Trading In Our Health System? The Impact of the Australia-US Free Trade Agreement On the Pharmaceutical Benefits Scheme

By Dr K Lokuge and Richard Denniss

The US Trade Representative has publicly stated that Australia's Pharmaceutical Benefits Scheme (PBS) is considered a barrier to trade.

The PBS was established in 1948 in response to concerns that not all citizens could afford expensive new medicines such as penicillin.

Important elements of the PBS include the manner in which drugs are chosen for inclusion in the scheme and the prices paid by the Commonwealth government to the pharmaceutical companies. The selection and pricing process relies heavily on a cost-effectiveness analysis which ensures that the prices paid for a new drug is determined primarily by the therapeutic benefits that flow from its use. According to one international expert, Professor Richard Laing of the Boston University School of Public Health, the PBS is the best in the world.

This paper presents evidence of the huge cost involved if the government implements the changes sought by US drug manufacturers. If the price of pharmaceuticals were to rise by $2.4 billion (as is estimated by the Productivity Cmn is price controls are lifted) and the Commonwealth govt decided to absorb half the increase through the budget and pass half on to the sick, then the cost of co-payments for concession card holders would still need to rise by 125%.

If Australia were to deregulate under the proposed free trade agreement it would lead to a surge in direct to consumer advertising aimed at inducing patient demand for more expensive medicines and it would probably lead to a substitution of pharmaceutical approaches for more appropriate lifestyle therapies in the treatment of illnesses such as obesity and smoking.

The only winners will be US drug manufacturers. By design the PBS combines the buying power of the government with extensive cost-effectiveness analysis to ensure Australians pay the lowest reasonable prices for their pharmaceuticals. Drug companies are not compelled to sell their products under the PBS; they choose to do so because it is profitable.