Australia

Thu Mar 20

Will the US trade war push up the price of medicines in Australia? Will there be drug shortages?

Written by: Anthony Scott, Professor of Health Economics and Director, Centre for Health Economics, Monash Business School, Monash University

Talks of a trade dispute ^[1] between the United States and Australia over the cost of medicines have no doubt left many Australians scratching their heads.

With all this talk of attacks on the Pharmaceutical Benefits Scheme ^[2] (PBS), and the prospect of a tariff on Australian drugs entering the US, many will be wondering about two key issues.

Does this mean the price of medicines will rise? And could any fall-out from the trade dispute lead to drug shortages?

Let’s see how this could play out domestically.

What is the Pharmaceutical Benefits Scheme?

The PBS provides Australians with subsidised medicines, keeping out-of-pocket costs low for consumers.

To receive the subsidy from Australian taxpayers all drug companies (not just US ones) must submit evidence to the Pharmaceutical Benefits Advisory Committee ^[3] (PBAC) which assesses if the drug is cost-effective compared to existing alternatives.

This process ensures Australian taxpayers get value for money for drugs and that the government is not wasting money on drugs that are too costly for the benefits they provide.

With limited resources, the federal government needs to decide which drugs to subsidise.

Our centre has a contract with the federal government to review submissions to the PBAC. Once the PBAC makes its recommendations to list a drug onto the PBS, the federal government then enters into bilateral (one on one) negotiations with each drug company over the price they will charge in Australia.

These price negotiations often involve confidential discounts and rebates, which can also cause delays in listing on the PBS and to people accessing them at the subsidised rate.

Patients pay a fixed co-payment under the PBS regardless of the negotiated price. That’s currently ^[4] A$31.60 for most PBS medicines, or $7.70 with a concession card. The Australian government picks up the rest of the cost.

Can the US influence the price for consumers?

The US has long argued ^[5] the PBS does not adequately recognise the value of developing innovative pharmaceutical products, as it focuses on demonstrating drugs provide value for money.

US drug companies have recently labelled the PBS “egregious and discriminatory ^[6]”. When they negotiate with the Australian government, they want to achieve higher prices they say reflects the cost of developing these drugs in the first place. They know that higher prices increases their profits.

The PBS acts to keep prices low and so benefits consumers. Price negotiations are conducted between the federal government and each drug company separately for each drug. So it is difficult to see how the US government could influence these specific negotiations between a private and often global pharmaceutical company and a sovereign government.

In any case, the price consumers pay is determined by the amount of subsidy from the federal government. Whether the cost of a drug to the Australian government is $50 or $5,000, consumers still play A$31.60 (or $7.70 with a concession card).

It’s also difficult to see how the imposition of tariffs on Australian exports of pharmaceuticals to the US, as has been flagged ^[7], could influence the process. That’s unless these issues are caught up in some larger trade or political deal.

Both Labor and the Coalition have come out defending the PBS ^[8], saying it would not be a bargaining chip in any trade war.

How about drug tariffs?

Then there’s the potential for tariffs ^[9] on Australian pharmaceuticals exported to the US. In 2023, Australia exported US$1.06 billion worth ^[10] to the US, representing 40% of its total pharmaceutical exports of about US$2.6 billion.

If Trump imposes tariffs, this will increase the prices of Australian drugs sold in the US relative to US manufactured drugs. For Australian patented drugs where there are no alternatives, this would hurt US consumers whose only option would be to pay higher prices and consume less. For other drugs, demand for drugs manufactured in the US would increase, supporting its local manufacturing.

The demand for drugs manufactured in Australia would fall (by how much is uncertain), creating incentives for Australian manufacturers to become more efficient. This may mean moving manufacturing overseas in the long term to countries with lower tariffs or to increase marketing efforts in other countries.

But this would not necessarily create new shortages of medicines in Australia. This is because about 90%^[11] of the pharmaceuticals we use in Australia are manufactured overseas rather than being manufactured domestically.

What if Australia retaliated with its own tariffs on US imported pharmaceuticals? Some 21%^[12] of our imported pharmaceuticals come from the US. Only then might tariffs influence price negotiations for listing on the PBS. This would be a bad idea for Australians’ access to innovative patented drugs. This is because there would be no other alternatives and prices would rise in negotiations, so restrictions would need to be placed on use and access.

Where to now?

It’s difficult to know how these trade negotiations will play out and we’ll likely be hearing more about them in coming weeks.

Overall, though, it is difficult to see how the US can influence the prices that Australians pay for pharmaceuticals, especially with the recent pre-election announcement ^[13] of further reductions in drug costs for patients to $25.