How wasting money on overpriced drugs costs taxpayers $320 million a year

by Stephen Duckett

Poor implementation of a policy to get better value for PBS spending is costing government $320 million a year and raising questions about pharmaceutical industry involvement in drug pricing, a new Grattan Institute report has found.

Premium policy? Getting better value from the PBS shows that the therapeutic group premium policy, introduced in 1998 to stop the government wasting money on over-priced drugs, has been so watered down that it is broken, and taxpayers are paying for the failure.

The policy applies only to a small number of interchangeable drugs that are equally effective and safe for most people. The government puts these drugs into therapeutic groups. In each group the government pays the price of the cheapest drug. Drug companies can accept that price, or pass on the extra cost to patients.

The policy is a good way to get value for PBS spending, but the removal of drugs from therapeutic groups and the way prices are compared means that it rarely has much impact.

The way the policy operates was devised with the close involvement of Medicines Australia, the pharmaceutical manufacturer lobby group.

A joint working group drawn from the Health Department and Medicines Australia established the rules for calculating price gaps after dumping the recommendations of an independent review.

“Seeking the advice of drug company lobbyists gave the foxes a big say in the design of the hen house,” says Grattan’s Health Program Director, Stephen Duckett.

As a result Australia has only four therapeutic groups and just two drugs within them are subject to a small premium. Germany, by contrast, has 30 equivalent groups and in the Netherlands nearly every drug is in a group.

The failure of the policy is a further reason why Australia should establish an independent drug purchasing agency, like New Zealand’s PHARMAC, to negotiate better drug prices and administer the therapeutic group premium policy, says Dr Duckett.

“Fixing this policy and keeping vested interests out of policy making would save millions of dollars for both government and patients,” he says.

“Unlike many health spending decisions, this choice is easy. It’s time the government made it.”

Listen to Stephen Duckett speak about the report

Read the report

For further enquiries: Stephen Duckett, Health Program Director
T. +61 (0)3 8344 3637 E. media@grattan.edu.au