Australian PBS and Its Enlightenment to Drug Price Reform in China

ZHENG Qi, ZHANG Fang(School of Business Administration, Shenyang Pharmaceutical University, Shenyang 110016, China)

Australian PBS and Its Enlightenment to Drug Price Reform in China

ZHENG Qi, ZHANG Fang
(School of Business Administration, Shenyang Pharmaceutical University, Shenyang 110016, China)

Objective To study Australian Pharmaceutical Benefits Scheme (PBS) and to provide references for drug price reform in China. Methods The real-time information from the PBS website was searched and literatures on health care system in Australia were studies to sum up the process and methods of PBS. Results and Conclusion Australia effectively controls the growth of medical expenses and the average price of medicines is 30%–40% lower than OECD’s through strict control of PBS and setting the rational prices. The introduction of PBS and the control of drug price has a guiding significance in promoting drug price reform in China so as to lower drug prices reasonably.

drug price; pharmaceutical benefits scheme; Australia

In order to implement the spirit of the Party’s eighteenth plenary session and deepen the reform of the medical and health system, the National Development and Reform Commission issued “the reform scheme of enhancing pharmaceutical price (draft)”, which clearly stated that the National Development and Reform Commission intended to cancel the policy that the government sets drug prices, which means that the prices will be set by market competition through controllin g medicare costs and bidding[1]. 23% of China’s government pricing products in pharmaceutical market will be set by the market, involving more than 2700 kinds of drugs[2].

Australia’s national life expectancy ranks second in the world, and it is regarded as a model of health service system by WTO. Although China and Australia have different social systems, their hospital management and Medicare system have similar problems. PBS is a key component of Australia’s health system and has been in existence for over 60 years, and it also helps to achieve a reasonable control of drug prices. Therefore, summing up the principles of PBS selection in Australia and the method of drug pricing has an important guiding significance for promoting China’s pharmaceutical price reform.

1 Introduction of Australian medicare

Australian Medicare started in 1953, it mainly includes three aspects: (1) Medical benefit scheme (MBS), it is used primarily to compensate for the cost of outpatient treatment; (2) Pharmaceutical benefits scheme (PBS), it is mainly used to compensate the patients’ medication cost (the costs refer to the medication costs of patients outside the hospital), patients only pay part of the cost of drugs and the rest will be compensated by the government; (3) Inpatient services.

2 Australian pharmaceutical benefits scheme

2.1 Background of pharmaceutical benefits scheme

Pharmaceutical benefits scheme (PBS) was established in 1948, and the Pharmaceutical Benefits Advisory Committee (PBAC) was formally set up in 1953. Initially PBS catalog covered only 137 kinds of drugs[3](mainly for first aid use or disease prevention). It gradually expanded its scope of free pharmaceuticals to the elderly and the disabled (according to the BP). At the beginning, PBAC only provided advices on the comparison of clinical effect, data quality and economic evaluation models of rationality for PBS pharmaceuticals without considering the prices. Drug prices were set through negotiation between the Ministry of Health and pharmaceutical companies, which resulted in the soaring prices of PBS. Thus, from 1987 to 1992, a series of positive measures were taken to control drug prices by Australia’s government, such as selecting drugs and giving subsidies to these drugs, managing theprescription by giving subsidies to pharmacists and generic drugs replacement. The analysis of pharmaceuticals costeffectiveness was taken as a norm for drug pricing by PBAC in 1988, and Australia began to fully consider the impact of Australia’s pharmaceutical companies to the overall economic development.

2.2 The department of pharmaceutical benefits schemes

(1) Therapeutic Goods Authority (TGA) is responsible for drug registration and approval for sale; (2) Pharmaceutical Benefits Advisory Committee (PBAC) is an independent organization appointed by Australian Government (members include doctors, health professionals, health economists and consumer representatives). PBAC is responsible for the evaluation of efficacy and costeffectiveness of drugs and vaccine and recommending the pharmaceuticals listing in the PBS basic catalog to the Minister of Health[4]; (3) Pharmaceutical Benefits Pricing Authority (PBPA) is responsible for suggesting drug prices of PBS to PBAC.

