General Facts
Subsidised Medicines
What is the "price" of a medicine?
For medicines listed on the Pharmaceutical Benefits Scheme (PBS) the Government
pays any cost of the drug over $28.60 for general patients and $4.60 for concession
cardholders.1 Once patients reach a safety net
level, the price they pay falls even further.2 In
reality, most medicines cost more than the amount Australians pay directly
at the pharmacist. However, patients pay the full price for products not listed
on the PBS, unless they have a private health insurer who provides a rebate.
What contributes to the prices of medicines in Australia?
Pharmacists' costs comprise around one quarter of the total cost of PBS medicines
and a significant proportion of the total cost of private prescriptions. Wholesaler
costs are around 9% of the final price of PBS medicines, while manufacturers'
costs comprise the remaining proportion. In Australia, prices paid to manufacturers
for products still under patent represent only around 40% of total PBS costs.3
Why do some newer medicines cost more?
The high cost of many newer medicines reflects the significant research and
development costs incurred by pharmaceutical companies to make the treatment
available to patients. Latest estimates place the average cost to discover
a new medicine at over A$1.1 billion.4
Why does the price of medicines matter?
Without adequate returns for the high cost of research and development, pharmaceutical
companies cannot develop the new treatments which will save and improve lives
in the future. Furthermore, without adequate prices, it is sometimes not viable
to make innovative medicines available in Australia.
Equally, the price paid for a medicine needs to reflect the benefit that it
delivers to patients. The savings to society resulting from improved healthcare,
for example reduced hospital costs and higher productivity, are also relevant
to price. Overall price levels should be set at a level that allows the Government
to subsidise the most innovative medicines.
What prices does Australia pay for its medicines?
According to a study by Victoria University, prices paid to manufacturers
for medicines in Australia are 25-45% lower than in Western Europe and 40-200%
lower than in the United States and Switzerland.5 The
Productivity Commission has also confirmed that Australian prices are generally
lower than comparable countries.6 No similar
studies have been undertaken into the impact of wholesaler margins and pharmacist
costs on the prices of medicines for patients.
How is the price of medicines on the PBS determined?
The Federal Government exercises its sole purchaser position to negotiate
low prices for medicines listed on the PBS. The Pharmaceutical Benefits Pricing
Authority (PBPA) recommends a price to the Federal Government according to
a number of criteria, including the recommendations of the Pharmaceutical Benefits
Advisory Committee (PBAC) on the product's costeffectiveness, the cost of other
drugs with a similar function, and, in some cases, the cost of manufacture.
The Federal Government then negotiates with the companies to determine a
final price according to the amount it is willing to spend. Cabinet must approve
medicines that have the potential to cost more than $10 million per year in
any of the first four years of reimbursement.
The Federal Government may determine that a medicine should receive the same
price as other medicines in a therapeutic group. In this case, the lowest priced
medicine in the group sets the price for all the other medicines.
What happens to prices after the medicine is first
listed on the PBS?
Prices of PBS medicines in Australia are not adjusted for inflation and fall
in real terms over time.7 The Government also reviews prices regularly and
generally revises them downward, particularly if generic products or other
competitors appear on the market. This makes it increasingly difficult for
new products to pass the costeffectiveness "test" when they are compared to
older products.
The Pfizer Australia View
- Prices paid for medicines on the PBS should balance reward for innovation
with the need to make medicines affordable.
- Price setting on the PBS is not always efficient because it does not reflect
patient preferences or the need to reward improvements in treatment over
older products.
- The price given to a medicine should reflect the benefits which it provides
wider society including carers, employers and other healthcare providers.
1. Correct at June 2004
2. Once concession card holders have
spent $197.60 on the PBS or had 52 scripts in a year, the price per prescription
falls to zero. The safety net for general patients is $726.80, after which
prescriptions cost $3.80.
3. Pfizer calculation based on Department of Health and Ageing and Victoria University figures.
4. DiMasi JA, Hansen RW, Grabowski HG, The Price of Innovation: New Estimates of
Drug Development Costs, Journal of Health Economics 2003 Mar;22(2);151-85. Original figure is $US802 million. Includes the cost of failures and opportunity
cost of capital
5. Sweeny, K, A Comparison of International Pharmaceutical Prices, Victorian University 2003, Progress Report
6. Productivity Commission 2002, International Pharmaceutical Price
Differences
7. Sweeny, K, Price and Quantity Trends in the PBS, Victoria University
2004, Draft Final Paper