CHAPTER 7 The Pharmaceutical Benefits Scheme

Hans Löfgren, Ken Harvey

When you finish this chapter you should be able to:

• explain the purpose of the PBS and its role in the National Medicines policy

• provide a summary account of the history of the Pharmaceutical Benefits Scheme (PBS) and the circumstances of its introduction

• explain the operations of the PBS including the centrality of the evidence-based listing process and the Pharmaceutical Benefits Advisory Committee (PBAC)

• explain the different approaches to PBS cost-containment

• identify the key issues and the participants in the politics of the PBS.

Introduction

Consumer safety is a central purpose of pharmaceutical regulation. Medicinal drugs need to be of good quality, reasonably safe and used appropriately. Historically, unsafe drugs have caused recurrent disasters. The drug thalidomide, for example, resulted in thousands of infants being born with severe deformities of the limbs in the late 1950s and early 1960s. This episode triggered the introduction of stricter safety, quality and efficacy controls in many countries. A second reason for government intervention in the pharmaceutical market is to ensure that all citizens have affordable access to necessary medicines. In Australia, these regulatory objectives are achieved through two major Commonwealth programs that form part of our National Medicines Policy.

The role of the Therapeutic Goods Administration (TGA) is to ensure the quality, safety and efficacy of medicines. Drugs cannot be marketed to Australian consumers unless approved by the TGA. The Pharmaceutical Benefits Scheme (PBS), the second step of Australia’s system of drug regulation, is designed to provide timely and affordable access to a wide range of TGA approved prescription medicines. More than 70% of all prescriptions dispensed in Australia are subsidised under the PBS. This chapter explains the purpose and history of the PBS, describes its mode of operation, and highlights some of the controversies surrounding this scheme.

Origins of the PBS

In 1938 a conservative Commonwealth government sought to establish pharmaceutical benefits as a component of a national health scheme. This initiative was abandoned at the outbreak of the war following opposition by the then Australian Branch of the British Medical Association (BMA), which viewed public insurance arrangements as an intrusion on doctors’ free choice of treatment options for their patients. Proposals for medical and pharmaceutical benefits soon re-emerged. The recent memory of mass unemployment and the war effort created a widespread expectation of a more active role of government in the protection of the welfare of the population. Child endowments as well as unemployment and sickness benefits enjoyed bipartisan support, but health and pharmaceutical benefits gave rise to major conflicts.

In 1944 the Curtin/Chifley Labor government introduced a Pharmaceutical Benefits Act, which would have provided Australian residents with free access to medicines listed on a Commonwealth Pharmaceutical Formulary. The basic features of the future PBS were present. The formulary was to be compiled by an expert committee, and benefits would be available from approved pharmacists on the presentation of a prescription, written on authorised forms by a registered medical practitioner. The BMA raised objections and lodged a High Court challenge. The High Court found that Canberra had inadequate constitutional powers for this initiative and declared the Act invalid.

In response, the government in 1946 organised a referendum to amend the Constitution. The Commonwealth gained the power to make laws in respect to ‘the provision of maternity allowances, widows’ pensions, child endowment, unemployment, pharmaceutical, sickness and hospital benefits, medical and dental services …’ (Hansen 1993: 71). In 1947, an amended Pharmaceutical Benefits Act was passed, but the medical profession responded with a campaign of non-compliance. When the scheme came into operation in June 1948 only 117 doctors participated (Hansen 1993: 110). A new challenge was lodged in the High Court, this time focusing on the requirement that prescribers use authorised prescription forms only. The High Court affirmed the BMA’s position, ruling this obligation to be unconstitutional. The obstruction ceased with the election of a Liberal–Country Party Government in 1949, which was able to negotiate an agreement with doctors and pharmacists. The PBS commenced on 4 September 1950, initially providing all residents with free access to 139 mostly ready-made ‘life-saving and disease-preventing drugs’ (Sloan 1995: 3).

Pause for reflection

The majority of the medical profession initially rejected the idea of pharmaceutical benefits. How can this opposition be explained and why do most doctors today take the PBS for granted as an appropriate way of providing necessary drugs to the Australian population?

Ensuring affordable access to necessary drugs for all Australian residents

The PBS was introduced to provide all citizens, irrespective of financial circumstances, with access to necessary medicines and retains, after more than 50 years, elements of universalism. This policy model is unusual in Australia where most social welfare programs are selective, targeting those unable to meet their own needs. Over the years, targeting has become, however, a more pronounced feature of the program. More than 80% of the cost to taxpayers of the PBS is today expended on subsidies for concessional consumers. This is explained mainly by the generally younger age and better health of general consumers, but this effect is reinforced by the widening gap between the co-payments paid by general consumers, and pensioners and other low-income groups. Many drugs are priced below or only marginally above the general co-payment, in which case there is no, or only a small, government subsidy.

