Symposium: The 2002–03 Federal Budget

Securing the future of the Pharmaceutical Benefits Scheme?

Ken Harvey, La Trobe University

The 2002–2003 Federal Budget papers said:

The PBS [Pharmaceutical Benefits Scheme] is continuing to grow rapidly (an average of around 14% per annum over the last 10 years) which is challenging its long-term sustainability. The measures announced in this Budget are designed to secure the future of the PBS. The Budget measures focus on:
  • Increasing patient co-payments for prescriptions. This will restore the balance between what the Government pays for a drug and the contribution patients make to the cost of their medicines; and

  • Improving the quality use of PBS medicines.

These measures are expected to save a net $1.9 billion over four years (Patterson 2002).

However, these measures fail to address adequately the drivers behind the increasing cost of the PBS, and so cannot be relied upon to secure its future.

Increased patient co-payments and safety nets

The 2002–2003 Budget introduced a twenty seven per cent increase in patient co-payments and safety nets for both general and concessional users. The price of PBS medicines for general users will increase by $6.20 (to $28.60) and the safety net threshold by $188.50 (to $874.90, after which expenditure users are not charged further for eligible prescriptions). The price of PBS medicines for concessional users will increase by $1.00 (to $4.60) and their safety net threshold will increase by $52.00 (to $239.20). The Budget papers noted that the cost to government of the PBS had grown much faster than patient co-payments, hence the need to ‘realign’ patient co-payments and safety nets. This measure was estimated to produce net savings (to the government) of $1.1 billion over four years.

The Budget papers did not comment on any impact this measure might have on health outcomes. However, research shows that increasing co-payments can have negative effects on both health outcomes and costs. The RAND health insurance experiment, for example, assigned families to one of fourteen health plans, which covered identical services but varied by level of cost-sharing. This rigorous, longitudinal study found that adults with any co-payments were less likely to purchase prescription drugs and, as cost-sharing increased, the number of prescriptions per person dropped (Leibowitz, Manning & Newhouse 1985).

Co-payments also reduce the use of essential medicines (including those for hypertension, heart conditions, diabetes, and thyroid conditions) as well as the use of non-essential drugs (Freemantle & Bloor 1996). Reducing the use of essential medicines costs much more money than it saves. For example, New Hampshire’s now-abandoned effort to limit Medicaid recipients to three prescriptions a month reduced drug expenses by thirty five percent, but overall health care costs rose; a $47-a-year drug saving for each schizophrenia patient was eclipsed by an increased cost of $1,530 per patient in the use of other health care services (Soumerai 1991).

In Australia, major co-payment changes were last introduced into PBS in November 1990. At that time, the co-payment for general users rose from $11.00 to $15.00, and pensioners faced a co-payment or ‘price signal’ of $2.50 for the first time (Harvey & Murray 1995). However, to minimise adverse outcomes, the pension was increased by $2.50 and a ‘safety net’ was introduced for both groups. Subsequent research showed that the co-payment changes lowered the use of both essential and discretionary drugs by both concessional users and the general community, but reduction in the use of discretionary drugs was much larger. Prescriptions of essential drugs also increased after an initial decline, a trend not evident for the discretionary drugs. It seems that simultaneous introduction of measures to compensate high-risk groups enabled the co-payment to become a more selective policy instrument in Australia than in other settings (McManus et al. 1996).

Increasing co-payments can have negative effects on health outcomes and costs.

However, the twenty seven per cent increase in co-payments and safety net thresholds announced in the 2002–2003 Budget are not accompanied by compensatory measures to soften their impact on financially disadvantaged people with chronic illness. Further, a $6.20 increase in the co-payment for general users means that more drugs now fall under the $28.60 threshold and thus lack a government contribution. This is likely to further increase drug prices as some pharmacists dispense such drugs to unsuspecting consumers as ‘private scripts’ thereby allowing an increased mark-up. The changes also strengthen incentives for patients to ‘hoard’ and possibly waste medicines once they finally reach the ‘safety net’ threshold.

The PBS exists to provide Australians with equitable access to necessary drugs at a cost affordable to both individuals and governments. Despite evidence that increasing PBS co-payments will reduce equity of access to necessary drugs and increase health costs elsewhere, there is no indication that the government has any plan (or desire) to monitor the health impact of this major social policy experiment. It is not surprising that consumer groups, medical organisations and the pharmaceutical industry are supporting moves by Labor, the Democrats and the Greens to block this measure in the Senate (Moynihan 2002).