2.3 Introduce of pharmaceutical benefits schemes

The purpose of PBS is to provide people (including Australian residents and eligible residents from other countries) with timely, affordable and cost-effective drugs. Meanwhile pharmacists can obtain compensation by prescribing alternative drugs, which will ensure the healthy functioning of the pharmaceutical market.

PBS, as a basic prescription drug costs subsidy program, has developed into a wider coverage of insurance project. The government has listed most conventional drugs (including drugs widely used in clinical) in the PBS directory as essential drugs and the prices of those drugs are lower than market price. While many essential drugs can get subsidies from the government based on the cost of a patient’s prescription as co-payments. This ensures the patients to get drug therapy with a more reasonable payment (from 2010 to 2011, PBS subsidized more than 760 medicines available in more than 1,960 forms which were sold in more than 3,950 different brand names)[5].

3 Drug selection for PBS catalog

3.1 Process of selection

Australia has a strict drug selection process for PBS catalog, the process is mainly based on PBAC guideline. The following are the steps: (1) Seeking advice from the Pharmaceutical Evaluation Branch, PEB (Optional but recommended); (2) Making an application to PBAC (The safety and effectiveness of drugs must have been approved by TGA, allowing to be on the market); (3) Submitting the documents according to a series of comprehensive guidelines (mainly Pharmaceutical Economic Evaluation Guide) related to drug safety and effectiveness to PBAC for the entrance of PBS catalog; (4) Starting a communication between PBAC and pharmaceutical companies about clinical effectiveness, cost-effectiveness and sending a response to pharmaceutical companies; (5) Communication of PBAC outcomes; (6) Submitting drug pricing details and documents on prescriptions, efficacy stability and scale benefit; (7) Reaching agreements to share risk; (8) Confirming the agreed price; (9) Agreement on usage estimates; (10) Formal advice of listing[6].

3.2 Mechanisms for selecting drugs in PBS

PBAC requires that drug manufacturers who want their drugs to enter PBS should submit documents related to drug safety, effectiveness and cost. Once their drugs can be proved to be more effective and/or less harmful than the currently listed drugs and their prices are lower than the current drugs, they would be taken into PBS[3]. In order to analyze the cost effect, PBAC proposed the draft guideline of pharmacoecomics evaluation in 1991 which was formally introduced in August 1992. In Jan 1993, PBAC formally implemented pharmacoeconomics evaluation guideline which required applicants should provide additional information on pharmaceutical economics evaluation results and other related documents. In 1995, the second version came into effect. This time it emphasized the use of randomized controlled clinical trials and systematic reviews of biomedical literature concepts. And it was constantly revised and improved to emphasize the importance of all randomized clinical trials and the methods of trials. The main part of application must include: (1) The purposes of drugs and the drug details; (2) The main indications of randomized controlled trials; (3) The evaluation of economic models of the main indications; (4) The cost implications and the effect of drug use.

4 Setting drug prices in PBS

4.1 Method of setting drug prices

(1) Benchmark pricing. This method is based on theessential drugs (essential drugs: lowest-priced drugs in the treatment of sub-categories, and the companies are willing to accept the lowest price). If the drug could prove its clinical effectiveness and cost-effectiveness with an advantage over the existing essential drugs, it would make the price higher than the basic. If the pharmaceutical companies offer a much lower price than the existing directory drug prices, the drugs in PBS must submit information to prove the costeffectiveness, or they will be forced to cut prices. Most of drugs in PBS use this pricing method; (2) Cost plus. A reasonable discrimination price is added to a drug pricing based on the cost. This depends on the accurate and reliable cost information provided by pharmaceutical enterprses (not including the cost of sales, marketing expenses and general management expenses). The discrimination price is made mainly based on the factors such as drug prices set by pharmaceutical enterprises, anticipated amount of drug usage and the drug prices in neighboring countries.This method is usually used when PBS sets prices for basic pharmaceuticals or the drug applying for the only one in subclasses; (3) Weighted average monthly treatment cost. By calculating the weighted monthly drug treatment costs in subclass, the selection of drugs and prices setting can be made in comparison with the drugs. It is actually a variation to set prices, and it is generally used to set prices for chronic disease drugs.

