Big pharma--bullies in the PBS: Hans Lofgren shows how US pharmaceutical companies are undermining the PBS.

The Pharmaceutical Benefits Scheme (PBS), one of the enduring legacies of the Labor social policy reforms of the 1940s, is administered by the Commonwealth Department of Health to allow 'equity of access' to necessary prescription drugs. In the past the PBS has weathered pressures for greater reliance on 'free markets' with considerable success. But persistent drug industry lobbying, boosted by the Australia-US Free Trade Agreement (which came into force on 1 January 2005) has led to a weakening of the program's core underpinnings.

At a joint press conference with the US Trade Representative in March 2006, Deputy Prime Minister Mark Vaile announced that 'the core principle that we both agree on in this area ... is recognising the value of innovation'. Using precisely this language, the pharmaceutical industry has for decades criticised the PBS for paying inadequate prices. What riles the industry is that the PBS is designed to extract relatively favourable drug prices through the application of government purchasing power. US trade negotiators--notoriously close to the major drug companies--are now attempting to use the Free Trade Agreement to push down price controls. A recent Medical Journal of Australia article notes that negotiators were explicitly instructed to achieve, through the Free Trade Agreement, 'the elimination of government measures such as price controls and reference pricing which deny full market access for United States products'. To date, this aim has not been achieved, and the PBS retains strong popular and political support. However, recent changes to PBS pricing procedures do appear to be headed in the direction of meeting international drug industry expectations.

The PBS eliminates the risk, in most circumstances, of major financial hardship ensuing from pharmaceutical costs in case of illness or injury. In 2005-06, pharmacists dispensed 168 million PBS subsidised prescriptions (about eight per capita), accounting for approximately 72 per cent of all prescriptions. In addition, in the same year, around 33 million PBS prescriptions did not appear in the official statistics because they were priced below the general co-payment and paid for entirely by the consumer.

The central element of the complex PBS system is the Pharmaceutical Benefits Advisory Committee. This expert committee makes recommendations to the Health Minister on the listing of new products on the PBS. For listing, a new product must deliver efficacy and/or safety equal to or better than an already available alternative. A price acceptable to the PBS is then negotiated through the Pharmaceutical Benefits Pricing Authority. 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, based on a comparative analysis of therapeutic benefits against costs.

The PBS operates as the de facto second stage of Australia's system of drug regulation, following marketing approval by the Therapeutic Goods Administration. 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. US trade negotiators, however, and as explicitly stated by the US Department of Commerce, view the PBS as a price control system which damages the interests of US drug companies.

Under the Australia-US Free Trade Agreement, Australia has recently agreed to 'improvements in process and transparency in relation to the operation of the PBS'. A direct outcome is the introduction of an independent review mechanism, available when an application for listing on the PBS has been rejected by the Advisory Committee. The review cannot overrule the PBAC but its findings go back to the Advisory Committee for reconsideration. The significance of this new arrangement remains uncertain, though clearly it provides a new avenue for industry lobbying.

A Medicines Working Group has also been established, consisting of 'high level officials on medicines policy from both Australia and the US'. Deliberations within this group are not publicly disclosed, but a brief communique from its second meeting in Sydney in April 2007 reports that discussions were 'constructive and informative'. The meeting agreed on 'the importance of pharmaceutical research and development to continued improvement of healthcare outcomes', familiar code for 'rewards' through higher prices for patented drugs. That the US-Australia relationship is highly skewed, economically and politically, is well illustrated by the Australian Government's agreement to engage in formal talks with US officials about Australian medicines policy. It would be absurd, of course, to expect reciprocity; imagine formal deliberations between Australian and US officials about US medicines policy (the only industrially developed country without universal drug insurance).

A truly original medicine, which opens up a whole new area of therapeutic intervention, occasionally becomes available, but this is uncommon. Most new drugs are similar to existing medicines and are for pricing purposes 'referenced' by the PBS against already listed competitor products. Reference pricing, a basic premise of the PBS system, seeks to ensure that drugs that produce similar health benefits are priced similarly. The critical question that arises is: precisely which products should be considered interchangeable and be assigned the same subsidy? That alternative brands of the same drug (the originator products and their generic equivalents) may be substituted is now universally accepted. But where are the lines to be drawn where products have similar therapeutic effects without being chemically identical? Should patented products be referenced against off-patent drugs that deliver similar therapeutic effects? Here opposed perspectives clash: 'innovator companies' seek premium pricing for all new patented drugs, irrespective of the extent of their marginal benefits compared with previously available alternatives. In contrast, the mandate of the PBS is to deliver cost-effective outcomes for tax payers.