Improving the quality use of PBS medicines

New medicines are included on the PBS on the basis of their clinical and cost effectiveness. To ensure that medicines are prescribed effectively, the PBS includes restrictions on when and for what conditions some medicines are prescribed. The 2002–2003 Budget contained a number of measures aimed at improving adherence to PBS restrictions by doctors, pharmacists, and consumers. The measures range from the educative to the bureaucratic, and include:

  • awareness campaigns directed at both the community and health professionals to inform them of the high quality medicines system funded by taxpayers and provide them with independent information about new drugs or changes to the PBS information for doctors to ensure they have a clear understanding of the criteria that must be satisfied before they prescribe a medicine subsidised under the PBS

  • additional hurdles for doctors to jump in order to get approval to prescribe authority-listed PBS medicines. This may include the date of pathology testing, the name of the hospital where treatment commenced and/or previous drug therapies

  • encouraging doctors to use prescribing software that contains full information on the costs to both the consumer and the taxpayer of PBS medicines; and includes evidence-based guidelines that support quality prescribing

  • regulating to ensure that computer-prescribing programs used by doctors enable the use of generic drugs unless the prescribing doctor consciously chooses the original brand name product

  • using pharmaceutical sales representatives to inform doctors of the PBS prescribing requirements and including PBS prescribing information in drug advertising material

  • improved Health Insurance Commission audit, investigation, and counselling procedures and information for doctors and consumers who obtain a high number of prescriptions.

The end result is a pot pourri of largely unrelated initiatives that lack detail and engender cynicism.

In addition, the 2002–2003 Budget announced the Government’s intention to enter into an agreement with generic drug manufacturers to facilitate the use of generic medicines in return for a reduction in their prices. The Government will also ask the Pharmaceutical Benefits Advisory Committee (PBAC) to review the latest evidence on the safety advantages of Cox-2 selective drugs recently listed on the PBS for the treatment of arthritis, to determine whether the price pharmaceutical manufacturers currently receive for these drugs should be adjusted.

While some of these measures may prove useful, others have been tried before and found wanting. The Budget papers provided no proper analysis of the drivers of increasing PBS costs; they did not comment on what policy initiatives had been tried in the past, what worked, what didn’t, and what more was required. The end result is a pot pourri of largely unrelated initiatives that lack detail and engender cynicism. This is particularly disappointing because Australian efforts to achieve quality use of medicines are well regarded overseas and much has been learnt that could be better applied (Roughead et al. 1999).

The drivers of increased PBS cost

Between 1991–2001, the number of drugs prescribed under the PBS increased by fifty per cent, the price per script rose by more than 120 per cent, and the cost of the scheme soared from $1 billion to over $4 billion (Productivity Commission 2001). Why?

The increasing cost of new drug development.

There is controversy about the precise costs of new drug development and concern over the profits of pharmaceutical companies, but it is clear that pharmaceutical innovation is becoming more and more expensive (Public Citizen 2001).

Population ageing.

Increasing numbers of aged people with chronic conditions can genuinely benefit from pharmacological intervention, driving up total expenditure.

Increasing rates of diagnosis and treatment of chronic conditions such as mental illness, diabetes, and cardiovascular disease.

Depression rose from the tenth most treated condition in general practice in 1990–01 to the fourth in 1998–9, with a corresponding three-fold increase in the dispensing of anti-depressant prescriptions (Mc Manus et al. 2000). The prevalence of diabetes in Australia has tripled in the last twenty years (Gan and Chisholm 2001). A more aggressive approach to cardiovascular disease prevention has greatly increased the use of cholesterol-lowering drugs, which now account for about one fifth of the total cost of the PBS. This last development is of particular concern (Jackson 2001).

Cost shifting between the Commonwealth and state governments.

State-funded hospitals are limiting the supply of drugs to discharged patients and privatising outpatient clinics and pharmacies. The PBS now pays for drugs previously dispensed from hospital in-house pharmacies.

Increased eligibility for the highest level of PBS subsidy.

The PBS now pays for drugs previously dispensed from hospital in-house pharmacies.

Doubling of the income limits (up to $50,000 per annum for a single retiree) entitling self-funded retirees to the Commonwealth Seniors Health Care Card from October 2001 will increase the number of people who can claim concessionary PBS benefits by an estimated 50,000 people in 2001–02. This relaxation, together with a measure to exempt superannuation from the social security means test for people aged over 55, will increase PBS expenditure by an estimated $70 million in 2001–2002 (Senate Estimates Committee 2002).

Doctors prescribing larger volumes of newer, more expensive medication compared to older, cheaper drugs.

