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Healthy Skepticism Library item: 20441

Warning: This library includes all items relevant to health product marketing that we are aware of regardless of quality. Often we do not agree with all or part of the contents.


Publication type: Broadcast

Swan N
The High Costs of Pharmaceuticals in Australia
Health Report : Radio National 2012 Nov 260


Australia is the third most expensive country in the world for pharmaceuticals and we pay up to 40% more for generics than the UK, which amounts to an annual excess of between 1.5 and 3 billion dollars of taxpayers’ money.

Full text:

Norman Swan: Hello and welcome to this week’s Health Report with me Norman Swan.

Today, billions of dollars available to be saved from our medications bill, but the government is choosing not to take available price reductions, yet it still cries poor. So if the Australian consumer isn’t benefiting, who is?

How New Zealand is managing to spend half of what we do on medications, in part by encouraging competition, and should women with breast cancer receive chemo before their operation?

According to a leading health economist, we’re one of the most expensive countries in the world for medications and are spending up to $3 billion a year more than we need to, compared to similar countries.

The person saying this, based on his and other research, is Philip Clarke, who’s Professor of Health Economics in the School of Population Health at the University of Melbourne.

Philip Clarke: I’ve been working for a number of years looking at the pricing of pharmaceuticals in Australia and comparing that with other countries, and I found some quite stark differences, and so I’ve been interested in why they occur and ways in which we can lower the price, particularly of our older generic drugs.

Norman Swan: And we should just define what we’re talking about. A generic drug is a drug that is out of patent, produced often but not always by another manufacturer at a discount to the branded product. So, for example, diazepam is, if you like, the generic form of Valium, which is the famous branded drug, but there’s lots of other forms of diazepam on the market cheaper than Valium.

Philip Clarke: Yes, that’s exactly right.

Norman Swan: But we’ve got a reputation of course in Australia for having just about the world’s cheapest pharmaceuticals apart from New Zealand, and you say this is a myth.

Philip Clarke: Yes. Certainly that was the case around ten years ago, but a lot has changed since then. In particular what’s happened is that there’s been an increasing shift of many blockbuster-patented drugs going off patent. So there’ve been many more generics that all countries across the world have been using, particularly in the area of, say, cardiovascular medications, and Australia hasn’t kept pace with being able to decrease the price of these generic medications.

So what’s happened in the last five years is things have changed very dramatically. And to give you an example, a very recent report from the UK from the Office of Health Economics suggests that using a comparison across 13 countries, Australia’s now 40% more than the UK across the board for all its top pharmaceuticals, and we’re now the third highest country after the United States and Germany.

Norman Swan: The third highest country…this is overall, not just generics, this is branded products as well.

Philip Clarke: Yes. Overall we’re paying at our current exchange rates around 40% for our pharmaceuticals, which would be about an extra additional $3 billion per year. If you take a long run average exchange rate it’s about 20%, so about $1.5 billion extra expenditure than if we were paying United Kingdom prices across all our major drugs.

Norman Swan: Let’s just talk about per tablet, because that’s one way that health economists talk about this. And it becomes even more extraordinary when you look at the per tablet price. And you’ve looked at that for statins, the cholesterol lowering drugs.

Philip Clarke: Yes, what I think has happened is there have been very dramatic differences in the prices, say, to take an example of Atorvastatin. Now Atorvastatin was a drug the Australian government has spent more on than any other drug in the history of the PBS.

Norman Swan: So the brand name was Lipitor before it became off patent.

Philip Clarke: And they spent about $7 billion over the last 15 years because it was widely used as a major or the most commonly used cholesterol lowering medication.

Norman Swan: An extraordinary sum of money.

Philip Clarke: Yes. When it came off patent, the agreement with the pharmaceutical industry was to drop the price by around 15%. In almost all other countries, or the comparable countries I’ve looked at which is New Zealand, UK and Sweden, they’ve dropped the price by about 95%. And what I think this reflects is that the actual cost of the drug itself is a very small fraction of the actual overall cost of the patented drug which also includes a return on the research and development that the company’s engaged in to develop the drug.

