In most developed countries, governments provide some form of subsidy for medicines to ensure equity of access, independent of individuals' financial circumstances. In Australia, we have the Pharmaceutical Benefits Scheme (PBS) which provides a government subsidy for the full cost of medicines above a patient co-payment. This is a large and visible budget item (around $2.5 billion in 1998) and acts as an enticing target for cost-cutting measures. However, arbitrary cost-cutting in the pharmaceutical area can have perverse consequences in other health areas e.g. by increasing costs due to hospitalisation. In recognition of this, the government introduced legislation to incorporate cost-effectiveness considerations when drugs are considered for listing on the PBS.

Cost-effectiveness looks at the net cost of achieving a particular type of health benefit after incorporating cost offsets. The 3 major factors in this are:

  • the cost of the drug and related treatment costs
  • the size of the health benefit achieved
  • cost offsets due to savings e.g. in other drugs, nursing time, doctor visits or hospital stay

The National Health Act requires the Pharmaceutical Benefits Advisory Committee (PBAC) to consider effectiveness and cost, including comparative effectiveness and cost when recommending drugs for the PBS.

The cost-effectiveness provision of the National Health Act was implemented by introducing a formal process requiring economic data to be submitted with applications for PBS listing. In general, the pharmaceutical industry has supported the approach, as it demonstrates the health benefits and cost savings due to drug treatment. There has been extensive and continuing consultation with the pharmaceutical industry. In particular, the guidelines for submissions have been developed with industry and continue to undergo a process of updating and change. Although the guidelines are detailed, this is largely because of requests from industry. Companies want to know that when they put in a submission it will address the criteria used to assess it. As this was a relatively new area, it seemed important to have the ground rules laid out for both sides to help avoid misunderstandings. Although Australia was the first country to require mandatory economic analysis, a number of other countries (e.g. Canada, France and the U.K.) are now introducing, or considering introducing, similar requirements. The private sector, in the form of health maintenance organisations, has also been active in this area for a number of years. Consequently, industry is increasingly incorporating the routine collection of economic data into the drug development process.

Cost issues
There are costs for both industry and government in implementing and operating the requirement for economic analysis. However, the benefits have been substantial. From the point of view of government, the PBAC is now able to make recommendations for drug subsidies with good evidence. Judgements on value for money are still required, but the basis for making those judgements is now explicit even if the process is confidential.1 From the point of view of industry, much uncertainty has been removed from the system, as the rules are transparent, and companies can be sure that they will be treated equally.

The requirement for economic analysis is not a cost-containment measure, and indeed, could result in an increase in the rate at which spending on drugs increases. In Australia, the expenditure on the PBS continued to increase despite the introduction of economic analysis. The government has used other measures to contain costs, such as the therapeutic group premium policy and generic substitution. Further, there is some evidence that the prices paid for new drugs on the PBS have come closer to world average prices since the requirement for economic analysis was introduced.

The cost-effectiveness requirements are usually not in terms of the absolute cost-effectiveness of drugs (compared to no drug treatment), but consider the marginal benefits arising from adding a new drug to an area where the treatment options may already be quite good. For example, the drug treatment of hypertension is clearly a cost-effective strategy. However, there are already effective treatments, and it is difficult to produce new drugs where the added benefits outweigh the extra cost.

Cost-effectiveness can be put simply as 3 questions:

  • If a new drug is not as good as current therapy, because of poorer effectiveness and/or increased toxicity, why should the Australian taxpayer subsidise it? In fact, the National Health Act states that such drugs should not be listed for subsidy.
  • If a new drug is no better than existing therapy, why should the taxpayer pay more for it? In this case, cost minimisation would be applied - same value, same price.
  • If a new drug provides added benefit over existing therapy, does the cost of this extra benefit represent value for money? The cost-effectiveness (net cost per health outcome) would need to be acceptable.

A problem with the application of economic analysis to the pharmaceutical area is that it is not applied equally to other health interventions. This results in the criticism that the pharmaceutical area is being treated `unfairly'. However, this does not mean that the economic approach in the pharmaceutical area is not a good one, but rather that the approach should be widened to include other health interventions. The government is actively moving in this direction.

Finally, the costs and benefits of drug treatment should not be considered in isolation, but incorporated in a co-ordinated national health policy. This would allow better recognition of the savings which occur in other sectors of the health system as a result of drug treatment.


D.J. Birkett

Chairman, Pharmaceutical Benefits Advisory Committee

Professor of Clinical Pharmacology, Flinders University of South Australia, Adelaide