Free drugs trade: say no

31 October 2003, The Australian, By Christine Wallace

"They behave like the tobacco companies," says one critic of the giant American and European pharmaceutical companies. "And they're making a quite immoral profit."

The critic isn't the doyen of a left-wing think-tank either but a former Liberal cabinet minister. His comments were triggered this week by observing the vice in which Australia's unique pharmaceutical benefits scheme is being squeezed. It is being pressed on one side by global drug companies wanting PBS changes to boost their profits, and on the other by a federal Government desperate to rein in its escalating cost.

The Howard Government this week failed to rule out changes to the PBS as a result of negotiations for a free trade agreement with the US. Instead, it repeatedly offers reassurances, as Australia's lead negotiator Stephen Deady did in Canberra on Monday, that nothing will be offered that could "lead to or limit the ability of the Government to provide affordable medicines to Australians through a sustainable PBS".

There's plenty of possible structural change to the PBS consistent with that statement.

In a highly unusual development, the Australian Medical Association and federal Opposition united this week in calling on the Government not to make any PBS concessions as part of an FTA with the US.

Cunningly subverting George W. Bush's flattering description of Prime Minister John Howard during the President's visit last week, AMA president Bill Glasson said the Government has to get "fair dinkum about defending the PBS" in the FTA talks.

Research shows that affordable medicine saves lives and contains healthcare costs, he said. "It keeps people out of hospital and frees up resources in other areas of the health system. Our investment in the PBS pays huge dividends in terms of a healthier Australia, and must be protected."

Lead US negotiator Ralph Ives's comment in Canberra on Monday that his team was focusing on the valuation of innovative medicines under the PBS is code for saying that the US wants changes that would boost the
cost of medicines in Australia.

Combined with the paltry offer on increased access for Australian farmers to the US market for farm goods, the US negotiating team's seeming sneak-up on the PBS, after months of soothing rhetoric, is souring the goodwill surrounding the talks.

"The changes they have in mind would either lead to an increase in the price of pharmaceuticals to consumers or, if the commonwealth absorbs the cost, a slug to the taxpayer," Opposition trade spokesman Stephen Conroy said. "Either way, the ongoing viability of the scheme as we know it would be threatened."

It is not as though the popular and politically sensitive scheme, in place since 1948, wasn't already in trouble. In last year's Budget, the Government introduced measures to trim the blow-out in PBS costs, the fastest growing part of federal health spending, according to Treasury's intergenerational report.

Without changes, PBS costs are forecast to grow as a proportion of national output from 0.6 per cent of GDP now, to 3.4 per cent in 2041-42.

Recent growth has been dramatic, and government spending on pharmaceutical benefits is forecast to rise from $5.8 billion in 2003-04 to $7.1 billion in 2006-07 – an average annual 5 per cent growth in real terms.

The Government's strategy is to increase the co-payment: the contribution people make to the cost of medicine when getting their prescriptions filled at the chemist. However, the Opposition and minor parties are blocking the measure in the Senate because research shows that higher co-payments lead to more people not filling their scripts.

Treasurer Peter Costello yesterday drew attention to the International Monetary Fund's call, in its annual review of the Australian economy, for the Senate to pass the co-payments bill – the latest in the Treasurer's long campaign to get the Opposition and minor parties to relent.

Even if the co-payment increase becomes law, Opposition health spokesperson Julia Gillard says the extra revenue would pay for only 14 days' worth of pharmaceutical benefits spending.

The cost of the PBS may be growing but there is no doubt it delivers top drugs more cost-effectively than is managed by most other nations. Productivity Commission research in 2001 found that the price of medicines in the US is 80-160 per cent higher than in Australia, while prices in Canada, Britain and Sweden are about 50 per cent higher.

The price-suppressant effect of the PBS leads to savings of about $2 billion a year to Australians taking prescription medicines, and to taxpayers. It is money that would otherwise go to the big pharmaceutical firms' bottom lines. The large US and European Union drug companies would naturally like to claw back what it considers profits wrongly appropriated by the federal Government through its "big powerful buyer" PBS program.

But the stakes are even higher than getting back some of the $2 billion at issue.

The free trade agreement the US is now negotiating with Australia will be its first with a developed economy. The Bush administration sees it as a precedent-setter for other FTAs it wants to pursue – notably, down the track, with the EU. If it lets the price-suppressing PBS stand in its present incarnation, the US believes other countries may press for something similar.

As it is, the pharmaceutical giants are concerned that other countries already look at the prices being agreed to through the PBS and are saying to themselves: "Why can't we buy it at the price Australia gets too?"

"It's an excellent scheme – the world's best," says pharmacology expert David Henry of the University of Newcastle. "They're value-for-money prices. There's a major public interest in this and the intensity of the heat on this issue is a reflection of just how successful a program it is."

American rhetoric on the program in the FTA negotiation, framed for most of 2003 in terms of "information seeking" and possible improvements to PBS "transparency", has been disingenuous.

American drug companies are among the most politically savvy operators in the US political system – among the biggest donors to politicians' campaign funds, spenders of huge advertising dollars in public support for the drug companies' agenda, and with nearly as many registered lobbyists as there are members of Congress. They actively helped shape the US FTA negotiating agenda and were already extremely well informed about the PBS and how it worked.

For Australia, it may be a case of adopting Nancy Reagan's famously sage advice on taking drugs: "Just say no."

When it comes to PBS changes and the FTA, Stephen Deady and Trade Minister Mark Vaile would be politically well advised to do the same.