium to longer term, as highlighted in Chart 7.8 below.

Chart 7.8: Projected spending on the Pharmaceutical Benefits Scheme

This chart shows expenditure on the Pharmaceutical Benefits Scheme increasing from just under $10 billion in 2013-14 to over $15 billion in 2023-24.

Source: National Commission of Audit.

This largely reflects the combination of the ageing of the population, the increasing incidence of chronic conditions, the listing of new and relatively expensive medicines on the PBS schedule and growing demand for pharmaceutical products. It is estimated that Australians aged over 65 accounted for almost two thirds of the number of Pharmaceutical Benefits Scheme medicine prescriptions filled and around half of all of the scheme’s expenditures.

In recent years cost containment in the Pharmaceutical Benefits Scheme has been achieved most notably through improved price disclosure arrangements, resulting in a slowing in the real rate of the scheme’s growth over the forward estimates to 1.4 per cent. However, this expenditure growth does not include potential new listings which have historically been a major contributor to growth.

Reductions in Australian medicine prices often lag behind those of many other advanced countries. 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.

To manage expenditure growth in the Pharmaceutical Benefits Scheme, the Commission considers that major reform of the funding arrangements and management of the scheme, together with reforms to the community pharmacy sector are needed.

In particular, the Commission considers that there is a need to take a holistic approach to managing Pharmaceutical Benefits Scheme medicine listings and price negotiations.

More needs to be done to ‘create room’ for new medicine listings by rationalising existing listings or re-negotiating new prices. Under current arrangements, once a medicine is recommended by the Pharmaceutical Benefits Advisory Committee, there are expectations that theCommonwealth Government will list it.

Little consideration is given to whether this can be afforded or what else can be done to accommodate the new listing, for example by de-listing existing medicines, reducing the prices of existing listings through tenders, negotiating bundled packages with manufacturers and/or working within a pre-negotiated annual budget.

One approach to reducing cost pressures on the Pharmaceutical Benefits Scheme would be to either freeze expenditure at the current level or set a predetermined funding envelope over a period of perhaps seven years.

However, to ensure that the funding envelope keeps pace with community expectations, demographic change and developments in pharmacy technology, there should be an independent review before the conclusion of the initial seven year period and recommendations put to government about the appropriate size of the next funding envelope.

Under this arrangement, any new pharmaceuticals would be listed only if existing drugs are removed from the Scheme, or better prices are negotiated for pharmaceuticals currently listed. This would be accompanied by a strengthening of negotiation arrangements with manufacturers and pharmacies.

Related to this, an independent authority (the 'PBS Entity') would be established and headed by a Chief Executive Officer reporting to the Minister. The PBS Entity would manage access to subsidised pharmaceuticals and operate under a clear objective to provide reliable and affordable access to a wide range of necessary pharmaceuticals within the defined budget.

To meet this objective, the PBS Entity would: manage the funding of new and currently listed medicines; negotiate prices for existing drugs; and make decisions about de-listing drugs. This would require the PBS Entity to negotiate directly with pharmaceutical companies and with pharmacists in relation to the margins and dispensing fees charged by pharmacies. It is anticipated that this process would lead to further price falls for pharmaceuticals.

The PBS Entity would be accountable for the whole of PBS performance, including the rationalisation of the current multi-stage decision-making process for pharmaceutical listing and pricing issues.

A mechanism would exist to permit the government to have items added to the PBS list in exceptional circumstances by introducing a disallowable instrument into Parliament. The process would require receipt of advice from the PBS Entity regarding which items are to be de-listed in order to offset the additional cost. Given the highly specialised and technical skills required for this role the PBS Entity would draw on relevant technical knowledge from within government, industry and the research community, similar to the Pharmaceutical Benefits Advisory Committee.

Consistent with the approach outlined in the previous section on reforming the health care system, the Commission considers that co-payments should also be increased for use of pharmaceuticals. Some level of contribution should be paid for all medicines under the PBS, including for concessional medicines that are currently free.

