Brendan Shaw
How much value for money does Australia get from the Pharmaceutical Benefits Scheme?
Following on from an earlier blog written with a colleague, I got to thinking about how much of its national income Australia spends on the PBS today compared with times gone past, and how much value Australians get out of it.
Background: the 2002 Intergenerational Report and beyond
A significant moment in PBS funding policy occurred in 2002 with the release of the Australian Government’s first Intergenerational Report (IGR). One of the major claims coming out of this report was that growth in government expenditure on the PBS was growing too fast and risked becoming financially unsustainable. The 2002 IGR forecast that the PBS would grow as a proportion of gross domestic product (GDP), such that its cost would grow to be 3.4% of GDP by 2041-42.
Shawview Consulting analysis and chart. Sources: Department of Health and Aged Care. 2024. PBS Expenditure and Prescriptions 1 July 2023 to 30 June 2024, Excel tables, https://www.pbs.gov.au/statistics/expenditure-prescriptions/2023-2024/Expenditure-prescriptions-report-tables-2023-24.XLSX; Department of Health and Aged Care. PBS Expenditure and Prescriptions, various years; ABS Australian National Accounts: National Income, Expenditure and Product, December 2024, Data downloads, 'Table 3. Expenditure on Gross Domestic Product (GDP), Current prices'; Treasury. 2002. Intergenerational Report, p. 39, https://treasury.gov.au/sites/default/files/2019-03/2002-IGR-report.pdf; Treasury. 2007, Intergenerational Report, p. 93, https://treasury.gov.au/sites/default/files/2019-03/IGR_2007_final_report-1.pdf; Treasury. 2010. Intergenerational Report, p. 156, https://treasury.gov.au/sites/default/files/2019-03/IGR_2010.pdf. No PBS forecasts contained in IGRs after 2010. All figures based on nominal / current price figures. All publications accessed 23/3/2025.
Even at the time the projections seemed ridiculous. The Treasury of the day had merely taken the last 10 years of growth rates in the PBS and projected these out 40 years into the future to reach the astronomic heights of 3.4% of GDP.
Nevertheless, the IGR proved to be the launch pad for a push by governments to reign in the cost of the PBS. The then Treasurer, Peter Costello, singled out the PBS as a particular target of government policy reform, suggesting in 2003 that:
“The IGR identified the Pharmaceutical Benefits Scheme (PBS) as the most significant area of future spending pressure in the Commonwealth Budget.”
Over the ensuring 20 years, various rounds of PBS pricing reforms occurred, starting with the first mandatory price cuts for generic medicines introduced in 2005, with that statutory cut being absorbed into other reforms to split the PBS into the F1 (single brand medicines) and F2 (multiple brand medicines) formularies, and the introduction and acceleration of price disclosure in F2, followed later by the introduction of statutory price cuts in F1.
Much of this was done through collaboration between the pharmaceutical industry and successive governments. Increasingly, this was secured through formal agreements like the initial Memorandum of Understanding (2010) and subsequent Strategic Agreements (2015, 2017 and 2021) between the government and industry groups , Medicines Australia. and the Generic and Biosimilar Medicines Association. At the same time, more stringent and pervasive cost cutting arrangements like special pricing arrangements and risk sharing agreements have been extended to most new medicines when they are listed on the PBS in the F1 formulary, with companies paying sizeable rebates back to government through these measures.
Interestingly, subsequent IGRs since the first in 2002 have progressively replaced the PBS as the responsible villain of health expenditure growth; first switching to the private health insurance rebate, and then to the Medicare Benefits Scheme. This could perhaps be an admission that Treasury got its forecasts wrong back in 2002.
How much does the PBS cost today?
As we have noted previously, in any analysis of PBS costs, the important thing is to account for the significant rebates (or effectively co-payments) that companies now pay back to the government each year. In 2023-24, the Australian pharmaceutical industry collectively paid back more than $5.3 billion in rebates to the government. While commentators often don’t understand these rebates or try to ignore them, it is important to take these into account in any discussion about the financial sustainability of the PBS. They could be considered the pharmaceutical company equivalent of patient co-payments.
