The Pharmaceutical Benefits Scheme: History, current status and post-election prognosis

Ken Harvey, La Trobe University

Over the last 12 months, the media has devoted considerable attention to Ministerial changes to the Pharmaceutical Benefits Advisory Committee (PBAC), the machinations of the pharmaceutical industry, and the escalating costs of the Pharmaceutical Benefits Scheme (PBS). This saga culminated with Federal Health Minister Dr. Michael Wooldridge announcing his resignation (for family reasons).

The forthcoming federal election provides an opportunity to compare whether the major parties have recognised the problems confronting the PBS, to examine the policy initiatives proposed and prognosticate about the likelihood of their success.

The History of the Pharmaceutical Benefits Scheme

The Chifley Labor government first proposed a PBS 52 years ago. At that time, there was concern that people could not afford expensive but valuable new drugs such as penicillin. Doctors opposed the Scheme, fearing that it was thin end of the wedge of socialised medicine, so the PBS was not implemented until several years later when the Menzies Liberal government came to power and reassured doctors that socialised medicine was not on their agenda. An expert Pharmaceutical Benefits Advisory Committee (PBAC) was set up to implement the PBS. Their task was to formulate a limited list of life saving or disease-preventing drugs, tailored to the health needs of the country, to be made available for prescription free of charge. The World Health Organization subsequently adopted this Australian concept as a key mechanism of ensuring equity of access to necessary drugs.

The PBS evolved from a scheme that fully subsidised 139 drugs to one that now partially subsidises about 650. Over the years the cost of the PBS has escalated and patient co-payments, brand premiums and other strategies have been used to provide price signals and transfer some of the cost to consumers. In 1993, Australia was one of the first countries in the world to add economic analysis to the criteria used for listing drugs on the PBS and for price determinations (Harvey & Murray, 1995).

Unrestrained PBS costs will inevitably be passed on to consumers.

The PBS purchases about 90% of all prescription medicines. This dominant or monopsony power has resulted in Australian drug prices being at least 160% lower than in the U.S., 50% lower than in the Canada and Sweden, and similar to the prices received in France, Spain and NZ (Productivity Commission, 2001). However, Australian prices for new innovative pharmaceuticals are much closer to those in the other countries. The largest price differences are observed for ‘me-too’ pharmaceuticals (minor chemical variations that lack major benefits on an innovator brand) and generic drugs (off-patent copies of innovator brands). PBS price negotiations have been good for Australian consumers but they have caused the pharmaceutical industry considerable angst.

In 1948/1949 the PBS cost the government $298,074. It took 40 years for the costs to reach a billion dollars but more recently costs have been rising far more rapidly. Between 1992-93 and 1999-2000, government spending on pharmaceuticals rose from under 12 per cent of public expenditure on health to over 15 per cent (Productivity Commission, 2001). The 2001 budget papers estimated PBS expenditure for 2000/01 to be $4.26 billion, a 20% increase on the previous year.

Why Increasing Costs Despite Fair Drug Prices?

There are a number of reasons for increasing PBS costs. There are increasing numbers of aged people with chronic conditions that can genuinely benefit from pharmacological intervention. There have been national campaigns to improve the treatment of inadequately treated conditions such as asthma, depression and elevated blood cholesterol levels. There has been State-Commonwealth cost shifting, with hospitals limiting supplies of drugs when patients are discharged and privatising outpatient clinics and pharmacies. But the major cause of escalating PBS costs has been a shift towards prescribing larger volumes of newer, more expensive medication compared to older, cheaper drugs (Arnolda, 2001). Not only has this use not always accorded with clinical best-practice guidelines; many of the prescriptions written for these drugs are for uses that have never been approved by the PBAC as cost-effective. In many cases the PBS is paying a price for these expensive medications that are far higher than would be justified by the health benefit achieved.

Current Controversies

There is concern that inappropriate, excessive and costly prescribing is largely driven by pharmaceutical promotion (Coulthart, 2001). According to the industry’s own figures, manufacturers spend up to one-third of sales revenue on marketing, twice as much as they spend on research. Marketing programs involve pervasive advertising, large numbers of sales representatives, physician hospitality and international trips, conference sponsorships, lavish drug launches, gifts, and gimmicks.

More recently, the federal government has allowed pharmaceutical advertisements to infiltrate the electronic prescription pad. GPs have received up to $10,000 as practice incentive payments to purchase a computer, connect to the Internet and use electronic prescribing packages for most of their prescriptions. Yet the government has laid down no standards for this software with respect to the presence of advertisements, the quality of the drug databases used or the appropriateness of the software for the task. Consequently, the market model adopted by the leading software packages has been to heavily subsidize the price of their products by selling pharmaceutical advertising space. Advertisements for the latest and most expensive drugs now appear on the same screen that a doctor uses for making decisions about prescribing.

The Liberal Party’s action plan does not specifically mention the PBS.