Since 1994, pharmacists have been able to substitute a cheaper generic product for the prescribed brand medicine if accepted by the patient and not explicitly vetoed by the doctor. In the United Kingdom and the United States, and several European countries, more than 50 per cent of prescriptions are dispensed as generics. In Australia, the proportion is around 25 per cent. PBS pricing arrangements (which price generic medicines at the level of the originator brand) have largely precluded Australian tax payers from benefitting from the ready availability of cheap generic medicines. As the number of major drugs facing patent expiry has multiplied, pressures for lower prices for generic drugs have become increasingly compelling, and the government has been grappling with the issue of precisely how to generate 'better value' from generics. As noted in a Parliamentary Library paper, the outcome of deliberations with pharmacists and various sections of the drug industry is a model that 'bears most similarity to that proposed by the [brand] medicines industry'.

Most OECD countries apply some form of reference pricing, an approach always criticised by the drug industry, which resents, in particular, the inclusion of patented and out-of-patent products in the same reference group. In Australia, until recently, therapeutically similar products were grouped together, irrespective of patent status, and the PBS subsidised each of these products to the level of the lowest priced drug.

This is now changing as a consequence of legislation passed in June 2007 that brings in a major restructuring of PBS pricing arrangements. Through lengthy behind the scenes discussions, the government arrived at a reform package supported by the major interest groups, most importantly the association representing 'big pharma'--Medicines Australia--and pharmacists--the Pharmacy Guild of Australia. The new pricing arrangements are intended to rein in both unnecessarily high PBS prices for generic medicines and the large discounts ('secret kickbacks') provided to pharmacists by the suppliers of generic medicines.

The role of Medicines Australia in the formation of the new policy may seem surprising, since originator products are likely to increasingly lose market share in the next few years. But the trade-off for its member companies is a weakening of the reference pricing system. The PBS formulary has been divided into two: F1 for single-source, mostly patented medicines; and F2 for multi-source (generic) medicines. F2 is further divided into two groups: F2A, where price competition between brands is low, and F2T, where competition between brands is high (with large pharmacy discounts provided).

Prices for F2 products will be subjected to mandated price cuts from 2008 (2 per cent over three years for F2A and a one-off price drop of 25 per cent for F2T products). Price disclosure, that is, a requirement that the actual price paid by pharmacists be made known to the government, will be introduced over time for drugs in both groups. Pharmacists will be compensated for the impact of these adjustments in the period of the current government- Pharmacy Guild agreement through increases in the dispensing fee and the mark-up, and some other new incentive payments.

A further reason for Medicines Australia to support these changes is that its member companies are the suppliers, directly or indirectly, of many generic drugs. When launching the new policy, Health Minister Abbott asserted that '70 per cent of the Australian generics market is occupied by companies which are not members of the Generics Medicines industry Association' but members of Medicines Australia. Indeed, in Australia and internationally, the historical dividing line between the generics and originator sectors has been much weakened. This is demonstrated by the prevalence of 'authorised generics', also known as pseudo-generics or fighting-brands. This refers to brand-name products given a generic label sold by the brand-name manufacturer either directly or through a subsidiary or a generics firm licensed to sell the authorised generic. Authorised generics are now common in Australia.

In addition to the Free Trade Agreement-related policy changes, it is concerning that full cost recovery for the PBS listing process, through fees paid by pharmaceutical companies, will apply from January 2008. This will make the perspectives and needs of the industry even more central to the administrators of the PBS. The risk with this model is captured by the proverb 'He who pays the piper calls the tune'. The Therapeutic Goods Administration already operates on a cost-recovery basis by charging industry fees for services provided. The Therapeutic Goods Administration and the Pharmaceutical Benefits Advisory Committee are expected to operate in the public interest, and not only as a provider of company services, and their dependence on industry funding is ominous. The Australian Medical Association warns that 'the Government's cost recovery plan will undermine the independence of the [Pharmaceutical Benefits Advisory Committee] and provide the pharmaceutical industry with another line of attack against [its] decisions'. In the United States, cost recovery through industry fees for the Food and Drug Administration is highly contentious. Scandals such as the Vioxx controversy have led to accusations of industry capture of the regulatory authority. As Philip Mirowski in Social Studies of Science puts it, the Food and Drug Administration 'really exists these days primarily to validate the market strategies and information control regime built by Big Pharma'.

The PBS is one of the most robust components of Australia's welfare state. It is an integral part of a 'national medicines policy', which has four interrelated objectives: reliable and affordable access for the Australian community to necessary drugs (PBS); the timely introduction of safe, efficacious and high-quality products (Therapeutic Goods Administration); the development of a robust pharmaceutical industry that provides economic benefits; and quality use of medicines to improve health outcomes. This way of framing Australian drug policy gives expression to compromises between conflicting interests and perspectives. Yet advocates of health equity and social justice face the perennial challenge of mobilising in support of the PBS (and indeed Medicare) when its integrity is threatened by step by step adjustments influenced by neo-liberal ideas and industry pressures.

Hans Lofgren is Director of Deakin University's Master of Politics and Policy program.