I ve been asked to talk about the Pharmaceutical Benefits Scheme in the context of Medicare and the broader health sector.

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1 1 Sustaining the PBS for the future Dr Brendan Shaw, Chief Executive, Medicines Australia Speech to 2 nd Future of Medicare Conference 11 November 2010, Sydney Thank you for the opportunity to speak with you today. I start by acknowledging the traditional owners of the land we are meeting on today, the Cadigal people. I acknowledge them as the traditional custodians of this land and pay respects to their elders, past and present. I ve been asked to talk about the Pharmaceutical Benefits Scheme in the context of Medicare and the broader health sector. So I ll start by talking about the PBS and its relevance to the broader Medicare system. I ll then talk about both the supply and demand sides of the PBS to look at the trends in the PBS and what needs to occur to ensure it remains an effective and sustainable part of the Federal Government s health system going forward. The PBS Briefly, the Pharmaceutical Benefits Scheme, or PBS, is a Federal Government scheme that subsidises patients use of various prescription medicines. The scheme started in 1948, and has grown and evolved with the times over the six decades since. Basically, patients pay a co-payment up to a maximum amount depending on whether or not they have a concession card, with the government picking up the rest of the cost of the medicine. A concession card is available to pensioners, older Australians with a Commonwealth Seniors Health Card, and people who hold a Health Care Card, or Department of Veterans Affairs cards. The general co-payment for patients is currently $33.30 per prescription, but for concessional patients those who qualify for a concession card the co-payment is $5.40 per prescription. It is indexed in January each year to keep pace with inflation. Once a patient s spend on medicines reaches a total amount in a year, called the safety net, a general patient qualifies for cheaper medicines at the concessional rate for the rest of that calendar year.

2 2 For concessional patients if they reach the safety net they pay no more co-payments on their prescriptions for the rest of that calendar year. As at 1 January the general safety net ranged from $1, to $1,281.30, while for concessional patients the safety net ranged from $318 to $324. During , Government expenditure on the PBS was $7.7 billion while patient contributions accounted for an additional $1.3 billion. The Commonwealth funded 83.4 per cent of the PBS in that year, with 16.4 per cent funded directly by patients through their co-payments. The Commonwealth Government, through the PBS, accounts for the lion s share of funding of the total prescription medicines market in Australia, including non-pbs medicines, private prescriptions, those dispensed by state hospitals and covered by private health insurance (Slide 1). Australian prescription pharmaceutical market, Hospitals (non- Private insurance PBS) 0% 14% Other 3% Total market: A$12.2 billion Patient Private 13% PBS patient copayment 12% Pharmaceutical Benefits Scheme 61% Source: Australian Institute of Health and Welfare, Australia s Health 2010,, p. 440, Note: PBS Govt includes highly specialised drugs program and RPBS, Patient private includes private prescriptions and PBS below co-payment, Other is other Australian Government and injury compensation insurers. Almost three-quarters of Australia s total prescription medicines market is accounted for by the PBS if you combine the impact of the Federal Government s own funding at 61 per cent, and the impact of consumer co-payments which funds a further 12 per cent of the market. That gives a total of 73 per cent where the Federal Government controls access to the market. For patients it is an important support for their access to affordable medicines.

3 3 Other sectors of the health system make far less contribution to funding medicines. Consumers fund 13 per cent of the market out of their own pockets for private, non-pbs prescriptions and below co-payment prescriptions, and hospitals fund 14 per cent. Private health insurance funds very little of the market in Australia. It has often been argued over the years that the PBS is a major component of healthcare expenditure, is growing relatively fast, and therefore its expenditure needs to be managed and curtailed from time to time. Most recently, we have seen this again in the Department of Finance and Deregulation s Incoming Government Brief which, for the first time, was released publicly on its website several weeks after the recent Federal Election. While a lot of the detail of that brief was blacked out to maintain confidentiality, the fact the Department of Finance saw fit to include the PBS as one of a number areas where it felt the Government should direct further attention to finding savings suggests that there is still concern inside the Government about the growth in the PBS. PBS trends compared Yet, the evidence suggests that the PBS is not growing out of control, either by the standards of other areas of healthcare, or compared with international trends. While I genuinely have enormous respect for the Department of Finance and Deregulation, I think they should take a Bex and have a bit of a lie down. For a start, despite what s often claimed, the PBS is not a major area of healthcare expenditure for the Federal Government. The PBS accounts for 16 per cent of the Federal Government s total healthcare budget, including the Highly Specialised Drugs program. This is a lot less than other major areas of expenditure (Slide 2).

4 4 Federal Govt health spending $billion Medical services and benefits 22.3 Hospital services 2.2 National health and hospitals network 11.2 Pharmaceutical benefits and services 9.8 Aboriginal and Torres Strait Islander health 0.6 Health services 5.0 General administration 1.6 Total 52.8 Source: Commonwealth Treasury, Budget Paper No. 1, , p For example, while the combined pharmaceutical services, comprising the PBS as well as other medicines programs, costs $9.8billion in or 19 per cent, medical services and benefits cost $22.2 billion, or 42 per cent of the Government s health budget, combined payments for hospitals cost $14.1billion, or 27 per cent of the health budget, and other health services like population health, research, allied health and blood products cost $5 billion or 9.6 per cent. Even more interesting is the growth rates of these elements of the Government s health budget. While the PBS has been growing at an average annual rate of 5.5 per cent per annum over the five years to in nominal terms, the MBS has been growing at a higher rate of 6.9 per cent (Slide 3).

