Australia’s poorly applied drug policy wastes $320m a year: study

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The government has applied its policy to so few groups of drugs that in practice savings are minimal, the report finds.
While the policy is good in theory, the government has applied it to so few drugs that in practice savings are minimal, the Grattan Institute report finds. Photograph: Gabriele Charlotte/Fairfax Media via Getty Images

The federal government is wasting $320m every year through its failure to implement properly a drug-pricing policy for subsidised medicines, a new report from the thinktank the Grattan Institute shows.

The report analyses a policy known as the therapeutic group premium, whereby different drugs used to treat the same condition, and which do exactly the same thing, are clustered into a group. The government then subsidises the cheapest drug within that therapeutic group.

This puts pressure on drug companies that manufacture the most expensive drugs in the group to lower their prices, otherwise doctors and their patients have little incentive to choose the pricier equivalents.

While this policy was good in theory because it kept prices competitive, the report said the government applied it to so few therapeutic groups of drugs that in practice savings were minimal.

The policy only applied to four groups of drugs, the report found: angiotensin antagonists (most often used to reduce blood pressure); H2-receptor antagonists (used to treat gastric acid); proton pump inhibitors (also used to reduce gastric acid); and venlafaxine and venlafaxine derivatives (antidepressants).

By comparison, the Netherlands applies the policy to every type of drug, while Germany applies it to 30 types of drugs including statins, a cholesterol-lowering class of drug that is the most commonly prescribed medicine in Australia.

Two of these statins, atorvastatin and rosuvastatin, were the most costly drugs for the government in 2013-14, costing the Pharmaceutical Benefits Scheme $570m, the report found.

Failing to apply the therapeutic group premium to statins and other commonly prescribed drugs meant the policy was so “watered-down” it no longer worked, said the program director of health at the Grattan Institute, Dr Stephen Duckett.

“The waste from this aspect of the Pharmaceutical Benefits Scheme amounts to $1.2bn over four years,” Duckett said.

“We are paying more than other countries for these drugs because our policy is much narrower. I think when the government is scratching around for savings, this is an easy way they could make some savings at no impact to taxpayers.”

This policy failure was exacerbated because, unlike Germany, doctors were not required to tell patients if the drug they prescribe was the more expensive option, and it was likely the doctors were not aware themselves, the report found.

“It seems very unlikely that doctors would wilfully expose their patients to a premium 99% of the time, and that patients would always accept it without requesting a different drug,” the report said.

“A much more likely explanation is that most doctors and their patients are not aware of the policy … they have a right to know.”

The statistical model the government used to calculate the premium a drug at the higher end of pricing within a therapeutic group should attract was also flawed, the report said, and was often set too low.

The Consumer Health Forum’s chief executive, Leanne Wells, said the report highlighted the “unnecessarily high” costs to patients of Australia’s “complex and labyrinthine” drug-pricing system.

“The premium pricing policy not only tests logic but imposes unnecessarily higher costs on patients,” Wells said.

“If reform of this area can generate $300m in annual savings without disadvantaging patients, it would certainly be preferable to increasing the PBS co-payment as the government still plans to do.”

Guardian Australia had not received a response from the health minister, Sussan Ley, at time of publishing.

A professor of health economics with the University of Melbourne, Philip Clarke, described the Grattan Institute report as “sensible”. It highlighted one of many problems in the way drugs were subsidised in Australia, he said.

“The Grattan report also calls for a root-and-branch review of the PBS,” he said. “One can contrast the approach the government has taken with its recently announced review of Medicare.

“This is being undertaken by medical professionals and academics, while pharmaceutical policy is largely determined by closed-door negotiations with drugs industry groups.”