If a drug is listed for subsidy on the basis of acceptable cost-effectiveness for a severe disease, its cost-effectiveness is diluted if there is widespread use or ‘leakage’ for less severe disease outside the PBS restrictions (Birkett, Mitchell & McManus 2001). In this situation the price paid for the medication is higher than can be justified by the actual health benefit achieved. There is considerable evidence that ‘leakage’ is responsible for a major proportion of unnecessary PBS cost increases (Arnolda 2001).

To minimise ‘leakage’ the PBAC has recommended capping mechanisms such as price-volume agreements, under which a drug’s price is set according to the number of prescriptions estimated necessary to treat a specific condition for which the drug is deemed cost-effective. If sales exceed the agreed volume then the price is reduced. Not surprisingly, the pharmaceutical industry has opposed such arrangements. In 2000, the PBAC recommended that the arthritis drug celecoxib (Celebrex®) should initially be priced at $1.00 a day, with the government negotiating a contract to halve the price once an agreed number of scripts had been issued. The Pharmaceutical Benefits Pricing Authority was apparently unable to get the manufacturer to accept the PBAC’s advice. Instead of supporting the PBAC, the then Health Minister, Dr. Michael Wooldridge, accepted the Pricing Authority’s recommendation to charge patients $1.20 a day with no cap on the numbers of scripts issued. Listing Celebrex on the PBS was estimated to cost about $50 million per year. However, following an extensive promotional campaign by the manufacturer, Celebrex cost the PBS $100 million in the first five months alone (Davies, 2001), and pharmacists commented that it was being prescribed for a variety of minor complaints including strains, sprains and sports injuries.

Policy options to produce a sustainable PBS

Some annual increase in the PBS budget is necessary and desirable if an ageing Australia is to gain the genuine benefits of newer, more expensive drugs. The focus should be on making sure these drugs are used appropriately for indications where their cost-effectiveness has been proven. This means tackling the drivers of inappropriate use, not merely transferring costs to consumers via higher co-payments. The following suggestions owe much to Goddard, Henry and Birkett (2001).

Improved transparency and functioning of the listing process.

The culture of ‘commercial-in-confidence’ secrecy surrounding the PBS listing process must end. Publication of detailed information about the PBAC’s decisions would improve accountability and help answer the false claims manufacturers sometimes make about why their product was rejected. Crucial clinical and economic information to inform prescriber and consumer education programs would become available, allowing programs to be co-ordinated with the listing of new drugs. The dispensed price of each prescribed item should also be printed on the pharmacist’s label along with the amount actually charged to the patient. This would be an effective way of demonstrating to consumers the value of the PBS. Both the skill set of PBAC members and the makeup of the present committee should be re-examined, with particular attention to the appropriateness of having an industry member. Finally, legal status must be given to PBAC recommendations on the pricing of those drugs that need additional measures such as price-volume agreements to achieve cost-effectiveness.

Multi-tiered price-volume agreements.

Funding for the independent education of consumers and doctors must be substantially increased.

Greater use of legally binding, multi-tiered price-volume agreements would limit the promotional oxygen currently driving PBS ‘leakage’. Differential prices need to be set for each drug based on the number of prescriptions estimated necessary to treat the various conditions for which the drug is deemed cost-effective. Thus, a single drug with four major uses would have four different prices reflecting differing levels of cost-effectiveness, each with its own item number in the Schedule of Pharmaceutical Benefits. A doctor would select the condition for which the drug was being used in his prescribing software, or specify the item number on the prescription. If sales exceeded the agreed volumes for each indication then the price paid to the pharmaceutical company would be substantially reduced.

Regular reviews of the cost-effectiveness of listed drugs.

The current Budget seeks to review the cost-effectiveness of anti-arthritis drugs—a good measure that does not go far enough. Regular reviews of the cost-effectiveness of drugs already on the PBS list are needed to consider clinical and utilisation evidence as it emerges. A drug’s price should be changed if its actual patterns of use in the community are different than predicted or if post-marketing evidence shows that a drug worked better or worse in the community that it had in the original clinical trials. A permanent and properly resourced review process within the PBAC should conduct similar reviews on a large number of listed drugs, with a view to reviewing prices in the light of post-marketing evidence and to control leakage.

Greater control over pharmaceutical promotion.

The Budget ‘initiative’ of using pharmaceutical sales representatives to inform doctors about the PBS restrictions on new drugs is laughable. Sales representatives will still be permitted to promote ‘leakage’ uses. They will still be rewarded by the volume of sales they achieve, not by whether the drugs they promote are used cost-effectively.