In addition, over the last few years, individual pharmaceutical companies have sued PBAC members over decisions not to list drugs such as sildenafil (Viagra®), have successfully lobbied the Federal Health Minister to replace PBAC members judged antagonistic to industry, and have succeeded in getting a former industry lobbyist appointed to the committee (Jackson, 2001).

Health Minister Wooldridge has argued that the increased PBS expenditure is acceptable given the benefits medicinal drugs provide. In addition, he asserts that changes to the PBAC have resulted in a better committee that now contains industry expertise.

Critics note that an escalating drug budget has opportunity costs: less money for public hospitals, less money for aged care, and less money for public health. They point to the role of the pharmaceutical industry in influencing drug use and evidence of excessive, inappropriate, and wasteful prescribing. They argue that adding an industry lobbyist to the PBAC is akin to placing the defendant on the jury, is likely to inhibit free debate among independent experts, and could result in more costly drugs (with more marginal benefits) being added to the PBS. They are concerned that unrestrained PBS costs will inevitably be passed on to consumers via higher co-payments, de-listing ‘less-essential’ drugs and other strategies. The end result would be a U.S. style pharmaceutical system where poorer citizens can no longer afford necessary drugs.

Another battle is over direct-to-consumer advertising (DTCA) of prescription drugs. The Australian Pharmaceutical Manufacturers Association (APMA) is lobbying the Federal government to remove current restrictions on DTCA of prescription drugs. The U.S. experience shows why. In 1999, U.S. pharmaceutical companies spent $US 1.8 billion on DTCA, a 40% increase over 1998 with $US1.1 billion spent on television ads, a 70% increase over 1998. Forty one percent of DTCA spending was concentrated on ten products, among them loratidine (Claritin®, $US137 million), finasteride (Propecia®, $US100 million) and sildenafil (Viagra®, $US94 million). The 25 top-selling DTCA drugs accounted for 40.7%, or $US7.2 billion, of the overall $US17.7 billion (19%) increase in drug sales (retail) in 1999 compared to 1998. Doctors wrote 34.2% more prescriptions in 1999 than in 1998 for the top 25 DTCA drugs. Doctors wrote only 5.1% more prescriptions for all other prescription drugs (The Therapeutics Letter, 2001).

Strategies to Improve Drug Use

In 1992, another Labor initiative, the Commonwealth Pharmaceutical Health and Rational Use of Medicines (PHARM) Committee recommended a quality use of medicines (QUM) policy as the final integrating arm of national medicinal drug policy. The Committee advocated independent information, drug audits, and targeted education aimed at both consumers and health providers. These concepts were subsequently adopted as government policy and PHARM gained funding for QUM projects (allocated on a competitive grant basis). The PHARM Committee was ultimately able to prove that certain strategies, such as drug audit, prescriber feedback, and targeted education worked.

A subsequent Liberal government also endorsed the QUM Policy (Commonwealth Department of Health and Aged Care, 2000) and added a National Prescribing Service (NPS) to the existing PHARM initiative. The NPS works with Divisions of general practice and has focused primarily on educating prescribers. For an expenditure of about $5 million per annum, they have demonstrated improvements in prescribing worth about $15 million per annum. Although NPS activities are undoubtedly worthy, the savings achieved represent less than 2% of latest $800 million annual increase in the cost of the PBS.

The 2001 federal budget provided another 4 years funding for the NPS (at the same level) and also allocated $14.6 million (over four years) for ‘a consumer education strategy’. The danger of the latter initiative is that it could lead to yet more fragmentation and duplication of effort, especially if yet another implementing body is set up. Regardless, given that independent educational activities continue to be dwarfed by pharmaceutical industry promotion, it is unlikely that the former will significantly impact on escalating PBS costs.

Election Policies Analysed

The Labor PBS policy provides a better diagnosis of current problems facing the PBS.

So how do the major parties propose to deal with the problems confronting the PBS?

The Liberal Party’s action plan, ‘A Healthier Australia’ states that the Coalition will build on past efforts. Increased immunisation rates are one of the achievements highlighted. The PBS is not specifically mentioned. However, $11.5 million is allocated over the next four years for a new initiative targeting arthritis. The aim is to improve GP access to quality treatment and prescribing information, and to support those affected by the diseases in assisting the management of their diet and encouraging exercise. The current Health Minister, Dr. Michael Wooldridge has announced his retirement after the election.

‘Kim Beazley’s Plan for Medicare’ has a specific section titled ‘Protecting the Pharmaceutical Benefits Scheme’ (Australian Labor Party, 2001). It notes that ‘like Medicare, the Pharmaceutical Benefits Scheme is under attack by the Howard Government’. It identifies a number of concerns: escalating PBS costs, the appointment of a pharmaceutical industry representative to the PBAC and the de-listing of 60 medicines from the PBS.

