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Prescription Drugs

A Cost-Effectiveness Approach To Drug Subsidy And Pricing In Australia

Abstract

 
The Australian government offers its citizens subsidies on a select list of pharmaceuticals. For a drug to qualify for inclusion on this list, its manufacturer must demonstrate that the drug is both clinically effective and cost-effective. In part, this measure, along with others, was introduced to improve clinical and economic outcomes. Although this evidence-based system has provided transparency and consistency in decision making about which drugs will be covered, it may not have contained the rate of increase in drug costs.

Governments need to maintain a rate of public pharmaceutical cost increase that is fiscally sustainable over the longer term. Inmost developed countries drug costs have been rising at the rate of about 10–12 percent per annum over the past decade, in part because of increasing use and the introduction of new, expensive drugs. This would not be a problem if the new drugs were cost-effective compared with other health interventions, but this is not always the case.

Internationally, various pharmaceutical cost control mechanisms have been used, including generic substitution, therapeutic reference pricing, positive or negative subsidy lists, fixed or percentage patient copayments, limits on profits and marketing expenditure, and risk sharing (drug budgets) with groups of medical practitioners. However, cost control mechanisms applied indiscriminately can result in perverse outcomes if they discourage cost-effective drug treatment resulting in higher costs elsewhere in the health system—for example, by increasing hospital admissions.

Governments also need to maintain autonomy of decision making and continuity of drug supply against the context of a large, powerful, and globally organized pharmaceutical industry. There is often a tension in government between departments of health and departments of industry, with the former wishing to keep drug costs as low as possible and the latter wishing to provide incentives for the development of a local high-technology drug industry.¹

In this paper we describe the Australian system for the subsidy of pharmaceuticals, which is based on a formal evaluation of cost-effectiveness; present some of the outcomes of the system; and discuss some points of tension and controversy that inevitably arise.

The Australian Health System Context

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Medical services. Australia has a comprehensive system of health coverage (Medicare) for both outpatient and hospital services. Community (nonhospital) services are directly funded by the federal government on a fee-for-service basis. Hospital services (inpatient and outpatient) are the responsibility of the states but are largely funded by the federal government under a federal/state cost-sharing arrangement. A large proportion of the population (about one-third at present) takes out optional private health insurance for hospital and some ancillary services. Subsidized by the federal government, this insurance provides access to the private hospital system or to the doctor of one’s choice in public hospitals.

Pharmaceuticals. Drug products must meet efficacy, safety, and quality standards before they can be marketed and, once registered for marketing, can be supplied as private prescriptions with the patient paying the full cost. Once a drug product is registered, the sponsor can apply for it to be listed on the Pharmaceutical Benefits Scheme (PBS), a comprehensive system for subsidy of prescription drugs covering the whole population. Nonprescription products and complementary medicines are generally not covered, but some (for example, paracetamol and aspirin) are included when supplied under a prescription. Hospital medicines (both inpatient and outpatient) are funded by the states under a federal/state cost-sharing arrangement with public hospitals. This is currently under review with a proposal for hospital discharge and outpatient drugs to be funded directly through the PBS.

Medicinal products that are not included on the PBS are not subsidized by the government. The patient pays a fixed copayment for subsidized items, and the balance is paid by the government. There are two categories of copayment. Concession patients who are eligible for Social Security entitlements (aged, disabled, unemployed, or students, for example) pay a fixed amount (U.S.$1.90) per drug item.² Other (general) patients pay U.S.$11.80 per item unless the dispensed price is less than this when they pay the full amount. For both concession and general patients, there is a maximum out-of-pocket expense per year (safety net). No item listed on the PBS is priced below the concession copayment, so concession patients receive subsidies on all items purchased from that list. However, some items on the PBS are priced below the general patient copayment amount. Purchases of such drugs by general patients are regarded as private (nonsubsidized) purchases, although such purchases still count toward the individual’s annual out-of-pocket maximum.

Clinical And Economic Evaluation Of New Drugs

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The Pharmaceutical Benefits Advisory Committee (PBAC), a statutory committee established under the National Health Act of 1953, consists of family and specialist medical practitioners, pharmacists, and a consumer representative. It has two subcommittees: the Economics Sub-Committee (ESC) and the Drug Utilisation Sub-Committee (DUSC). The PBAC is charged with making recommendations to the minister for health and aged care about which drugs and medicinal preparations should be listed for subsidy. The minister cannot list a new drug without a positive recommendation from the committee but can reject a recommendation or amend the conditions of listing. Products are considered for subsidy within the boundaries of their registration (marketing approval), including indications and other marketing restrictions. The National Health Act was amended in 1987 to require the PBAC to consider comparative effectiveness and cost in making its recommendations. To fulfill this requirement, cost-effectiveness requirements were phased in during 1991 and 1992 and became mandatory in 1993.