For general patients with costs below the safety net, the co-payment could rise by $5.00 (from up to $36.90 currently to up to $41.90) while above the safety net it could also rise by $5.00 (from $6.00 currently to $11.00). To ensure individuals made a greater contribution to meeting their own pharmaceutical needs and to ensure that the Budget was not adversely impacted by the rise in the co-payments, the general patient safety net should increase from $1,421.20 currently to $1,613.77.

For concession card holders, there would be no increase to the co-payment (currently $6.00) below the existing threshold of $360. However, the Commission considers that introducing a co-payment would be an important step in providing a signal to users about the cost of their care and place greater value on these medicines potentially reducing the incentive that users face to not take their medicines.

Accordingly, once the $360 threshold is exceeded, concession card holders should pay a co-contribution of $2.00.

There is also considerable scope to reform the pharmacy retail model to allow greater choice for customers, while ensuring the safe and appropriate dispensing of medicines.

Like much of the health industry, the pharmacy sector is highly regulated and has not been subject to the same level of reform experienced by much of the economy. There remains limited retail choice and competition in the pharmacy sector, with a reliance on community pharmacies to dispense medicines.

Encouraging greater competition within the sector could be undertaken by moving to deregulate pharmacy ownership and location rules. Such reform would be expected to lead to more efficient delivery and the development of alternative retail models - such as pharmacists available to dispense medicines at supermarkets.

Offsetting the impact on pharmacy incomes under this reform would require consideration of a number of issues, including providing pharmacists with opportunities to provide a greater range of services to their customers.

Further improvements could be made to the efficiency of the PBS by reforming associated regulatory processes. The Therapeutic Goods Administration assesses new drugs for safety, quality and efficacy, before they can be supplied on the Australian market. As well as adding to the cost of drugs in Australia, there can also be delays in getting products through this process.

Further reductions to the cost of pharmaceuticals could result from recognising approvals made by overseas agencies, including the United States Food and Drug Administration and the European Medicines Agency. This arrangement would not only reduce the estimated annual cost pharmaceutical companies incur by having to win separate approvals from the Therapeutic Goods Administration but also it would provide better outcomes to consumers as the latest drugs could be brought to the market without being delayed by a lengthy approval process.

Recommendation 19: The Pharmaceutical Benefits Scheme

The Commission recommends changes be made to the Pharmaceutical Benefits Scheme and to the pharmacy sector to improve this integral part of our health system through:

  1. the introduction of new arrangements for funding the Pharmaceutical Benefits Scheme within a set funding envelope that extends for a seven year cycle;
  2. establishing an independent authority ('PBS Entity') to be headed by a suitably qualified Chief Executive Officer who would oversee management of subsidised pharmaceuticals within the Australian health system and be required to report to the Minister for Health;
  3. permitting the Minister in exceptional circumstances to have new items listed by introducing a disallowable instrument into Parliament and on receipt of advice from the PBS Entity regarding items to be de-listed in order to offset additional costs;
  4. increasing co-payments for all medicines under the Pharmaceutical Benefits Scheme, including for concessional medicines that are currently free. This includes:
    1. for general patients with costs below the safety net, a co-payment increase of $5.00 (increase from $36.90 to $41.90), while above the safety net a rise of $5.00 (from $6.00 to $11.00);
    2. in line with the increased co-payment arrangements, the general patient safety net should increase from $1,421.20 to $1,613.77; and
    3. for concession card holders, no increase to the current co-payment of $6.00 while below the safety net threshold of $360.00. However, once the safety net limit has been reached, concession card holders will be required to co contribute $2.00 to the cost of their medicines;
  5. opening up the pharmacy sector to competition, including through the deregulation of ownership and location rules; and
  6. streamlining approvals for new drugs through the Therapeutic Goods Administration process by recognising approvals made by certain overseas agencies.