Labor policy initiatives include:

  • Removing industry representation on the PBAC;
  • Making the PBAC processes more open and accountable;
  • Extending the PBAC remit to include making recommendations about the price at which a product will be cost effective;
  • Establishing a rapid response mechanism for reviewing the prescribing patterns and cost of new medicines in their first year on the PBS;
  • Controlling excessive pharmaceutical industry promotion to medical and pharmacy professionals through setting a $10 cap on the value of gifts and entertainment, and more tightly defining educational and entertainment activities;
  • Extending the ban on ‘direct to consumer’ advertising of prescription medicines to close loopholes that have allowed inappropriate promotion through public relations and media activities;
  • Providing medical practitioners with independent and evidence-based information to reduce their reliance on pharmaceutical industry marketing messages. This information will be provided electronically and by specialist advisers visiting doctors to discuss new developments; and
  • Providing consumers with factual information so that with their doctor they can make informed choices about the medicines they take and how to take them effectively.

These initiatives are said to have zero cost over four years. The Shadow Health Minister Ms. Jenny Macklin is expected to take the Health portfolio if Labor wins the election. She has the credentials to do so, having been the Director of the National Health Strategy, which produced, among other publications, ‘Issues in Pharmaceutical Drug Use in Australia’ (National Health Strategy, 1992).

The Liberal PBS ‘policy’ presumably builds on current NPS activities (and budget) but, in addition, targets the treatment of arthritis, one of the disease-drug groups for which costs blew out in 2000-2001. It uses the current strategies of provider and consumer education but fails to acknowledge or address underlying problems such as the promotional efforts of the pharmaceutical industry. However, it does provide (hopefully) an additional $11.5 million over four years to increase the current small voice of independent pharmaceutical education (The Liberal Party of Australia, 2001).

The Labor PBS policy provides a better diagnosis of current problems facing the PBS and a long list of policy initiatives, including some innovative approaches to curtailing the excesses of pharmaceutical promotion. However, the initiatives listed have not caught up with the latest promotional channel, advertising on the electronic prescription pad.

Hopefully, ‘recommendations about the price at which a product will be cost effective’ will include price-volume agreements to substantially cut the PBS price once prescription volumes suggest a drug is being used for more than its agreed cost-effective indications. This policy is likely to cut off some of the promotion oxygen that currently drives excessive usage of expensive new drugs.

However, less pharmaceutical promotion also needs to be augmented with more effective consumer and physician education; this is unlikely to be achieved if Labor neither increases the pharmaceutical education budget nor rationalises PHARM and NPS activities. Finally, Labor has apparently rejected some interesting New Zealand initiatives such as budget holding or other forms of clinical governance that can encourage physicians to prescribe more cost-effectively (Malcolm & Mays 1999).

The PBS does not exist in isolation. There are inter-relationships and tensions between the four goals of Australian medicinal drug policy: drug quality, equity of access, quality of use, and industry profitability. All parties know that a balance is required. Liberal policy (and their track record) appears to lean more towards supporting a profitable pharmaceutical industry (from which comes jobs and innovative new products); Labor towards preserving equity of access to necessary drugs (from which comes social capital and better health outcomes). Ultimately, the voters must decide.


Arnolda L. (2001) ‘Containing the costs of managing hypertension’, Medical Journal of Australia, 174, 556-557.

Australian Labor Party (2001) ‘Kim Beazley’s Plan for Medicare’, available online at [accessed October 31].

Commonwealth Department of Health and Aged Care (2000) ‘Quality Use of Medicines Policy’, available online at [accessed October 31].

Coulthart R. (2001) ‘The Doctor’s Gravy Train’, Nine Network Australia Sunday Program, August 5, available online at [accessed October 31].

Harvey K and Murray M. (1995) ‘Medicinal drug policy’, in H. Gardner (ed.) The Politics of Health, 2nd Ed., Melbourne: Churchill Livingstone, pp. 238-283.

Jackson L. (2001) ‘Paying the price’ ABC-TV Four Corners Program, February 19, available online at [accessed October 31].

Liberal Party of Australia (2001) ‘A Healthier Australia’ available online at [accessed October 31].

Malcolm L. and Mays N. (1999) ‘New Zealand’s independent practitioner associations: a working model of clinical governance in primary care?’, British Medical Journal, 319, 1340-1342.

National Health Strategy (1992) ‘Issues in Pharmaceutical Drug Use in Australia’, Issues Paper No 4, Melbourne: Treble Press.

Productivity Commission (2001) ‘International Pharmaceutical Price Differences: Research Report’, Melbourne: Productivity Commission, available online at [accessed October 31].

The Therapeutics Letter (2001) ‘Direct to Consumer Advertising (DTCA)’, March/April, available online at [accessed October 31].

Dr. Ken Harvey is a Senior Lecturer in the School of Public Health, La Trobe University, a Director of Therapeutic Guidelines Limited and a Councillor of the Australian Consumers’ Association.

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