Figure 1 PBS listing process

4.2 Pricing basis

When drugs got the approval from PBAC, PBPA will negotiate with the companies to form a PBS admission price. The negotiation largely relies on: (1) Related contents of drug economics evaluation. To ensure cost-effectiveness of drugs in PBS catalog, the economics evaluation was required as an essential consideration; (2) Recommendations from PBAC. While PBAC gives advices on PBS listing, it will provide the reference report about the cost-effectiveness to PBPA, which includes the suggested price and the price in OECD (mainly in Britain and New Zealand), the price of similar medicines in PBS, price calculation and profit margins, etc.

5 Mechanism of price controls in Australia

Patients get medication subsidies from PBS through its insurance directory. During the process of relieving subsidies, the government mainly controls four aspects: (1) The selection of drugs for PBS catalog; (2) Taking the PBS drugs as a reference price for insurance; (3) Determining compensation for the discrepancy; (4) Regulating pharmacist prescription by following the pharmacists act, controlling the quantity of pharmacists to reduce the use of high-priced drugs.

5.1 Controlling drug prices through PBS selection and subsidies

The PBS catalog almost covered 90% of drugs in Australia, so even though pharmaceutical companies got the marketing authorization from TGA, they can not sell the drugs at any price in the market. They have to negotiate the prices with PBPA to enlarge the market capacity. The government controls drug prices through this method.

At the same time, although the government allows a higher price for the drug which can demonstrate the superiority in terms of clinical and cost-effectiveness (belonging to the particular patient financing method), PBS only covers the lowest cost of similar drugs in the copayment system and, the excess cost over PBS subsidized price must be paid by the patients. Therefore, the patients usually do not choose the drugs with high self-paying ratio which limit the amount of high cost drugs. The government controls drug prices through the co-payment mechanisms.

5.2 Managing the prescription by giving subsidies to pharmacists

Pharmacists’ main incomes in Australia come from drug price differences from the wholesale and retail as well as the prescription fees[7]. The relevant laws in Australia prescribe that drug price differences from the wholesale and retail can float within a certain range (i.e. low-price drugs have high price differences rate and high-price drugs have low price differences rate) (as Table 1). This leads to the different incomes for pharmacists. Meanwhile, the subsidies for pharmacists from the Ministry of Health are only based on the basic price, and the excess cost should be paid by patients, which is not covered by the deductibles (the highest co-pay of safety net). The subsidies given to the pharmacists come from margin between individual payment (safety net) and basic price in PBS. In addition, patients do not want to pay more for high-priced drugs. This encourages pharmacists to select drugs in PBS, which can avoid the abuse of high-priced drugs.

Table 1 Price differences from wholesale and retail for different drugs

5.3 Generic drugs replacement

Australian government also controls the rising drugprices by encouraging the use of generic drugs. Pharmacist can replace the prescription drugs with drugs of the same chemical composition in PBS to offer patients more opportunities of pharmaceutical payment level (In 2008 PBS started a cost-control reform which encouraged pharmacists to use the generic drugs. Each replacement pharmacists could get 1.5AUD$ from PBS). Meanwhile, the Ministry of Health just reimbursed the basic price of every generic drug which also limited the sale of high-priced drugs.

Table 2 Fees, patient contributions and safety net thresholds

6 Conclusions

6.1 The problems of China’s drug prices

(1) There is the phenomenon of inflated drug prices in China which results from the rebates and discounts given to the hospitals and pharmacy to occupy a high market share by the pharmaceutical companies. And they put this part of cost into pharmaceutical market price which leads to the high sales price. The big price difference of the similar medicines and same therapeutic function causes the inflated drug prices; (2) The inflated drug prices deviates from the basic principles of economics. As a commodity, drug price must be affected by the market supply and demand. But the oversupply of drugs in China’s pharmaceutical market is serious, and the drug sales price is much higher than its true value.

6.2 Enlightenment on China’s drug prices reform from Australia

First, the government should fade from drug pricing areas, once the decentralization occurs, market will better perform the function. In China, pharmaceutical companies report the cost of drugs to NDRC and it will examine and approve drug prices. But the NDRC can hardly take control of the real cost. The government sets the ceiling price for drugs without taking the adjustive functions of market into consideration which leads to an increasingly high drug prices.

