Australia was one of the first countries to require economic evaluation of new pharmaceuticals before agreeing to subsidise their cost in a national health scheme. This system has been operational for over 5 years, so an evaluation is timely.

To test whether economic analysis is working, the costs of the process can be compared with its outcomes. The comparison may depend on the perspective of the assessor, and I obviously present a view from the pharmaceutical industry.

In 1987, the National Health Act of Australia was changed to incorporate the consideration of cost and effectiveness before a drug could be listed on the Pharmaceutical Benefits Scheme (PBS). However, mandatory cost-effectiveness submissions were only required from 1993. Guidelines1 for the preparation of cost-effectiveness submissions by industry are set by the Pharmaceutical Benefits Advisory Committee (PBAC). These guidelines describe the evidentiary requirements and attempt to produce elements of uniformity in submissions from industry.

The compliance costs
The early experience of industry after the introduction of cost-effectiveness was that economic analysis was onerous2, that the guidelines were inflexible and that they emphasised data validity rather than community impact.3 The Industry Commission later identified the process as complex, leading to unnecessary delays and restricting prescribing freedom.4 The more recent Australian National Audit Office report into the PBS noted that the guidelines have become more complex and have produced an increased workload within the process.5

The drivers of compliance costs
The complexity (which increases cost) in the PBS system is progressive and self-reinforcing. This is partly due to the activities of industry in evolving the collection and interpretation of data. It is also due to the evolving sophistication of the evaluation process. These two factors act in a positive feedback loop and progressively raise the level of sophistication and complexity with time.

To illustrate the range of complexity, consider the calculation of equivalence of two drugs. At one end of the spectrum of complexity, their average effects can be compared at the most widely used doses. At the other end of the spectrum, equivalence can be mathematically derived by calculating the difference between each product's dose response curves for each indication, for each patient with adjustments for any time effects of disease.

The first approach is simple, easy to understand, the data are readily available, but the answer is imprecise. The second is complex, difficult to analyse, the data are scarce, but the answer is precise.

The level of complexity is probably self-limiting as there are limits to the availability of data and the ability of decision-makers to deal with the complex calculations. The PBS listing process should, and often tries to, strike a balance between what is practical and what is desirable.

The returns of economic analysis
The PBS listing process is the second round of evidence-based evaluation of pharmaceuticals; the first round is evaluation by the Therapeutic Goods Administration (TGA).

To industry, the added cost of this second round needs to be justified by increased returns, generally through higher prices. Unfortunately, prices have not increased much under cost-effectiveness. Before the imposition of mandatory cost-effectiveness, the prices of leading products in Australia were 55% of `world' prices, whereas in 1995, using a similar method of calculation, they were 54% of OECD prices.6 In 1995, new products were initially priced at 70% of OECD prices6; however, PBS-listed pharmaceuticals have a flat or, more recently, negative price growth. Prices for PBS-listed pharmaceuticals in 1997 were at the level they were in 1992 after reducing consecutively every year from 1993 by an average of 1% per year.7

Economic evaluation has produced a small absolute increase in returns for new products. Returns relative to what they may have been under the previous system are probably somewhat higher. It would be fair to say that mutual returns to society and to the industry are probably higher than they would have been in the absence of evidence-based economic evaluation.

PBS program efficiency and the future
For government, the measure used to assess the PBS is expenditure - unadjusted for population growth or inflation.8 The impact of the PBS is not routinely assessed in terms of outcomes achieved such as comparing costs with, for example, national health targets. This means that the PBS is not properly assessed in terms of efficiency and that central government scrutiny is limited to the growth in the costs of the PBS.

As a result, industry is confined to presenting a case for increased funding at the micro or evaluation level rather than at the macro or national level. Since the allocation of funds to the PBS is not the domain of the evaluation process, there is a degree of conflict with the political process, particularly when costs increase at a rate greater than that deemed to be politically acceptable.

This creates a paradox: the evaluation and recommendation process should improve the efficiency of the PBS, even in the absence of specified efficiency targets or cut-offs. Conversely, central government scrutiny penalises any efficiency gains if these increase expenditure.

Put simply, if the PBS economic evaluation system worked, you would expect to see PBS expenditure grow relative to other expenditure. It generally does, but it is counter-productive to use this increased expenditure as a trigger to alter the system, as with the imposition of therapeutic reference pricing in 1997-98.

If the system is to work in the long term, central allocation of funds needs to be in concordance with health objectives. This may require fundamental changes to health funding in Australia as there are many conflicts and inconsistencies within the system. If governments wish to continue controlling the market for primary medical care in Australia, but do not address the funding distortions in the system, then the incentive for industry to invest in Australia will be poor.


Mendel Grobler

formerly Manager, Health Economics, Australian Pharmaceutical Manufacturers Association, Sydney