Norman Swan: What do you mean?

Philip Clarke: Well, the reason why patented drugs are so expensive I suppose is the companies are given a monopoly, so they’re given exclusive right to sell a particular drug for a period of 20 years. And the reason why they’re given that is to encourage innovation. Because it’s obviously risky…

Norman Swan: They’ve spent money developing the drug so they have a right to the return.

Philip Clarke: Exactly. The day that return ends, then really the governments should only be paying for the cost of manufacture.

Norman Swan: Plus a margin.

Philip Clarke: Yes, obviously it’s got to be profitable. But just to give you the example of Atorvastatin, currently we’re paying for the actual costs of the drug, and this is excluding any cost to the chemist. For a typical dose, 40 milligrams, we’re paying $50. That will actually drop on 1 December to $38. But New Zealand is purchasing it from actually the company that produce Lipitor for $2 for exactly the same drug currently in New Zealand.

Norman Swan: Extraordinary. What’s going on here? I in the program in the past have accused the Pharmacy Guild of Australia, which represents pharmacy owners, of cosy deals with the government, who don’t want to annoy corner shops and have marginal electorate fights with pharmacists and essentially guaranteed them a reasonable margin here. Because it’s not as if the drug companies are necessarily making money out of this, because my understanding is the pharmacists are buying these drugs at low levels, but because the government sets the price they’re able to get a huge margin on them.

Philip Clarke: I think that’s true in terms of that what is happening is that the actual traded prices between the pharmaceutical manufacturers and the individual pharmacists are much lower than the prices they’re receiving, or the payments the government is paying each time per script to a pharmacy. That may well be above world prices, so they’re kind of sharing this fairly large level of funding from government, as it were, but yes, certainly pharmacists do directly benefit. And we’ve done some calculations on Atorvastatin, and it’s around about $50,000 per year per pharmacy at the moment.

Norman Swan: So that’s what they make out of that drug…

Philip Clarke: Yes, exactly. Across all…

Norman Swan: Including their dispensing fees?

Philip Clarke: No, that’s on top of that. That’s just for the difference between the manufacturers, or what’s the government recommended ex-manufacturer’s cost and the actual cost they’re purchasing the drug for.

Norman Swan: Nice business if you can get it. And do we have dispensing fees that are higher by international standards?

Philip Clarke: I think it varies, in all the comparisons I’ve done I’ve basically stripped those off. There is some work also that our out-of-pocket payments are high. For example, I think one quite significant difference between us and other countries is in many countries, for many cardiovascular drugs, they dispense a three-month supply. For example, in New Zealand you can only get 90 or 100 tablets for many of the common drugs. Here we have individual only one-month’s supply.

Norman Swan: So that means a new dispensing fee every month.

Philip Clarke: Yes, exactly. So there could be innovations there. That in many ways I think is a separate topic that really should be again investigated, because there is real opportunities here for consumers to benefit from these dramatically lower prices of generics that most of the rest of the world is experiencing, but Australia is lagging behind.

Norman Swan: What’s the answer here? Is it because we set prices nationally and just don’t encourage an open market?

Philip Clarke: No, I think there’s a number of possible reforms. We’ve got, as I said, a system of price disclosure. The only thing I would say is…

Norman Swan: So tell me about that system?

Philip Clarke: How it works is that the government collects the actual traded prices, so the actual prices that the pharmacists and the pharmaceutical manufacturers are actually selling the products for…

Norman Swan: So that’s not a behind-doors thing, they’ve got to disclose that.

Philip Clarke: They’ve got to disclose that to government, and that was a reform that was made in 2010. And based on that disclosed price…

Norman Swan: And how do we know that’s an honest disclosure?