Pharmaceutical promotion is a major driver of inappropriate drug use (Coulthart 2001, see also Moynihan, Heath & Henry 2002). Promotion should be restricted to PBS listed indications; tax deductibility for drug company promotional expenses should be removed, and the industry’s push for direct to consumer advertising must be resisted. In addition, the Australian Pharmaceutical Manufacturers Association (APMA) Code of Conduct needs to reflect contemporary medical ethical standards and consumer expectations, not just condone current marketing excesses. The Australian Competition and Consumer Commission should not endorse the APMA Code until it is improved.

Improved education for prescribers and consumers.

In 1992, 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. Strategies included independent information, drug audits, and targeted education aimed at both consumers and health providers. PHARM argued that for successful projects to be continued they would need to come under the umbrella of an independent National Medicines Centre created for this purpose.

A subsequent government endorsed the QUM Policy (Commonwealth Department of Health and Aged Care, 2000) but created a National Prescribing Service (NPS) in addition to PHARM. The NPS primarily focused on educating prescribers by working with Divisions of General Practice. For expenditure of about $5 million per annum NPS produced improvements in prescribing worth about $15 million per annum—undoubtedly worthy results, but equivalent to only two per cent of latest $700 million annual increase in the cost of the PBS.

Policy should curtail inappropriate prescribing while still preserving the core value of the PBS.

The 2001 federal Budget saw the NPS funded for another four years at the same level, and allocated a further $14.6 million (over four years) for ‘a consumer education strategy’. Twelve months later, this has yet to be implemented, and there is concern that this will lead to 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 inconceivable that the educational measures will significantly impact on escalating PBS costs unless educational efforts are increased and pharmaceutical promotion decreased.

Funding for the independent education of consumers and doctors must be substantially increased and aimed solely at providing quality care. QUM programs lose credibility if they are seen as mere cost-cutting or policing exercises. Much better integration, cooperation, and rationalisation of various government branches and other agencies involved in QUM is required. These currently include the following alphabet soup: the Therapeutic Goods Administration (TGA), the Pharmaceutical Benefits and Quality use of Medicines Branch, the Pharmaceutical Health and Rational Use of Medicines Committee (PHARM), the National Prescribing Service (NPS), the newly proposed consumer medicine education organisation, the National Institute of Clinical Studies (NICS), the Australian Council of Quality and Safety in Health Care (ACQSHC) and the National Health Information Management Council (NHIMAC). The current government has fragmented an originally coherent QUM plan into an under-funded, uncoordinated, and ineffectual mess. In short, the QUM program is in drastic need of major re-organisation, not the ad-hoc initiatives provided in the current Budget.

Removing prescribing software from the influence of the pharmaceutical industry.

Electronic prescribing packages must be wrested back from the influence of the pharmaceutical industry, which currently underwrites the cost of these packages in return for advertising and other rights. The Budget measure of regulating to ensure that software programs do not automatically print ‘Do not substitute generic drugs’ is at least a start. Nor should prescribing software automatically add the maximum number of repeats. Further, pharmaceutical advertisements should be banned, at least from the screens on which doctors select drugs.

Prescribing software should contain nationally endorsed evidence-based information repositories such as the Australian Medicines Handbook and Therapeutic Guidelines. This would help clinicians select cost-effective regimens for particular conditions and facilitate self-audit and education. The budget plays lip service to this but no specific action was detailed. The following is required:

  • defining and/or giving a ‘seal of approval’ to key independent therapeutic information resources that should be available in prescribing software. These might include the Pharmaceutical Benefits Schedule, the Australian Medicines Handbook, Therapeutic Guidelines, Australian Prescriber and the Adverse Drug Reaction Bulletin

  • providing competitive research and development funds for projects to develop and integrate ‘approved’ information resources with prescribing software

  • targeting practice incentive payments (PIPs) to health workers who subscribe to ‘approved’ information repositories, thereby preserving market choice but providing an incentive to health workers to subscribe to these resources and for software vendors to incorporate them in their software.


Value for money is more important than bottom line PBS cost. Cutting costs too far in the wrong way will produce poor value for the health system if people get sick because they do not have appropriate access to medicines and other parts of the health system end up bearing increased cost. The challenge for the government is to find a policy mix that will curtail inappropriate prescribing while still preserving the core value of the PBS; that is providing all Australians with equitable and affordable access to necessary, but increasingly expensive, drugs.

Hopefully, by blocking some of the PBS budget measures in the Senate, Labor, the Democrats and the Greens will assist the government in this regard.


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Ken Harvey is a Senior Lecturer in the School of Public Health at La Trobe University, a Board Member of Therapeutic Guidelines Limited and a Councillor of the Australian Consumer’s Association.

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