Almost a quarter of a century later, how much does the PBS cost today? Did the dire predictions at the beginning of the 21st century turn out to be correct? What is the PBS-to-GDP ratio today?
Shawview Consulting analysis of the trend in the PBS-to-GDP ratio using the latest data and, importantly, accounting for rebates or company co-payments, shows an interesting trend.
Shawview Consulting analysis and chart. Sources: Department of Health and Aged Care. 2024. PBS Expenditure and Prescriptions 1 July 2023 to 30 June 2024, Excel tables, https://www.pbs.gov.au/statistics/expenditure-prescriptions/2023-2024/Expenditure-prescriptions-report-tables-2023-24.XLSX; Department of Health and Aged Care. PBS Expenditure and Prescriptions, various years, https://www.pbs.gov.au/info/statistics/expenditure-prescriptions/pbs-expenditure-and-prescriptions; ABS, Australian National Accounts: National Income, Expenditure and Product, December 2024, Data downloads, 'Table 3. Expenditure on Gross Domestic Product (GDP), Current prices', https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/latest-release#data-downloads. All figures based on nominal / current price figures. All publications accessed 23/3/2025.
A few key points come out of this analysis.
Firstly, since the introduction of various PBS reforms from 2005 the net government PBS cost to GDP ratio (accounting for company rebates) has largely trended downwards over the last two decades. The result is that by 2023-24 the net government cost of the PBS represents just 0.47% of GDP, having fallen from a peak of more than 0.64% of GDP in 2003-04 and 2004-05. The deterioration in the net government PBS-to-GDP ratio appears to accelerate after 2009-10 with Australian governments’ introduction of F2 price disclosure, F1 statutory price cuts, and an expansion of risk sharing agreements and special pricing arrangements.
Secondly, there is a discussion to be had here about whether this is a good thing. While bean counters in the Departments of Health and Finance might see this as a great outcome, Australian patients waiting for the latest medical technologies may have a different point of view. Part of the original PBS reform policy agenda that industry signed up to two decades ago was that PBS reform was all about providing financial headroom for new medicines. It wasn’t just about cost cutting. Ensuring financial sustainability of the PBS and expanding access to new medicines should be considered two sides of the same coin. For example, the current Medicines Australia – Australian Government Strategic Agreement has the aspiration of Australia being a ‘first-launch’ country for new medicines. However, nearly 25 years on, history shows that while governments have been quick to lock-in the savings from PBS reforms, they have been a lot slower and less amenable to implementing agreed policies to improve Australians’ access to new medicines. Today, the Australian government has the current HTA Review Final Report on its desk. This Report contains 50 recommendations on how to speed up Australians’ access to new medicines and medical technologies, however many of these recommendations have been around for decades and have not progressed in the past.
Thirdly, it raises the question of whether the government has the financial headroom (or should have the financial headroom) to implement the range of reforms to bring the PBS into the 21st century. Other major public policy spending commitments have come and gone over the years, like several rounds of PBS patient co‑payment reductions, PBS co‑payment freezes and 60-day dispensing, the National Disability Insurance Scheme, the AUKUS nuclear-powered submarines, and a government-owned nuclear power industry. However, over the same period the PBS has not kept pace with growth in the Australian economy. The track record over the last two decades of past governments improving the timeliness of Australians’ access to new medicines has been disappointing.
Fourthly, while the net amount the government spends on the PBS has fallen as a share of national income, as has total patient co-payments paid by patients, pharmaceutical company co-payments – in the form of rebates paid to governments – have increased dramatically. The amount that pharmaceutical companies pay in rebates / co-payments now far exceeds that paid by patients.
Is Australia getting value for money from the PBS?
