How to slash half a billion dollars a year from Australia’s drugs bill

complementary medicines - pills spill out of brown bottle

How to slash half a billion dollars a year from Australia’s drugs bill

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The government is paying too much for pharmaceuticals that are no better than their cheaper counterparts. Let’s fix that. from

Jonathan Karnon, University of Adelaide; Laura C Edney, University of Adelaide, and Michael Sorich, Flinders University

Australia is spending more than A$500 million a year too much for pharmaceuticals because of a little known loophole that allows drug companies to overcharge the government for a wide range of drugs. The Conversation

The loophole results in the government paying different prices through the Pharmaceutical Benefits Scheme (PBS) for different drugs that work as well as each other to treat a given medical condition. The problem occurs when the price of one drug drops but the prices of other, newer drugs with equivalent effects do not.

Our recent paper suggests that by closing this loophole – so the price of these newer but equivalent drugs drops to those of existing, equally beneficial drugs – the government could save more than A$500m a year on its drugs bill.

The rising cost of health care

Health expenditure in Australia has long increased at a faster rate than the Australian economy. Over the past 25 years, government spending on health increased from 15.7% of taxation revenue to 24.1%, and health expenditure increased from 6.5% to 9.7% of total economic activity.

With reduced economic growth and continuing uncertainty, this trajectory cannot continue. We need to find ways to provide more cost-effective health care, including reducing the A$10.8 billion the government spent on drugs subsidised on the PBS in 2015/16.

Let’s talk about statins

A good example to illustrate the pricing anomaly of equivalent drugs is with statins. This is the class of drugs used to lower cholesterol levels and so reduce the risk of serious cardiovascular events, like heart attacks.

When the first statin was developed, there was evidence it provided high value for money compared to the standard treatment at the time, which was essentially some form of lifestyle advice targeted at improving diet and physical activity. Over time, many drug companies developed their own statin.

But statins have a range of potential side effects, such as headaches, difficulty sleeping, flushing, muscle aches. And each different company’s statin has somewhat different side effects. This means that patients who do not tolerate one form of statin might be able to tolerate another.

There is a benefit in listing multiple different statins on the PBS to allow patients with high cholesterol to find a medication they can tolerate. But the expected benefits of the three most commonly prescribed statins are largely the same for patients at moderate risk of a cardiovascular event.

When newer statins were listed on the PBS, their prices were matched to the price of already listed statins, which had the same expected effect.

The government could have made considerable cost savings by levelling the price of statins on the PBS. from

This price matching is maintained until one of the older drugs loses its patent, at which point the price of the off-patent drug is automatically reduced by 16%. But much larger price reductions often occur as manufacturers of generic versions of the same drug enter the market.

Often pharmaceuticals with the same expected effects come off patent at different times, and this results in potentially large differences in price.

Let’s look at the numbers

In 2013, the average price of an older off-patent statin, simvastatin (40mg) was A$22.81, while the average prices of the equivalent doses of the newer statins, atorvastatin (10mg) and rosuvastatin (5mg) were around A$35. More than 2 million prescriptions were filled for atorvastatin (10mg) and rosuvastatin (5mg) in 2013. If the government had paid the same average price as they paid for simvastatin, we would have saved over A$50 million in 2013 alone, just on these two statins. Or to put it another way, the taxpayer paid over A$50 million on statins for no additional improvements in health outcomes that year.

By 2016, two statins for people at high risk of cardiovascular events, atorvastatin and rosuvastatin, had come off patent. But their prices were still different. Atorvastatin (20mg) cost A$15.04 and rosuvastatin (10mg) cost A$24.34. This price difference cost the taxpayer over A$22 million for no additional health benefits in 2016.

Statins are high-profile drugs. But there are significant savings to be made from avoiding overpaying for a wide range of other drugs that provide no additional benefits compared to similar, cheaper medications.

What we found

We reviewed pharmaceuticals listed on the PBS between 2008 and 2011 at the same equivalent price to a pharmaceutical already listed.

We identified 68 listings with the potential for diverging prices for pharmaceuticals with equivalent effects. We then estimated the potential cost savings of maintaining equivalent prices for 12 of the 68 drugs for which accurate estimates could be generated using published PBS data.

The table lists the 12 drugs and the conditions they treat. The estimated potential cost savings ranged from under A$0.5 million to over A$16 million in the 10 months to April 2015. And the savings were still increasing in 2015, from a total of A$48 million in the year to June 2014 to A$73 million in the 10 months to April 2015.

In a separate analysis, colleagues at the Grattan Institute estimated annual potential savings of A$320 million from paying the same price for drugs with equivalent effects in seven different drug classes.

Based on these two studies, we estimate that the total savings a year to the Australian taxpayer from paying the same price for drugs with equivalent effects is at least A$500 million and likely closer to A$1 billion.

What we’d like to see

The government should pay the same price for pharmaceuticals with equivalent effects. The price should be set at the price of the cheapest equivalent drug.

There will clearly be resistance from the pharmaceutical industry, which will argue higher prices are needed to support research to continue to develop new and more effective drugs. This argument has little merit in the case where multiple companies have developed similar drugs with equivalent effects.