Philip Clarke: Because there are quite severe legal penalties if they make incorrect disclosures. So what happens is that data is collected for a period of a year, then the pharmaceutical industry is given six months to comment, then there’s a few months before the drug price changes. And I suppose if you compare that with, say, the banks, and the Reserve Bank, when the Reserve Bank changes interest rates, people have an expectation that that flows on to consumers within days. Here we’re talking about a period of…

Norman Swan: Well, we used to, we used to have an expectation…

Philip Clarke: [laughs] Exactly. So there’s no real reason why we have such a long period. The United Kingdom uses a similar system of price disclosure but it has much better outcomes. And one of the reasons may well be its cycle over which it changes prices is much shorter. It’s measured in months rather than years.

Norman Swan: So if we put you as ruler of the world, at least the pharmaceutical world, or pharmacy world, tell me the reforms you would put in place that would track us down to world standards in terms of pricing.

Philip Clarke: I think there are a number of options. In many ways we can learn from the rest of the world, because most of the rest of the world is doing it better than us. The options on the table would be to use a system like New Zealand of national tendering. You would potentially get as it were the lowest price, because effectively you have one manufacturer supplying it to the whole country. Maybe that is a fairly major reform, so I suppose that that’s something that would have to be weighed up, the pros and cons of that against potentially other methods.

Even changing the price disclosure to bring it much more in line with the United Kingdom would assist matters. But I think what we’ve got to do is basically have an idea that if we are paying a margin on the rest of the world it’s small, and work out the best way of doing it. The other ways are potentially having greater regulated cuts. Some countries base their prices on what other people pay, and that would be another way of ensuring that you’re not paying ten times the price of other countries, which we currently are for many of our common drugs.

Norman Swan: And what’s happening with branded products, the original products? Again, that’s where the Pharmaceutical Benefits Advisory Committee would say we’re getting good deals.

Philip Clarke: I think overall that’s probably true. Perhaps the other part of this is the degree to which we list new products. And I must admit, I must stress, I think there are very valid reasons why innovative, effective patented medicines have high prices, in terms of that obviously it’s a fairly risky industry. But here’s a classic example. If you could make savings on generics it opens up funds to potentially purchase new cost-effective drugs and list them much more quickly. But again, you would want to pay prices that are comparable with the rest of the world. So I think that’s not where the problem has been, it’s much more on the generic side. But again, I think they’re interlinked. And increasingly, as I said, what’s happening is there’s this huge shift towards many drugs going off patent. It’s commonly referred to overseas as the patents cliff, and governments round the world are basically looking to take a dividend from the lack of technological change, particularly in cardiovascular medications.

Norman Swan: I come back to my question earlier. People have criticised the backroom deals that are done between the government and the Pharmacy Guild, the industry organisation. Multibillion dollar pharmacy agreements, which we’ve shown in the Health Report are not necessarily lived up to; you know, pharmacists are given money for handing out consumer information that’s not handed out. Obviously there are honourable exceptions among many pharmacists. But essentially there are deals that are done that are not transparent. Have you got any evidence that part of this background deal is a quiet agreement that ‘we will give you your margins for longer than others’ just to get some benefits down the track in other areas?

Philip Clarke: I don’t personally have any evidence. I mean obviously one can speculate, and clearly the beneficiaries of the current system are the pharmaceutical industry and pharmacists. This is a classic example of a structural change occurring in an industry. It seems to me, given the quantum of money we’re talking about, clearly we can’t have industry support programs that are costing the Australian taxpayer billions of dollars on an ongoing basis, and I think we really need to think hard. Particularly in the current environment when the budget is highly constrained, and here is an area where you really can make big savings.

Norman Swan: Well, particularly if you’re going to give a billion dollars to the pharmaceutical industry, you’d want to have strings attached to it such as innovation, doing research in Australia, developing patented drugs that we benefit from rather than it just going into general revenue for the companies or the pharmacists.

Philip Clarke: Exactly. And I think one parallel; it would be a bit like trying to support the Australian car industry by inflating the price of second hand cars. The generics were developed more than 20 years ago. If we do want to pay pharmacists for providing better management of pharmaceuticals, we should be looking at directly paying them for that service, rather than indirectly through these inflated prices on these generics. Clearly over time there will be a need for changes in the models of dispensing, and obviously there’s technological change going on there, such as the National Broadband Network, and implications about how people interact with a pharmacist in future, but those issues should be tackled in an open and transparent way, and we need to really ultimately think what is the best way to do this for the consumer. That would be, as an economist, my primary concern here in terms of who should be benefiting from these changes. And these should be bringing large benefits to a lot of people who are consuming particularly cardiovascular medications who have chronic conditions in Australia.

