Brendan Shaw and Vinh Vo
The United Kingdom and Australia have a long tradition of mostly friendly rivalry over things like cricket and whether Marmite or Vegemite tastes better.
When it comes to pharmaceuticals, the same comparative discussions often happen in policy circles on whether the UK’s NHS or Australia’s Pharmaceutical Benefits Scheme (PBS) is the better program to supply medicines to those countries’ respective populations. The Brits often passionately promote the NHS as a bastion of UK society, while the Australians take on a slightly more easy-going, but quietly confident attitude that they really know their PBS performs better.
What’s often less well understood is that in both countries pharmaceutical companies have become major supplemental funding sources for both the NHS and PBS respectively.
Moreover, the way this corporate funding of healthcare has grown over the years has meant that the policy debates around these programs are often ill informed. There is often a lack of appreciation of the increasing role that pharmaceutical company rebates play in funding medicine supply systems.
The UK’s VPAG vagaries
How pharmaceutical companies supply medicines to the UK’s NHS is currently governed by an industry-government agreement called the Voluntary Scheme for Branded Medicine Pricing, Access, and Growth (VPAG). The current VPAG commenced in 2024, following its predecessor, the Voluntary Scheme for Branded Medicines Pricing and Access (VPAS) which started in 2014 - the latest scheme adding a 'G' for growth in a post-Covid world. Both schemes have operated alongside a statutory scheme for companies not participating in the voluntary scheme.
Under the VPAG, the pharmaceutical industry, through its national association – the Association of the British Pharmaceutical Industry (ABPI) – agreed to continue assisting the UK government manage the cost of the NHS pharmaceutical budget by companies paying rebates to the government for overruns in NHS medicines expenditure beyond an agreed rate of growth.
The ABPI notes that the VPAG agreement is aimed at managing the cost of branded medicines to the NHS and providing predictability and increased financial headroom for the UK pharmaceutical industry to grow over a five-year period.
The current VPAG agreement commenced with an expectation in industry that the repayment rate for companies to be announced by the NHS in 2024 for payment this year would be 15.3% of sales of branded medicines, with this figure falling in later years. Instead, for reasons that, apparently, are still not clear, the repayment rate announced by the NHS at the end of 2024 for payment in 2025 has been calculated by the NHS to be 22.9% - obviously higher than 15.3%.
The British industry was apparently "stunned" when this figure was announced. It means that this year the British pharmaceutical industry will pay around GBP 3.4 billion back to the NHS. To give a sense of the scale of these payments today, this GBP 3.4 billion for one year under VPAG is more than the total amount of repayments made by the British industry during the five-year VPAS scheme from 2014 to 2018.
The disappointment therefore continues for the UK industry, given the VPAG’s predecessor, the VPAS, also produced unexpectedly high and punitive payback rates of up to 26.5% towards the end of its operation in 2023. It was hoped that the new VPAG scheme would avoid surprises like this.
Payment rates announced by the NHS across both schemes started at 3.74% in 2014, peaked at 26.5% in 2023, and declined slightly to 22.9% in 2024. Payments for the statutory scheme remained relatively stable until 2022, then grew to 27.5% in 2023 before dropping to 21.9% in 2024. From 2014 to 2017, the statutory scheme was based on a 15% list price reduction from 2013 levels rather than percentage-based payments. The sharp increases in both payment types after 2021 suggest ongoing bigger bills for pharmaceutical companies supplying branded medicines to the NHS.
Quite apart from the frustration for companies of having to collectively repay such large amounts, from a policy perspective it means that these days pharmaceutical companies are funding almost a quarter of the UK’s NHS pharmaceutical budget for newer, branded medicines.
The ABPI explains that after accounting for rebates paid by pharmaceutical companies and inflation, over the last decade the value of the branded medicines market in the United Kingdom has dropped by 11% while the cost of the total NHS budget grew by 33%, or one-third. The ABPI argues that the rebate scheme needs to change to ensure new medicines are provided to patients through the NHS, to provide greater predictability for companies, and to grow the life sciences sector.
At a time when the industry argues that the NHS needs to invest in new medicines, budget restrictions like these make the task more difficult.
Australia’s PBS paybacks
While the UK pharma industry is paying back almost 23% of NHS new branded medicine sales to the UK government, spare a thought for Australian innovative pharmaceutical companies which repay more than 48% of the sales of new, single-brand medicines.
Estimates by Shawview Consulting, calculating the difference between the gross and net totals for PBS expenditure (the difference being revenue earned by the government from rebates) published by the Department of Health and Aged Care show that in financial year 2023-24 pharmaceutical companies paid back AUD 5.33 billion in rebates to the government.