Firstly, we should be providing incentives to companies to develop unique drugs to treat conditions with high unmet needs, not providing incentives for duplicating research and development efforts.

Secondly, our proposal has less impact than the New Zealand approach, in which the government buys only one of multiple similar drugs. The New Zealand system pushes prices down further and means only one company receives any return on their research and development costs.

In our proposal, the goal of paying the same price for the same effect could be achieved through the existing therapeutic group premium policy. This policy specifies that the government only pays for the cheapest therapy within a therapeutically equivalent group (with a safety net for patients who cannot tolerate the cheapest therapy or therapies). But only seven therapeutic groups have been defined in Australia. By comparison, Germany has more than 30 therapeutic groups.

But the therapeutic group premium policy is limited by legislative amendments to the National Health Act in 2007 that effectively prevent the government from setting the same price for patented and off-patent pharmaceuticals.

The potential savings from paying the same price for equivalent drugs is much larger now than in 2007, when the legislative amendments were made. And the state of the economy is much different too. The government should act to revoke the legislative amendments and to expand the application of the therapeutic group premium policy.

Jonathan Karnon, Professor of Health Economics, University of Adelaide; Laura C Edney, Research Fellow, University of Adelaide, and Michael Sorich, Associate Professor in Pharmacology, Flinders University

This article was originally published on The Conversation. Read the original article.

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  1. Erin Connor

    Tamsulosin – UTI?

  2. Nicholas Logan

    No improved health outcomes between statins is debatable.

    • Owner

      Everything’s debatable; whats your position?

    • Michael Khoo

      Excellent second year Pharmacology exam question – compare and contrast Atorvastatin and Rosuvastatin. I can think of a crucial difference that has a major impact at a clinical level. Pharmacogenomics.

  3. james jefferies

    I’ve got a suggestion, how about we find the lowest paid health economist in the country and pay all the rest at the same rate? There will clearly be resistance, as they will argue higher wages are required to generate more of this flawed research. However there is little merit in this argument as there are multiple economists who have generated plenty of rubbish with similar results.

    On a serious note, whilst me too’s may seem a waste of research dollars. How often have the first to market in a class been improved upon and eclipsed by subsequent entrants? Or drugs withdrawn after hitting the market because of adverse effects?

  4. Anthony Tassone

    This report is yet another chapter in a series from this organisation sprouting the same misleading and unbalanced line through its convenient selectivity of a small set of 19 PBS medicines.

    The facts are, the Grattan Institute has a poor record when it comes to demonstrating an understanding of the PBS. In a 2013 report the Grattan Institute claimed that savings of $1 billion could be achieved through benchmarking the ex-manufacturer price of PBS-listed generic medicines to prices paid in other countries (including what seems to be the darling of Professor Duckett, New Zealand).

    There does not appear to be any acknowledgement of the significant savings delivered already from price disclosure and PBS reform since 2007, and the estimated $20 billion of savings forecast to be delivered over the 6CPA term.

    Anybody who understands the NZ system of generic tendering, capped pricing on their PBS funding equivalent PHARMAC amongst other measures knows of the; lack of consumer choice, ongoing supply shortages and lack of ongoing viability in the supply system to ensure equity of access.

    Put simply adopting such a system would undermine the very tenets of National Medicines Policy being quality use of medicines and equity of access.

    In 2014 following accelerated price disclosure, the Grattan Institute revised down their claimed ‘savings’ from benchmarking to $580 million as part of a submission to a Senate inquiry at the time. Their submission had to be corrected, basically halving the claimed saving, because it missed the impact of a single round of
    price disclosure reductions.

    That is just a lack of understanding that the broad sector could have and did recognise at the time.

    In the latest report, they have again called for from international benchmarking – but now the saving is just $93 million per year, down from over $1 billion in 2013.

    Professor Duckett seems to feel that expanding the role of pharmacists to ‘take the heat off’ GP’s is an appropriate offset for his flawed assumptions of benefits to deregulation of ownership and location rules. Expansion of a health practitioner’s role should be based on evidence and to deliver patient benefit that is also cost effective.

    Location rules have been demonstrated to help assure and promote equity of access. The Grattan institute report makes mention of some ‘international evidence’ that shows access to pharmacies increased in metropolitan areas with relaxation of location rules, but makes no mention of what occurred outside urban areas or an understanding of the whole framework.

    The latest report is another chapter in a misleading and unbalanced series from the Grattan Institute who are fast losing credibility commenting on PBS policy matters.

    Anthony Tassone
    President, Pharmacy Guild of Australia (Victoria Branch)

  5. Simon Sponza

    The Grattan institute is another symptom of government creep. An “Independent” think tank set up with an endowment from the Victorian and Federal governments. It is part of the compliance / regulation industries that are sucking the innovation and life out of private businesses. Their work exists to keep themselves in a job; review.. recommend.. review.. recommend.. meanwhile in the real world, some of us are trying to make a real living whilst these academics / economists talk shit and get paid generously for it.

    • William

      It is well known that the Grattan Inst. is a left wing think tank.
      Nevertheless the fact remain that it is very hard to clinically justify high priced drug when similar ones are available at lower cost.
      In most cases there are marginal differences between them so it is up to the Sponsor why theirs should attract a premium.

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