Budget entrée disappoints but PBS reform still on the menu

A significant element of this year’s budget was supposed to be major reforms to the Pharmaceutical Benefits Scheme (PBS) with projected savings of more than $3 billion over the next four years. But even though health minister Sussan Ley foreshadowed the changes, the budget contained few reforms.

Instead it showed savings of just $252.2 million over five years from adjusting the price of a small number of PBS-listed drugs. But buried deep on page 53 of the budget papers is a statement that:

From 1 July 2015, the Government expects to introduce a balanced range of measures to support the longer-term access to, and sustainability of, the PBS.

It would appear that the announced cuts are just an entree. We must now wait for the main course.

Budgetary pressures

As the budget papers make clear, pharmaceutical expenditure is rising due to the listing of new medications. A key driver has been the emergence of a range of high-cost drugs, such as a treatment for malignant melanoma (trametinib) which costs over $131,000 per course of treatment.

This year’s budget includes funding for seven such drugs, at a projected cost of $1.6 billion over the next four years. But it’s important to note that, at its most recent meeting, the Pharmaceutical Benefits Advisory Committee (PBAC), the expert body that advises government on which drugs to add to the PBS, recommended adding a further $2.5 billion worth of new drugs.

The pipeline of new drugs places real and ongoing pressure on the government to find savings, particularly as the budget papers indicate the projected rate of increase in PBS expenditure will rise significantly over the next few years. Fortunately, when it comes to the PBS, savings are relatively easy to find.

Proposals floated by the government in the media over recent weeks included:

• removing many medications from the PBS that could be bought over the counter, such as aspirin and paracetemol
• accelerating reductions in the price of generic medicines
• closing a loophole that allows pharmaceutical companies to charge much more for combination drugs, which are simply when two drugs are combined into a single tablet
• an across-the-board 5% cut to the prices of medications that are still under patent, but have been listed on the PBS.

Reportedly, there were also plans to introduce a modicum of competition into the pharmacy sector by allowing pharmacists to offer a discount of up to $1 on their dispensing fees.

The health minister has flagged her willingness to consider a broad range of reforms like these as part of negotiations for the next agreement between the Commonwealth and the retail pharmacy sector. This will cover payments made by government for dispensing drugs. That might explain why the budget papers say new measures will come into force on July 1 2015. The current agreement is due to expire on June 30.

Good ideas

The suggested reforms were all good ideas. Take generic medicines, for example. It has long been known that Australia has being paying too much for many common generic drugs. While generic drug prices have come down in recent years, we are still paying many times more for medicines such as the antipsychotic Olanzapine, which remains 15 times more expensive than in England.

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Currently, the government sets generic prices through what’s known as Expanded and Accelerated Price Disclosure. It sets future prices by collecting information on the wholesale prices pharmacies around Australia pay for these medications, which are often at substantial discounts offered by drug manufacturers.

The proposed plan was to accelerate reductions in the price of these medications by excluding the original brand of drug (which is often discounted less than generic brands of the same drug) when calculating average cost.

Similarly, the government could make significant savings by tackling one of the great PBS pricing anomalies concerning combination drugs. Price reductions for these drugs have been much slower than for other types of generic drugs, so they are often much more expensive than individual component drugs. Take the stroke prevention medication clopidogrel, which costs around $15 per script on its own, but $40 when combined with aspirin.

While the 2015 budget papers did indicate an adjustment to the price of one combination (Ezetimibe with simvastatin), closing this pricing loophole across all combination therapies should net the government savings of more than $800 million over the next four years.

Probably the most controversial of the mooted savings measures was an across-the-board cut to subsidies for listed medications after a period of time. Reducing the subsidy on PBS drugs over time, mimics the way the prices for innovative products, such as new features on mobile phones, decline over time.

While this measure would clearly impact the profits of some pharmaceutical manufacturers, it should be seen in the context of many uncertainties these businesses face. The recent decline in the Australian dollar, for instance, creates much greater fluctuations in revenues for these companies than this proposed cut would have.

Like laws and sausages

The other group that would have been significantly impacted by the reforms are pharmacy owners as the revenue they receive from discounts on generic drugs would have fallen. But these discounts have always been a bonus on top of the $3 billion a year the retail pharmacy sector receives through the agreement with the Commonwealth government negotiated by the Pharmacy Guild of Australia.

In the past, the guild has run campaigns arguing such changes would put some pharmacies under threat, one of which it claims attracted over one million signatures.

What was different about this set of proposed reforms was that the government also floated the idea of allowing pharmacies to discount their dispensing charges. This would have given consumers a direct stake in the reforms because they would have saved money when having prescriptions filled.

But even though the next Community Pharmacy Agreement is imminent and the budget papers hint at PBS reform, we have no way of knowing whether anything will actually change. Reforms are negotiated behind closed doors directly with the Pharmacy Guild and the drug industry lobby group Medicines Australia.

Negotiations have always been far from transparent. It’s never clear what gets traded off by whom and why. Or what relative weight is given to evidence versus stakeholder clout in shaping future reforms.

The limitations of past negotiations were highlighted in a recent National Audit Office report into the last Community Pharmacy Agreement, which involved the framework to allocate $15 billion of taypayer funds. The report noted that, among other things, the health department had failed to “keep a record of its meetings with the Pharmacy Guild”.

When it comes to PBS reform, this government appears to have taken the advice of Otto von Bismarck:

Laws are like sausages, it is better not to see them being made.

But with so many savings options on the menu, now is not the time to go on a reform diet.

Philip Clarke does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.