The latest figures recently published by Australia’s Department of Health and Aged Care show that in 2023-24 pharmaceutical companies paid back 29.6% of the total cost of Australia’s Pharmaceutical Benefits Scheme to the Australian government in rebates.
Rebates now account for almost 30% of the total cost of the PBS. It's even more extraordinary when you consider that these rebates are largely paid only for new, single brand medicines in the F1 formulary of the PBS (the F2 formulary being for multiple brand medicines). Taking that into account, these rebates now account for more than 48% - nearly half – of the cost of F1 single brand medicines budget on the PBS.
This total annual payment of rebates by pharmaceutical companies back to the Australian government is the highest amount recorded, and the highest percentage of total PBS costs, since the government started publishing data on rebates from 2008-09.
Unlike in the UK, in Australia these rebates do not result from industry-wide negotiations with government. Instead, Australian company rebates occur through a structure of product-by-product risk sharing agreements and special pricing arrangements negotiated between individual companies and the Department of Health and Aged Care. These agreements are negotiated when companies apply to have new medicines funded on the PBS. Typically, risk sharing agreements will have expenditure caps indicating the maximum amount the Australian government is prepared to fund for a medicine, usually with the requirement that pharmaceutical companies refund up to 100% of the costs of any overrun above the cap.
These risk sharing agreements have become the norm today, with the Australian government now usually requiring them for all new PBS medicines before even be considered for approval by Cabinet. Rebates are also paid under special pricing arrangements companies might negotiate with the Department of Health and Aged Care to provide lower net prices at a discount compared to the official published list price for a PBS medicine. It's worth remembering that these rebates operate in addition to statutory price cuts for F1 medicines introduced in the last 10 years.
As a result, today almost one-third of the total cost of the PBS is repaid back to the Australian government by pharmaceutical companies each year.
Over the last decade from the period 2013-14 through to 2023-24, the PBS has grown at a net average annual growth rate of just 1.1% per annum after adjusting for rebates and inflation. TIt is notable that the real growth rate of the PBS is so low even after major reductions in PBS patient copayments and safety nets in recent years. Over the same period, total federal government spending on health in Australia grew by an average annual rate of 2.3% per annum after adjusting for inflation.
These arrangements contribute to the general slowness in the adoption of new medical technologies in Australia, the delays Australian patients usually face in accessing the latest medical treatments, and to Australia slipping further down international rankings in global medicine supply chains.
Are rebate-subsidised pharmaceutical schemes a good thing?
Whether you like the fact that a substantial portion of government medicines schemes are funded by pharmaceutical companies depends on who you are. Government finance departments in the UK and Australia probably like these arrangements. What’s not to like about pharmaceutical companies repaying up to one-third of a cost of a health care program?
If you’re a pharmaceutical company, your reaction to such arrangements might be mixed. While such arrangements might provide some commercial benefit in the short-term, the risk is always that unexpected increases in expenditure may impose additional costs on your company, even if it’s not your fault.
If you’re the patient, it's a mixed picture. Budget management measures and confidential pricing arrangements might mean that eventually you get the medicine you need, but it might be a long wait while patients in other countries get access to new therapies sooner. Depending on the level of commercial risk companies face, you might be waiting a long time for that medicine or, worse, not getting it at all.
From a policy perspective these arrangements also make policy debates difficult because even policy experts, journalists and commentators often don’t appreciate these arrangements, One will often see headline budget numbers for the NHS or the PBS in speeches and news stories with little understanding that these days those numbers are often meaningless.
All this comes at a time when the industry is developing a range of productivity-enhancing new technologies to treat patients, including cell and gene therapies, emerging new cancer medicines, advanced therapies, and a range of medicines to treat rare diseases and chronic diseases. Health funding systems need to be sufficiently prepared and resourced for this.
Other countries have seen what happens when few people understand the often-substantial role that company rebates play in funding pharmaceutical schemes. For example, in the United States, the local pharmaceutical industry association, PhRMA, has had to resort to new advertisements to lobby Congress to ensure that the 50% rebates paid by manufacturers to pharmacy benefit managers (PBM) in US health schemes are passed on to patients and not held back by PBMs.
While there will always be policy arguments about how to keep such medicine schemes financially sustainable while improving patient access to medicines, starting such discussions with the facts is always helpful.
It also raises the question of relative policy priorities for these types of programs. What's the right balance between providing new medicines to patients versus cost cutting and budget management?
These are not new questions, but the emerging trends suggest that the answers are changing before our very eyes.
Brendan Shaw is Principal of Shawview Consulting and Vinh Vo is a Consultant with Shawview Consulting.
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