Initially, the guidelines for cost-effectiveness submissions were developed by consultants, but there has been an ongoing process of revision as experience with the process accumulates and as the scientific base of pharmacoeconomics matures.³

Choice of comparators. The choice of an existing treatment with which the new drug will be compared is critical. The most prescribed pharmacological analogue used for the same indication is usually preferred. If the drug is in a new pharmacological class, the drug most prescribed on the PBS for the same indication is the comparator. If no currently listed drug is available, the main comparator usually is standard medical (nondrug) management. The industry has argued that using these criteria disadvantages new drugs, as they are compared with cheaper old drugs that are out of patent. The industry has argued for using the drug with the best "head-to-head" trial evidence available, rather than the most appropriate pharmacological comparator. This nearly always results in the choice of the most expensive existing drug, as companies generally do not do trials against the older cheaper drugs (perhaps for this very reason).

Clinical evidence requirements. Sponsors are required to present all of the clinical evidence available to assess the new drug against the comparator. There is a strong preference (but not a requirement) for randomized trials that directly compare the proposed drug with the main comparator. Where these are not available, an analysis of two sets of randomized trials involving a common reference will often be acceptable. A meta-analysis is carried out where appropriate. The clinical evidence indicates whether a drug is better than, no worse than, or worse than the comparator and guides the type of economic analysis. Drugs that are worse overall than the comparator are generally not subsidized.

Price determinations. Many of the submissions involve cost minimization (the new drug is priced the same as the comparator) where the evidence indicates that the new drug is at least no worse (and typically no better) than the comparator. On the surface, this should be straightforward; that is, the same amount of benefit means the same price. However, determining the price for the new drug involves a judgment about the therapeutically equivalent doses of the two drugs, and the clinical evidence rarely provides the precision to do this within the limits required by the pricing process. The pragmatic approach taken by the PBAC is to recommend therapeutically equivalent doses, and therefore initial prices, based on all of the evidence submitted at the time of listing. The relative prices are then adjusted depending on the actual prescribed daily doses in the marketplace. From a pharmacoeconomic point of view, this assumes that the drugs are used in practice at therapeutically equivalent doses, which may not always be the case.

Drugs that are better than the comparator nearly always cost more than existing treatments, and sponsors are asked to quantify increases in health benefit and weigh them against increases in cost. In doing so, patient-relevant outcomes are preferred, particularly final outcomes such as deaths prevented or life years or quality-adjusted life years (QALYs) gained. The guidelines for submissions request a preliminary trial-based economic analysis, followed by a modeled analysis where appropriate.

The results are presented as the incremental net cost of achieving each additional unit of outcome with the proposed drug when it is substituted for the main comparator. A sensitivity analysis is used to define the areas and extent of uncertainty in the modeled analysis. Incremental cost-effectiveness ratios are expressed as the net cost per health outcome, the type of which differs according to the therapeutic group, the disease state being treated, and the patient group. While comparisons can be made within a therapeutic group where the outcome measures are similar, it is more difficult to judge relative value for money based on disparate outcomes across different therapeutic groups. Incremental cost-utility ratios provide consistency across drug groups by expressing the health benefits as a utility value—the extra cost per extra QALY gained. This provides a single metric of the strength of patients’ preference for changes in health status that can more easily be used to make comparisons across drug groups and various health outcomes.

Assessing Value For Money

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The evidence-based clinical and economic evaluation system provides good, explicit information on the presence and size of the incremental benefits and costs associated with a new drug’s potential listing for subsidy. However, the committee still has to judge whether these incremental costs represent acceptable value for money from the point of view of the government or community. In doing so, the perspective taken by the committee could be societal, the government health budget, or the government drug budget alone. A societal perspective would include patient copayments and extend to indirect costs and benefits such as productivity costs. In practice, the PBAC nearly always takes a health-budget perspective that considers costs and cost offsets in the health system as a whole but extends this to include patient copayments. In making judgments on value for money, the PBAC aims to achieve the maximum health outcomes per health dollar spent and to provide transparency and consistency in decision making.

Restrictions on subsidized use. Three levels of restriction on subsidized use are available. These are "unrestricted," "restricted benefit," and "authority required." The latter two allow the PBAC restrict subsidized use to specific indications, patient groups, clinical settings. The highest level of restriction, authority required, requires the doctor to obtain prior approval (usually by telephone) to prescribe under subsidy to the individual patient.