The decentralization of NDRC is just the beginning. In order to ensure the success of drug prices reform, a more scientific and rigorous system must be set up. Drug prices negotiation mechanism should be used for the less competitive drugs in the market. We can learn the following tips from Australian PBS selection:

First of all, strengthening cooperation between government departments, health insurance apartment should play an important role in the price-setting. The health insurance department must make the standard rulesof insurance payment so that it can sign contract with medical institutions according to its funds. The standard of Medicare payment and drug prices should be based on the number of patients and the workload of hospitals on previous years to keep drug prices at a reasonable level. Taking the co-payment mechanism of Australia as reference, we can give the same subsidies to the drugs with the same generic names. Patients have the freedom to choose and the excess will be paid by patients. This can not only make the health insurance fund benefit more people, but also allow pharmaceutical companies to participate in market competition fairly.

Secondly, a number of ways can be done to eliminate“covering hospital expenses with medicine revenue”. The implementation of the model of “hospital and medicine separation” should be deepened, a unified and efficient system of health care, health insurance and the overall price management should be set up. The mechanism that hospitals must participant in the bidding as a main negotiator to save procurement costs which will be given to them must be established. An initiative to investigate doctors who receive a rebate from pharmaceutical companies should be taken. Cut off the illegal income of medicines for medical institutions and medical personnel. We can take the general medical services of Australia as reference. In Australia, the incomes of hospital and doctors are not related to medicine expenses. Market can play a role in regulating the doctors’income. The quality of service is the key to the income of doctors. Social pharmacies are encouraged to sell the lowprice generics to reduce the phenomenon of abusing highpriced drugs caused by “covering hospital expenses with medicine revenue”.

Thirdly, the national pricing negotiation mechanism should be established by setting up a negotiating committee and the repository of drug prices. Trade associations and related expert advisory groups should be used to form multi-party consultation and perfect drug pricing system. Taking the admission process of PBS as reference, we can set up a special negotiating body in the Ministry of Health. Meanwhile, pharmaceutical companies, physicians, consumers (third-party professional insurance agencies on behalf of consumers are allowed to get involved, these commercial health insurers will negotiate with great power due to the stakeholders, and they have more professional points of views than the consumer) are taken into the pricesetting process[7]. At the same time, the negotiations for reducing drug prices must be at a moderate level. The information of new drug prices in different countries should be collected as the international reference prices without discouraging new drug research and development. Then, referring to the Pharmacoeconomics Evaluation Guidelines of Australia, we can implement the economics evaluation that adapts to China’s situation as soon as possible to guide rational drug access and pricing.

Finally, the functions of Pharmaceutical Prices Commission (PBPA in Australia) must be clear in that it just negotiates the prices of medicines, and the price setting should be made by relevant departments of the government (the Ministry of Health).

[1] The National Development and Reform Commission. The Reform Scheme of Enhancing Prices of Medicines (Exposure Draft) [Z]. 2014-11-27.

[2] More than 2700 Kinds of Chinese National Drug Pricing is Expected to be Achieved by Market [N]. First Financial Daily (Shanghai), 2014-11-27.

[3] GONG Xiang-guang, HU Shan-lian. Impression of Australian Experience to Chinese Drug Pricing Regulation [J]. Chinese Health Economics, 2002, 21 (11): 47-50.

[4] Submission Structure for a Major Submission [EB/OL]. http://www. pbac.pbs.gov.au/, 2013-02-01.

[5] Cost Recovery Impact Statement [EB/OL]. http://www.health.gov. au, 2013-06-30.

[6] The PBS Listing Steps [EB/OL]. http://www.pbs.gov.au/info/ industry/listing/listing-steps, 2014-07-09.

[7] MAO Wen-hui, LIU Hua, CHEN Wen, et al. Introduction of Australian Drug Pricing System and Its Revelation to Chinese Drug Regulation [J]. Chinese Health Resources, 2012,15 (5): 427-430.

[8] Participants in the Listing Process [EB/OL]. http://www.pbs.gov. au/info/industry/listing/participants, 2014-03-19.

Author’s information: ZHANG Fang, Associate professor. Major research area: Health economic policy evaluation and pharmacoeconomics. Tel: 15040165700, E-mail: xzhangf@126.com