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

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 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.

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 is a member of the Economic Sub-Committee of the Pharmaceutical Benefits Advisory Committee.

Michael Sorich previously was a member of the Economic Sub-Committee of the Pharmaceutical Benefits Advisory Committee.

Laura C Edney does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond the academic appointment above.