The PBAC used the restrictions to target drugs to indications, patient groups, or clinical settings that achieve the optimum clinical benefit and cost-effectiveness. Drugs themselves are not either cost-effective or not cost-effective. For example, a drug used for reflux esophagitis may be acceptably cost-effective in severe ulcerative disease but not so for minor symptomatic dyspepsia. If listed subsidy on the basis of acceptable cost-effectiveness for severe disease, the cost-effectiveness in actual use will be "diluted" if there widespread use for less severe disease outside the restriction.

Other factors. A number of other factors impinge on PBAC decisions, including the degree of uncertainty in the incremental cost-effectiveness estimates due to the strength or weakness of the clinical trial evidence, particularly for drugs that could have a very high total cost; the potential total cost to the PBS and/or health budgets; the potential for widespread use outside of the proposed restriction; the potential for adverse outcomes due to ready availability through the subsidy system, such as for drugs potentially subject to misuse or abuse; and the "rule of rescue" for drugs serious or fatal diseases for which there are no other treatments, such as multiple sclerosis, cystic fibrosis, and Alzheimer’s disease.

Types of PBAC recommendations. After making the overall value-for-money judgment, the PBAC may recommend the drug subsidy as acceptably cost-effective at the requested price or lower than the requested price; recommend with tighter restrictions than those proposed in the submission (known as targeting); reject subsidy listing on clinical and/or cost-effectiveness grounds.

Pricing mechanisms. Some drugs have differing cost-effectiveness, and thus merit different prices, for different indications. One mechanism developed to deal with this is to calculate the overall price as the average of the acceptable prices for the different indications weighted by the relative use for each indication. Also, price-volume agreements are increasingly being negotiated with sponsors to cope with the potential for use outside an indication which the drug is acceptably cost-effective. Once use goes beyond that estimated, a lower price will apply. This is essentially a risk-sharing agreement between the government and a sponsor.

Another pricing mechanism is the weighted average monthly treatment cost (WAMTC). This mechanism is contentious, and industry has secured government agreement for a review of it. It applies to drugs within a group that are regarded as therapeutically equivalent. The costs of the various strengths and formulations each drug in a group are combined using the relative volume of use and prescribed daily doses on the PBS. These are compared across the group to determine the lowest-price drug in the group. A subsidy is only provided at this lowest price, and higher-price alternatives are asked to reduce their price or be removed from the subsidy list if a premium arrangement does not apply.

Both generic substitution and reference-pricing mechanisms (the latter for only four drug groups at this stage) are used in Australia, in many other countries. A subsidy is provided only at the price the lowest-price (benchmark) drug or brand, with the patient paying the difference if a premium over the benchmark product applies. In practice, most drugs have been priced at the benchmark or have relatively small price premium.

Outcomes Of The Submission Process

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The PBS subsidy list now contains some 638 drugs as 2,306 brands.⁴ The cost-effectiveness requirements started in 1993 against a background of drugs already listed without economic evaluation, and percent of the drugs listed have now been subject to economic evaluation. An average of eighty to ninety submissions are dealt with per year, and head-to-head randomized trials have been available to form the evidence base of the submission in most cases.

Most submissions have involved cost minimization or cost-effectiveness analyses, but since 1996 there has been a rise in the proportion of cost-utility analyses (Exhibit 1). The quality of submissions and the problems identified with them have recently been published, and the results of this analysis emphasize the need for thorough and comprehensive evaluation of the scientific and economic content of submissions.⁵

View larger version (20K): [in this window] [in a new window] EXHIBIT 1 Trends In The Types Of Economic Analyses Submitted, 1993–1999

Consistency of decisions. The consistency of decision making has been investigated for those submissions with a survival-or utility-based economic analysis and therefore with common outcome measures (fewer than 10 percent of major submissions). The incremental cost per life year gained was reported in fifty-two submissions and ranged from U.S.$270 to U.S.$127,000, with five above U.S.$100,000. The incremental costs per QALY gained were reported in twenty-seven submissions and ranged from U.S.$108 to U.S.$66,000. The relationship between incremental cost per extra life year gained and acceptance or rejection for subsidy is statistically significant.⁶ Overall, the data indicate that there is reasonable consistency in decision making and that the efficiency objective of maximizing health outcomes while minimizing costs is being met. The PBAC has been careful not to set a cutoff incremental cost-utility ratio to avoid "regression to the mean." Also, as indicated above, other issues besides economic factors impinge on the decisions in particular cases.

