Big pharma foxes in the hen house - Grattan Institute

Published by The Canberra Times, Sunday 21 June

Lobbyists have been on the rise in Australia for a few decades. But regulation hasn’t kept up. A new Grattan Institute report suggests that keeping vested interests out of policy-making could save the government millions.

Lobbyists now need to register, and there are rules governing their interaction with the public service. But these rules only apply to lobbyists who represent multiple clients. Far more numerous are the groups and associations that lobby in the interest of their members – the representative associations in all industry sectors, public and private. Clear rules are needed to govern how the public service interacts with these organisations.

Consulting industry bodies and lobby groups is not the problem. These groups can strengthen policy development by offering expertise and ideas. The opinions of industry leaders can be sought to test their reaction to possible reforms. “Socialising” potential policies has become a bureaucratic buzzword.

But when does socialising go too far? What is the line between productive consultation and capture by industry groups? The risk is real. Senior Health Department employees have noted that junior staff can be captured by influential stakeholders, according to the Public Service Commission’s recent Capability Review of the Department.

Grattan Institute’s report, Premium Policy: Getting better value from the PBS, suggests that the relationship between the Health Department and the pharmaceutical industry may have become too close. The implementation of therapeutic group premiums is a striking case in point.

This policy is designed to limit government spending on interchangeable drugs. For most people, these drugs are just as safe and effective as other drugs in the same therapeutic group, but some are more expensive than others. Under the policy, the government is supposed to pay no more than the cost of the cheapest drug in the group. Drug companies can accept that price, or charge patients an extra fee.

Joint working group established

In 1999, the Health Department faced the challenge of how to identify the lowest price in a group of drugs, given that drugs come in different doses. The lower the price, the bigger the savings to government.

The Minister, Michael Wooldridge, commissioned an independent review. A joint working group was then established to respond to the review. It dumped the recommendation about how to measure price gaps and developed a different set of rules.

The members of the joint working group were drawn from the Health Department and Medicines Australia, the pharmaceutical manufacturer industry lobby group. In other words, the foxes were given a big say in designing the hen house. The process was agreed, launched and implemented, with a manual about it made available on the Department website.

And what a process it is! Ideally, it should establish a simple way to measure the price gaps between drugs so that the government can pay the lowest price. Instead, it ignores and minimises the price gaps by making conservative assumptions and calculations at every turn.

Does the process start by establishing whether any drug is more expensive than another? No, it checks whether there is a statistically significant difference across a group of drugs. Only if this test is passed are two single drugs compared. Does it use the average price of the cheapest drug? No, it uses the lowest upper bound of the 95 per cent confidence interval of price (that is, the highest probable price for that drug).

Because it uses sample data with small sample sizes, few price gaps even pass the statistical tests. Since 2012, the Department has had a much better data source – not doctor surveys, but comprehensive dispensing data from pharmacies – but it has not updated the process.

Each of these decisions reduces the potential price adjustment, and forces the government to spend more.

Advice for drug companies

The most amazing section, though, is buried in Appendix J of the manual on the Department’s website. It essentially tells drug companies where the hen house barbed wire is loose. It advises them how to reduce their prices just enough to avoid triggering the therapeutic group premium policy, but no more.

The upshot of all this is good policy hobbled in its implementation. Just one drug group, and just two drugs within it, are now subject to therapeutic premiums. These premiums cover a mere 8 per cent of expenditure over and above the cheapest drug. Done right, the policy could save the government more than $300 million a year.

The old adage ‘when you sup with the devil, use a long spoon’ springs to mind. The joint working party report seems to have enjoyed a really cosy meal, with the taxpayer as dinner instead of diner.

The premiums policy can easily be fixed. Now that the Department holds complete data on all pharmaceutical prescribing, the whole sampling process can be avoided.

This policy failure raises a more general question. How involved should industry groups be in policy design? Certainly they should be consulted, but their views need to be taken with a large quantum of salt and assessed against their impact on other groups, not just on industry. Grattan’s report suggests the time is ripe for departments to develop guidelines for how departments and industry organisations should interact. That way, we’ll get better value for the taxpayer and better policy.