The other story, by the way, is that if you take the statins, in the UK, before Atorva went off patent, 70% of the statins prescribed in the UK was basically Simvastatin. In Australia it’s the exact opposite, 70% is either Atorva or Rosuva. So not only are we paying high prices for generics, Australian doctors have a real preference for prescribing patented drugs. And it started when Simvastatin went off patent.

In the department I have been pursuing that at the moment. The PBAC recommended in July a reduction in the price of Atorvastatin, and they’ve basically said that the price of Atorvastatin should be no more than 12.5% more than Simvastatin. Now that should, if you use the dose equivalents, I think take a 40-milligram Atorva down to about $18 or $20. What happened was the pharmaceutical industry voluntarily cut the price by 25% when the price should have been cut by 50%. And the government has not implemented the recommendations of the PBAC.

Now, I have been asking the Commonwealth Department of Health to check this, and they have not been able to offer anyone to check the assumptions I’ve used are valid. So I’ve interpreted this they’ve kind of gone into the bunker about this stuff, but what it means is there’s money on the table that they’re choosing not to pursue.

Norman Swan: Philip Clarke is Professor of Health Economics in the School of Population Health at the University of Melbourne.

I asked the Department of Health and Ageing for an interview but they were unable to provide someone. Instead they supplied the following statement:

‘Does Australia pay more for generic medicines than other countries?

All health systems are different and therefore it is difficult to make direct comparisons. A country’s generic pricing policies cannot be assessed in isolation of its overall health and industry pricing and policy objectives.

Since 2007, Australia’s approach to pricing generics has recognised that there is significant discounting of off-patent medicines in Australia. Price disclosure and statutory price reductions take a share of these discounts for the taxpayer and the patients, and leaves room for further discounting, encouraging greater competition.

Since price disclosure was introduced it has achieved savings on individual medicines of between 10% and 82%.

The Government’s price disclosure policy is helping to keep the Pharmaceutical Benefits Scheme sustainable by reducing the price of medicines. The Government is on track to achieve $1.9 billion in savings through this policy.

As competition in the market is what generates these savings, it is important to strike the balance between allowing new products to establish a market and ensuring taxpayers benefit from that discounting.’

End of statement.

It’s important to note the issues: price disclosure helps but pharmaceutical manufacturers are not necessarily bringing their wholesale prices down to, say, UK levels. Secondly it’s a slow process, and thirdly, as Philip Clarke said, Australian doctors are not necessarily prescribing the most cost effective medications, presumably because they’re susceptible to pharmaceutical marketing.

The other thing you should know that both sides of politics have been guilty of giving free kicks here, often in fear of a marginal electorate campaign by High Street pharmacies.

So the next time the government cries poor about medicines, you might remember having heard this here on RN’s Health Report.


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Far too large a section of the treatment of disease is to-day controlled by the big manufacturing pharmacists, who have enslaved us in a plausible pseudo-science...
The blind faith which some men have in medicines illustrates too often the greatest of all human capacities - the capacity for self deception...
Some one will say, Is this all your science has to tell us? Is this the outcome of decades of good clinical work, of patient study of the disease, of anxious trial in such good faith of so many drugs? Give us back the childlike trust of the fathers in antimony and in the lancet rather than this cold nihilism. Not at all! Let us accept the truth, however unpleasant it may be, and with the death rate staring us in the face, let us not be deceived with vain fancies...
we need a stern, iconoclastic spirit which leads, not to nihilism, but to an active skepticism - not the passive skepticism, born of despair, but the active skepticism born of a knowledge that recognizes its limitations and knows full well that only in this attitude of mind can true progress be made.
- William Osler 1909