Accuracy of usage predictions. We also investigated for selected drugs the extent to which prescription volumes and costs predicted in submissions are reflected in reality after listing, and this will become a systematic part of the process. Of those drugs looked at so far, usage predicted in the submission has been greatly underestimated for about one-third and greatly overestimated for about one-third.⁷

Cost Trends And Comparisons

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The cost-effectiveness requirements for subsidy listing address the issue of achieving efficiency or value for money but are not a cost containment mechanism. Generally, drugs that are judged to have acceptable cost-effectiveness are recommended for listing at the price requested. The government drug budget is not capped and, as is the case in similar countries, has been increasing at the rate of about 10 percent per year over the past decade during the period that the cost-effectiveness requirements have been in operation. In 2000 this increased to around 15 percent per year. Organization for Economic Cooperation and Development (OECD) data indicate that the Australian total (private and public) spending on pharmaceuticals is below, but close to, the OCED average on several measures (Exhibit 2). The rate of increase over 1990–1996 (when cost-effectiveness requirements were introduced) was greater than the OECD average. Public spending on pharmaceuticals in Australia in 1996 was 49 percent of total spending, a similar ratio to the average (57 percent) for OECD countries.⁸ For comparison, the corresponding ratio for Canada was 36 percent; New Zealand, 70 percent; the United Kingdom, 63 percent; and the United States, 14 percent.

View larger version (23K): [in this window] [in a new window] EXHIBIT 3 Trends In Prescription Volume And Government Costs, 1990–1999

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However, in the past two years there has been a less cooperative relationship, with the Australian Pharmaceutical Manufacturers Association criticizing the PBS listing approach and lobbying for a comprehensive review of the listing and pricing processes. Factors involved may include recent reductions in industry support funding and a global pricing approach adopted by a number of multinational companies. Companies have resorted to the federal court on two occasions recently to challenge the PBAC decision-making process. The two decisions in question were rejections for subsidy listing of naltrexone for alcohol and opioid dependence, and sildenafil for impotence. Naltrexone was subsequently listed for alcohol but not opioid dependence, and the sildenafil case is still under appeal the company to the full bench of the federal court.

Successes And Problems

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The cost-effectiveness requirements for subsidy listing have achieved the desired objectives, overall. Evaluation of the outcomes indicates that drugs have generally been recommended for subsidy listing according to the net incremental cost of the health benefits that they produce, thus satisfying the efficiency objective. At same time, mechanisms have been available to provide access some patient groups on the basis of special need. The strongly evidence-based system has provided clarity, consistency, and transparency in decision making. Areas of disagreement with industry continue, but it is inevitable that this will be the case given different perspectives and goals of government and industry. The cost-effectiveness requirements have not noticeably contained overall drug costs, which have continued to rise at what may be unsustainable rate.

Editor's Notes

 
Donald Birkett is professor of clinical pharmacology at Flinders University in Adelaide, South Australia. Andrew Mitchell directs the Pharmaceutical Evaluation Section in the Australian Department of Health and Aged Care. Peter McManus is secretary of the Drug Utilisation Sub-Committee of the Australian Pharmaceutical Benefits Advisory Committee.

An earlier version of this paper was presented at the Commonwealth Fund International Symposium on Health Care Policy, "Quality and Innovation: Issues, Strategies, and Implications for Policy," in Washington, D.C., 11–13 October 2000.

NOTES

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1. See M. Angell, "The Pharmaceutical Industry—To Whom Is It Accountable?" New England Journal of Medicine 342, no. 25 (2000): 1902–1904.
2. Universal Currency Converter, <www.xe.net/ucc>.
3. The full guidelines are available from the Commonwealth Department Health and Aged Care, <www.health.gov.au:80/haf/docs/pharmpac/gusubpac.htm> (November 2000).
4. "Schedule of Pharmaceutical Benefits for Approved Pharmacists and Medical Practitioners" (Canberra: Australian Government Publishing Service, 1 August 2000).
5. S.R. Hill et al., "Problems with the Interpretation of Pharmacoeconomic Analyses: A Review of Submissions to the Australian Pharmaceutical Benefits Scheme," Journal of the American Medical Association 283, no. 16 (2000): 2116–2121.
6. Full results are in B. George, A. Harris, and A. Mitchell, "Cost-Effectiveness Analysis and the Consistency of Decision Making: Evidence from Pharmaceutical Reimbursement in Australia, 1991–1996" (Submitted to Pharmacoeconomics).
7. Unpublished data from the Drug Utilisation Sub-Committee of the Pharmaceutical Benefits Advisory Committee, Department of Health and Aged Care, Canberra, Australia.
8. S. Jacobzone, "Pharmaceutical Policies in OECD Countries: Reconciling Social and Industrial Goals," Labour Market and Social Policy Occasional Papers 40 (Paris: Organization for Economic Cooperation and Development, April 2000).
9. Health Insurance Commission, Canberra, Australia, <www.hic.gov.statistics/index.htm> (March 2001).

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