[Ip-health] Op-ed on Overhauling Australia's Pharmaceutical Benefits Scheme
Mon Jan 9 13:03:02 2006
Let's overhaul the Pharmaceutical Benefits Scheme
Andrew Laming (Member of Parliament)
Op-ed published in the Australian
January 10, 2006
SUPPLYING Australians with the medications they need through the
Pharmaceutical Benefits Scheme is a $6 billion industry, bounded only by
government's ability to pay for new discoveries. The PBS has served us
well, saving lives and delivering medications to slow down preventable
diseases such as high cholesterol and blood pressure. But paying for the
high-cost tailored drugs of the future will be an even greater test.
Threat now brings opportunity. Expiring drug patents herald ultra-cheap
generic medications, offering billion-dollar savings to the PBS. But
unlike the rest of the world, our flawed drug purchasing system removes
the incentive for generics to compete on price. That means we pay
$800million too much for plain-label medications each year, which
undermines access to the breakthrough cures enjoyed by other economies.
Alphapharm and Sigma Arrow control 86 per cent of Australia's generic
market. Without research and development costs to recoup, the big two
get top dollar from the PBS, then hand 30per cent to 70 per cent to
pharmacists as loyalty discounts. Pharmacists find it too risky, too
complex and too costly to break these cosy deals and hunt for cheaper
Once top-secret, last month's Pharmacy Guild Newsletter confirmed that
discounting to pharmacists occurs. Worse, pharmacists holding shares in
generic firms have a conflict of interest in retaining the loophole.
Those supporting the status quo either use selective figures to deny PBS
growth rates, or claim that an end to discounting will spell financial
ruin and allow Asian generic firms to overrun the locals.
Securing the next generation of innovative medications needs action now.
The common denominator of reform is a tender process.
When a patent expires, a competitive process between manufacturers
should set the government price for that class (a group of drugs
treating similar diseases).
That leaves three options for patent-protected medications: exclusive
tendering (the New Zealand model, where all but the cheapest offer is
excluded from the market), non-exclusive submissions (where the lowest
offer sets the government purchasing price, but all brands can remain in
the market) and delinking (where genuinely innovative lines retain their
At the heart of the debate is price referencing, a system of setting
prices for new innovations according to the health outcome. Where
competition is absent, price referencing sets fair prices for innovators
in areas such as pharmaceuticals, prostheses and medical appliances. As
a rule of thumb, new treatments that offer an extra year of healthy life
for less than $45,000 are deemed cost-effective. Setting such a
benchmark prevents government and monopoly providers from getting too
greedy with prices.
With the global pharmaceutical sector fast differentiating into two
radically different markets, the challenge is to determine when new
drugs deserve innovation prices and when they should be subject to
generic prices. On the one hand, revolutionary treatments change lives
and cost billions of dollars. Government is to blame, not pharmaceutical
companies, when globally available cures for terminal cancer or severe
rheumatoid arthritis are delayed. In contrast, market forces deliver
commodities such as generic medications at prices that are just a
fraction of what would be commensurate with the health benefits they
offer, effectively undermining the price referencing process. Clearly,
no single system works flawlessly in both situations.
The answer is a PBS that responds to this diverging market. Truly
innovative cures should be price referenced against innovation in other
classes, rather than against generics. This ensures allocative equity
between drug classes, fair prices for breakthroughs and secures the best
treatments on time for Australian patients.
However, where innovation has moved less than 10 per cent over a patent
period, it makes sense for generics, when available, to set PBS prices.
This frees up resources for innovation and prevents "me-too" medications
extending patents and high prices for minimal health gains. Competitors
would have to match generic prices, apply a brand premium or leave the
Australia's pharmaceutical advisory committee would determine degree of
innovation at the end of patent periods when adequate clinical
information was available. In this blended purchasing system, genuinely
innovative products are rewarded while market forces set generic
medication prices. New Zealand's model offering sole-provider status to
the lowest bidder is suited only to small economies and in medication
classes where innovation is all but absent.
Beyond pricing, greater generic use frees up government resources for
innovation. Where a generic is available and the clinical outcome is
equivalent, patients must be rewarded with co-payment reductions to
increase the generic sector to about 50 per cent of PBS market share,
similar to other economies. Such a move could double the projected $400
million annual savings from tendering and free up resources for the
breakthrough drugs of tomorrow.
Overpriced generic medications aggravate PBS growth and indirectly delay
innovative life-saving medications. That is why Australia is best served
by competitive generic price offerings to the PBS and a class-by-class
pricing system for patented drugs that rewards genuine innovation.
Together with co-payment discounts for patients who choose generics,
such a system balances market forces with rewarding the cures of
tomorrow. That is the right mix for the future of our PBS.
Andrew Laming is a Liberal member of parliament
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