Aside from the last couple of years, you need to go back to the last century to find the last time an Australian government spent 0.47% of GDP on the PBS. In fact, 1997-98 was the last time the net PBS-to-GDP ratio was at the same level – noting that in those days there were no rebates paid by companies, and an absence of the statutory price reductions and price disclosure that exists today. Despite the full force of Australia’s ageing population, and the surge in new medical technologies over the last few decades, Australia’s net government cost of PBS-to-GDP ratio is the same today as it was in the early years of the Howard Government.
So, what sort of medicines featured on the PBS in 1997 compared with 2024 for the same amount of national income? What were the topmost expensive types of medicines that Australia was getting for its 0.47% of GDP in 1997 compared with today?
Well, it turns out that in 1997 for 0.47% of GDP got you the following. As of 30 June 1997 (using 1996-97 data because 1997-98 data couldn’t be located), the biggest class of medicines the Australian government spent money on in the PBS for the financial year was antacids, drugs for treatment of peptic ulcer and flatulence. As of 30 June 2024 – 27 years later – the biggest class of medicines the Australian government spent money on in the PBS was Antineoplastic and immunomodulating agents to treat various cancers and autoimmune diseases (Table 1). Other top medicine classes in June 1997 were medicines to treat blood pressure, asthma and reduce cholesterol, while in June 2024, other top medicine classes were those addressing the nervous system, metabolic diseases, cardiovascular disease and anti-infectives.
Table 1: Top 5 highest cost medicine groups, PBS, 1996-97 vs 2023-24
If we go a step further and look at the top 10 individual medicines on the PBS in 1996-97 versus 2023-24, the difference is even more stark (Table 2). Looking at the top 10 PBS medicines in June 1997 and June 2024 is like going through a time warp. Back in 1996-97, most of the top 10 PBS medicines by cost treated cardiovascular disease, gastrointestinal issues, stomach ulcers, asthma and other lung diseases. By contrast, in 2023-24 the top 10 PBS medicines by cost treated multiple cancers, cystic fibrosis, inflammatory diseases like arthritis, Covid-19, macular degeneration, atrial fabulation and osteoporosis.
Table 2: Top 10 highest cost medicine active ingredients, PBS, 1996-97 vs 2023-24 (with disease treated by the medicine)
*Elexacaftor + tezacaftor + ivacaftor & ivacaftor
**Nirmatrelvir & ritonavir
Note: Total cost includes patient contribution and cost to government. Top 10 active ingredients for 1996‑97 are estimates drawn from top 50 list. Shawview Consulting analysis. Data sources: Department of Health and Family Services. 1997. Schedule of Pharmaceutical Benefits for Approved Pharmacists and Medical Practitioners, p. 4, https://www.pbs.gov.au/publication/schedule/1951-2002/1997-11-01-PBS-Schedule.pdf, accessed 13/3/2025; Department of Health and Aged Care. 2024. PBS Expenditure and Prescriptions 1 July 2023 to 30 June 2024, Table 5(a) & Table 3(b), https://www.pbs.gov.au/statistics/expenditure-prescriptions/2023-2024/Expenditure-prescriptions-report-tables-2023-24.XLSX, accessed 13/3/2025.
The important thing to note is that all these medicines in 2023-24 were part of a scheme that cost the same amount of Australia’s national income (GDP) today as the scheme that funded the medicines of 1996-97.
It begs the obvious question: what are the collective improved health outcomes and broader productivity benefits Australia is securing today for the same amount of national income that was spent when John Howard was first elected Prime Minister? I’m not aware that this sort of analysis has been done.
It’s also worth remembering that most of those older medicines listed on the PBS in 1996-97 that were new and “expensive” in their day will still be on the PBS today, it’s just that most will have seen their patents expire and prices plummet. Today, many of them would be regarded as cheap commodities.
The PBS has changed a lot over the last 25 years or so, both in terms of what we get for our money and who pays for it. The challenge for the future is getting the balance right between saving money and ensuring Australians get access to new medical innovation.
Comments