5 5 MBS vs PBS Expenditure, $ (billions) MBS CAGR % billion $7.83 billion$8.12 billion$8.60 $7.33 billion Expenditure comparison - MBS vs PBS $11.74 billion $10.98 billion $9.92 billion billion $5.46 billion$5.59 billion$5.74 billion billion$5.10 $4.23 billion$4.63 $3.83 billion PBS CAGR % $13.01 billion MBS CAGR % $14.32 billion $6.24 billion$6.92 billion PBS CAGR % 2000/ / / / / / / / /2009 MBS PBS Source: Medicare CAGR: Compound Annual Growth Rate The PBS is hardly the cause of any major blowout in health care spending. Moreover, by international standards, Australia does not actually spend that much on medicines compared to many other OECD countries (Slide 4). Pharmaceuticals spending as share of GDP - OECD Australia Source: The RX&D International Report on Access to Medicines, p. 15

6 6 Australia spends around 1.25 per cent of its gross domestic product on medicines, compared with the OECD average of 1.5 per cent. There are 22 other industrialised countries that spend more of their income on medicines than Australia. So, again, it doesn t suggest that the country s medicines budget is an amorphous monster that is consuming all of our resources. Pricing and the supply of medicines PBS and the MoU I ll talk briefly about the supply side of the PBS and particularly the arrangements for how the Government prices the medicines the industry supplies to the PBS. For a number of years, now, both current and former Governments have recognised the importance of pricing multiple brand, or off-patent, medicines differently from single brand medicines. In the PBS, this is achieved by having two separate formularies F1 for single brand medicines and F2 for multiple brand medicines. This is important to avoid the problems that historically beset the PBS, namely that while it is pretty effective at controlling the costs of single brand, newer patented medicines, historically it was blind to the competition and discounting that often occurs in the multiple brand, off-patent medicine market. For years, taxpayers and patients in Australia have been paying prices for old, off-patent medicines that were high by international standards. It has led to a situation where Australia has relatively low prices for innovative, new medicines by international standards, but the prices of old, off-patent medicines has been high. While in markets like the US and the UK typically the price of a medicine drops substantially after patent expiry and the entry of generics, historically in Australia this did not happen, or did not happen to anywhere near the extent as in other countries. This was an inefficiency in the market that meant that patients and taxpayers were paying too much for generics, while some manufacturers were enjoying the benefits of taxpayers subsidising the rebates they paid to pharmacists. In 2006 a range of reforms to the PBS were announced by the then Federal Government to help redress this policy conundrum by the introduction of the two formularies and a range of pricing measures to help drive a more competitive generics market in Australia principally through a system of price disclosure whereby the official Government reimbursement more or less tracks what the average actual price of a medicine is on the PBS.

7 7 If companies are substantially discounting a medicine to pharmacists at a market price significantly below what the official book price is for a medicine, under the original 2006 reforms that medicine has a chance of being subject to a market-driven price cut. Where there was little competition and little or no discounting, that medicine would not take a price cut. Most recently, Medicines Australia, on behalf of the bulk of Australia s medicines industry, signed a Memorandum of Understanding with the Federal Government. The MoU contains a number of initiatives to improve the operation of the PBS, from the perspective of government, industry and patients. In terms of pricing reforms, the MoU includes provisions to improve the operation of price disclosure: Making price disclosure mandatory for all medicines in the F2 multiple brand market, rather than being optional for many medicines and manufacturers as it currently is Supporting Government measures to provide a mechanism to guarantee the government a weighted average price cut of 23% across the F2 formulary in April 2012, and Shortening the time it takes for the price disclosure processes to 18 months such that the price cuts occur for government sooner. Essentially these reforms provide government with more pricing certainty about price disclosure, giving it greater confidence in the likelihood that price disclosure will provide efficiencies to government. As I said, a problem the MoU tries to redress is that under the current arrangements announced in 2006, for many medicines and manufacturers the requirement for them to disclose to the Government what they are actually selling a medicine for in the market, is optional. Because it is optional, the potential is currently there for companies to opt out or not participate in the price disclosure process, continue to rebate heavily in the market, with the taxpayer still subsidising those rebates at overblown prices that are high by international standards. If the MoU reforms do not get passed by the Parliament, these arrangements will continue, meaning the PBS will be less efficient than otherwise would be the case and patients will miss out on anticipated price cuts. To gauge the impact of the MoU on the future sustainability of the PBS, you don t actually need to look any further than the Government s own Federal Budget released in May this year. It also goes to the point I made earlier that the PBS is relatively sustainable. In May this year, the Federal Treasury in the Budget said that: The real growth over the forward estimates period for the pharmaceutical services and benefits subfunction is lower than that forecast in the Budget. This is attributable to the savings realised in