The PBS remains a universalist program in the sense that all Australian residents are, in most circumstances, protected from exorbitant costs if they require expensive drugs. Moreover, the processes of the PBS, further explained below, complement the quality, safety and efficacy controls exercised by the TGA. Broader public health benefits, in terms of more appropriate patterns of use of medicinal drugs, flow from the rigorous listing process and the monitoring of the drug market which the PBS makes possible. In the absence of the PBS, guidance for doctors and consumers in the appropriate prescribing and use of medicines would be less effective. All consumers benefit from the downward effect of the PBS on prices across the pharmaceutical market. The PBS has always enjoyed support from both major political parties but has undergone many incremental changes, which have sometimes resulted in conflict with the pharmaceutical industry, pharmacists and consumer groups.

Evolution over five decades

Throughout the 1950s many new medicines were brought to market and the number of PBS listed drugs expanded rapidly. All PBS items were supplied at no direct cost to the consumer, but pensioners and their dependants had access to a more extensive range of drugs than general consumers. In 1960 a single list of entitlements was created, and the number of subsidised drugs generally available increased. At the same time, a co-payment was introduced for general consumers.

By 1963, drugs formed the largest single item of government expenditure under national health benefits. Concerns emerged that some PBS prices were significantly higher than prices charged in the UK. As a consequence, the Department of Health became tougher in price negotiations with manufacturers before approving new PBS listings. Over the years, the department became adept, through effective use of its purchasing power, at achieving relatively low drug prices for Australian consumers. Suppliers had little option but to accept prices deemed reasonable by the department since PBS listing was generally required for commercially viable sales.

In 1983 a concessional category was introduced for low-income groups other than pensioners, with a co-payment of $2.00 (general consumers paid $4.00). The Departments of Treasury and Finance had long advocated a major rise in the general co-payment, which increased in 1986 by 100%, from $5.00 to $10.00 (Sloan 1995: 48). This was accompanied by the introduction of safety net arrangements to protect patients requiring a large number of prescriptions in any single year. In 1990, a co-payment was introduced also for pensioners, now required to pay $2.50 per prescription (though at the same time the pension was increased in compensation). Annual indexation of co-payments and safety net thresholds were introduced in 1991, but there have also been several substantial increases. In the 10 years up to 2007, co-payments increased by about 50% and safety net thresholds by about 70%. For the first time since the introduction of the PBS, evidence is now emerging that for some consumers costs have become an impediment to access to necessary medicines (Searles, Jefferys & Doran et al 2007).

Pause for reflection

The same safety net threshold is applied to a family unit regardless of whether the unit consists of an individual, a couple or a family with dependent children. After reaching the safety net threshold, general patients pay for further PBS prescriptions at the concessional co-payment rate and concession card holders are dispensed PBS prescriptions at no further charge for the remainder of that calendar year.

Patients may pay more than the co-payment when a PBS item is more costly than the lowest priced brand or product in a therapeutic group. This premium does not count towards the safety net.

What perverse outcomes might result when patients reach the safety net threshold and receive medicines at no charge for the remainder of a calendar year?

Why might doctors prescribe a more expensive brand of medicine that causes the patient to pay a price premium?

Before accepting the PBS listing of a new drug, the government negotiates an acceptable price with the supplier through the Pharmaceutical Benefits Pricing Authority (PBPA). Australia was the first country in the world to introduce (in 1993) a mandatory requirement that companies include evidence of cost-effectiveness with submissions for listing on a public drug insurance scheme. This entails a complex comparative analysis of therapeutic benefits against costs. Methods for undertaking such cost-effectiveness analyses are the focus of the emerging discipline of pharmacoeconomics (Walley, Haycox & Boland 2004). Table 7.1 summarises the history of the PBS.

Table 7.1 Key dates in the history of the PBS

1950	Introduction of the PBS with 139 ‘life-saving and disease preventing drugs’.
1954	Formulary committee reinstituted as the Pharmaceutical Benefits Advisory Committee (PBAC).
1960	Introduction of a co-payment of $0.50 for general consumers.
1983	Introduction of category of concessional (low-income) beneficiaries other than pensioners.
1986	Safety nets introduced for both general and concessional consumers.
1988	‘Authority only’ restrictions placed on high-cost drugs.
1990	Pensioners required to pay co-payments for the first time.
1991	Introduction of annual indexation of co-payments and safety net thresholds.
1993	Pharmacoeconomic analysis introduced as requirement for PBS listing.
1994	Generic substitution by pharmacists allowed.
2007	Break-up for pricing purposes of the single PBS formulary into F1 (single-source drugs) and F2 (multi-source drugs) to achieve cost savings from extended use of cheaper generic drugs.

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