AUSTRALIA pays too much for generic medicines, say health economists who want further reforms to correct the large pricing discrepancies between Australia and other countries.

An editorial in the latest MJA revealed that the Australian Pharmaceutical Benefits Scheme (PBS) pays more than twice the international average for the cholesterol-lowering drug simvastatin 40 mg. (1)

From April this year, a new agreement between Medicines Australia and the PBS will see the price of many generic medications start to decrease, but experts say this will not be fast or effective enough.

Professor Philip Clarke, a health economist at the University of Melbourne, wrote that an international price comparison showed that the Australian generic supply price of simvastatin 40 mg was greater than that in any of 13 comparable OECD countries.

He told MJA InSight that although statins were the most prominent example, this type of price disparity was common in medicines that had come off patent in Australia.

Experts told MJA InSight that Australia had historically paid more for generics due to a number of factors, including exchange rate fluctuations, less competition in the pharmaceutical sector and more independent prescribing practices, compared with countries such as the US, where health maintenance organisations can stipulate which drugs are prescribed.

In his editorial, Professor Clarke wrote that pharmaceutical pricing in Australia was governed by a federal government agreement with Medicines Australia. (2)

The agreement included a provision to reduce the price of older medications on the PBS, starting with regulated reductions of up to 5% for existing off-patent medications and a 16% reduction after expiry of a drug’s patent. Prices will then be determined through a “price disclosure” policy, which requires pharmaceutical companies to reveal to the government the actual price at which they sell their products to pharmacies.

“The first round of these price disclosure reductions comes into effect in April this year. In some cases, the reductions are substantial (more than 50%), indicating that the real cost of many generics is well below the current PBS subsidy”, Professor Clarke wrote.

He explained that the government paid a fixed fee to pharmacists each time a drug was dispensed to cover the cost to the pharmacist of the drug, a mark-up by the pharmacist, and dispensing and any other fees. “For example, the dispensed price of generic simvastatin 20 mg is $34, $22 of which is intended to cover its wholesale cost. The results of the first round of price disclosures for simvastatin indicate that pharmacists have actually been paying, on average, $10 for this drug.”

Using data from Medicare Australia, Professor Clark was able to estimate that the total paid by the PBS to cover the wholesale cost of simvastatin amounted to around $150 million between May 2010 and October 2011. “Price disclosure data reveal that pharmacies only spent $70 million on the drug, due to discounts from manufacturers”, he wrote.

Professor Clarke said although price disclosure would produce significant reductions in the price of some off-patent medications, these would not be insufficient to bring the cost of drugs such as simvastatin and atorvastatin in line with prices overseas.

In New Zealand, the government had reacted to pricing problems in its health system by putting the supply of generic pharmaceuticals out to tender. It buys just one or two generic forms of a particular drug class such as statins.

As a result, after patent expiry the supply price of generic atorvastatin 40 mg, for instance, will be $5 in NZ compared with around $50 per script in Australia, Professor Clarke said.

Professor Jon Karnon, a health economist at the University of Adelaide, said such a system should be possible in Australia. However, he said the argument against such a scheme was that it limited patient choice and that some patients might react adversely to one form of statin but not another.

Mr Kos Sclavos, national president of the Pharmacy Guild, said that in NZ the policy that enacted low prices had seen manufacturers leave the country, making the medicines budget a balance of payments problem for NZ.

Mr Sclavos said the medicines partnership in Australia was about to release data that showed the system was “working very well in achieving savings via the competitive pressure in the Australian price disclosure policy”.

“The price disclosure policy has been achieved by significant sacrifice and savings by the whole sector”, Mr Sclavos said.

A spokeswoman for the Department of Health and Ageing said statins were being sold by manufacturers to pharmacists at an average weighted discount of around 55%. She said some companies sold them for more and some for less, but based on all the prices charged and volumes sold, the average was around 55%.

University of NSW clinical pharmacologist, Professor Ric Day, said more information was needed about who was actually making the money under the current system — the pharmacist or the manufacturer.

“I think it’s a fair question, given that the price difference is still so big despite these reforms. A light should be shone on this”, he said.

The department spokeswoman said Australia consistently paid some of the lowest prices in the world for new and high-cost medicines and this is recognised by the OECD. (3)

“In fact, these medicines represent around 66% of the total cost of the PBS”, she said.

1. MJA 2012; 196: 153-154
2. PBS: Memorandum of understanding, September 2012
3. OECD 2008: Pharmaceutical Pricing Policies in a Global Market

Posted 20 February 2012

2 thoughts on “Generics pricing needs major overhaul

  1. Dr Michael Ortiz says:

    In Australia, statins represent about 17% of total PBS spend on medicines. The PBS listing of a generic statins results in an immediate 16% price cut, followed by market-based price reductions every 12 months.
    Professor Clarke raises the lag time in price cuts and suggests a tender process to drive prices down more quickly. The NZ tender model indicates that this will lower prices. However, when you only have one or two suppliers, then there could be significant “out of stock” problems for these lowest cost products, many of which are manufacturer overseas.
    Do we also want to see the same disinvestment by the pharmaceutical companies as has happened in NZ? Furthermore, the generic discounts that pharmacists receive were factored into the 5CPA agreement between the Guild and the Government in return for no change in the dispensing fee for two years. Will a change to the system result in pharmacists clawing back these savings through increased dispensing fees?
    Another concern with the proliferation of generic products, is the potential for patient confusion when patients have multiple switches between different brands of the same molecule.

  2. Kim Bulwinkel says:

    It will be interesting to watch how many more drugs become no longer available as we single-mindedly cut drug company profits. It is already happening. I am just being the devil’s advocate here.

    Decisions have consequences!!

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