8 8 new measures, namely the Fifth Community Pharmacy Agreement and Pharmaceutical Benefits Scheme further pricing reforms. Estimated growth is expected to be 6.4 per cent in real terms over the forward years from , or 2.1 per cent per annum on average in real terms over the forward estimates period. (Commonwealth Treasury, Budget Paper No. 1, , p emphasis added) Thus, the MoU is a key ingredient in keeping the PBS financially sustainable. This 2.1 per cent real average annual growth rate is almost the same as the Government s overall fiscal target of real average annual growth of all Commonwealth expenditure of 2 per cent. The fact that a health expenditure program like the PBS is expected to maintain a real average growth rate of just 2.1 per cent, practically the same as all Commonwealth expenditure, is extraordinary. In fact, compared with other areas of health spending reviewed in the May Budget, the PBS stacks up pretty well. By way of comparison, while the Treasury expects the PBS to grow at just 2.1 per cent per annum over the forward estimates, it expects the Commonwealth s total health budget to grow by 9.3 per cent per annum in real terms and Medicare expenses to grow by 3.3 per cent per annum (Slide 5). Growth in health spending Real average annual growth in spending (%) 9.3 Impact of MoU Total health MBS PBS Source: Commonwealth Treasury, Budget Paper No , pp Here is proof, not from a consultants report or from us, but from the Commonwealth Treasury that the PBS is sustainable by comparison with other areas of health spending. Don t take my word for it, take the Treasurer s!

9 9 The demand for PBS medicines The demand for PBS medicines is influenced by a range of factors including what medicines are available, what illnesses people have, how many people there are who need medicines, the ageing of the population, and what the consumer prices of those medicines are. I m not going to try and address all of these in the time left available. That could fill a whole two day conference in and of itself. However, it is clear that the demand for PBS medicines does vary, as shown by the variability in the growth of prescription volume on the PBS (Slide 6). PBS growth - prescriptions and government expenditure (Moving Annual Total,MAT) 25% % change 20% 15% 10% 5% Change in pack sizes, restrictions, price reduction for Celebrex and Zyban 21% increase in patient co-payment 12.5% price policy Change to seniors healthcare card eligibility New listings pre-election PBS Reforms price reduction GFC and Global economic downturn 7.0% 0% 0.4% -5% Feb-02 May-02 Aug-02 Nov-02 Feb-03 May-03 Aug-03 Nov-03 Feb-04 May-04 Aug-04 Nov-04 Feb-05 May-05 Aug-05 Nov-05 Feb-06 May-06 Aug-06 Nov-06 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Source: Medicare Australia Expenditure Prescription PBS Expenditure here does not include expenditure on S100 or Highly specialised drugs dispensed through public hospitals. Source: Medicare Australia, PBS Expenditure, updated till September This chart shows the growth of the PBS over the last eight years or so, both in terms of expenditure growth and prescription growth. Prescription growth plays a significant, although not exclusive, role in driving expenditure growth. You can see that annual prescription growth varies over time. The co-payments that patients pay affect the demand for medicines and the number of prescriptions subsidised by the Government on the PBS. For example, when co-payments increase, there are at least two effects that can cause the volume of PBS prescriptions to fall.

10 10 One is simply that as the base level co-payment rises, more medicines see their price drop below the co-payment level, which means that that prescription effectively drops out of the PBS. For example, if a medicine s price to the PBS is $5 and the patient co-payment is $4, the patient pays the first four dollars, and the Government picks up the remaining cost, in this case, one dollar. If the co-payment then increased to $5.40, while the price of that medicine to the PBS hasn t changed, it is still $5, the fact the co-payment has increased to $5.40 means that the patient now pays the entire $5 price of that medicine. And, the medicine is effectively no longer subsidised by the PBS. The other effect is what economists lovingly refer to as the price elasticity of demand, essentially the effect on consumer demand of a price change. Without going into specifics, the rule of thumb I use is that the price elasticity of demand for medicines is around That is, for every 10 per cent increase in the price of a medicine, the volume of medicines sold falls by 2.5 per cent. It s obviously rough and an average across the whole market, but it seems to hold. If you look at the history of discrete increases in PBS co-payments over and above general inflation over the years, that rule of thumb seems to hold. Conclusion So what does this all mean? Well, the PBS is a key part of maintaining a healthy population and a key part of the Medicare system. We know that Australia does not spend a lot of its health budget on prescription medicines by international standards. And we know that compared with other parts of the health system, the PBS is well managed and is not growing out of control. Assuming the Parliament passes the Bill that is currently before the Senate looking at the pricing changes associated with the MoU, according to the Federal Treasury the PBS will be very sustainable in the foreseeable future. There is no doubt that there will be many things that will keep Health Ministers awake at night over the next five to 10 years. But, because of the MoU, the PBS will not be one of them.

11 11 Health Ministers, Treasurers and Ministers for Finance will be able to sleep easy, knowing that the PBS is quietly doing its job of ensuring Australians have access to the medicines they need at a price they and the Government can afford. Thank you.

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