The United States pharmaceutical lobby has complained to US President Donald Trump that Australia’s Pharmaceutical Benefits Scheme (PBS) is damaging their profits and has urged Trump^[1] to put tariffs on pharmaceutical imports from Australia.

Prime Minister Anthony Albanese defended the scheme^[2], saying Australia’s pharmaceutical subsidy scheme was “not up for negotiation”. Opposition Leader Peter Dutton said he would also protect the PBS, which was the “envy of the world”.

But what exactly is the PBS, and why does it matter?

How did the PBS start?

In the early 1900s, Australians had to pay for medicines out-of-pocket. Some could get free or cheap medicines at public hospitals or through Friendly Society Dispensaries, but otherwise access was restricted to those who could afford to pay.

At the time, few effective medicines were available. But the development of insulin and penicillin in the 1920s made access to medicines much more important^[3].

The Constitution gave the federal government limited powers in the provision of health and welfare, which were largely the responsibility of the states. After World War II, the federal government wanted to expand these powers but it encountered several constitutional roadblocks^[4].

A rare successful referendum in 1946 changed that, enabling the National Health Act 1953 to pass. This established the PBS as we know it today.

How does the PBS work in practice?

The PBS covers the cost of medicines prescribed by doctors. Most are dispensed at community pharmacies (such as treatments for heart disease, the pill and antibiotics), but some more expensive ones are available at public hospitals or specialist treatment centres (such as chemotherapies and IVF medicines).

In 2023–24 there were 930 different medicines^[5] and 5,164 brands listed on the PBS, costing the government $17.7 billion.

The government negotiates the price of each medicine with the pharmaceutical company. Pharmacies then buy these medicines from wholesalers or companies.

When a patient fills a prescription at a pharmacy, they pay a co-payment. The government pays the difference between the agreed price and the co-payment to the pharmacy – costs that may amount to hundreds of thousands of dollars.

Patients pay $31.60 or $7.70 and the government pays the difference. Lukas Coch/AAP^[6]

There are two co-payments^[7]: one for concession card holders ($7.70) and one for the general consumer ($31.60). When a patient hits the annual spending limit (safety net threshold), the co-payment falls to $0 for concession patients and $7.70 for the general consumer.

Overall, patients contribute 8.4%^[8] to the total cost of the PBS, while the government pays the rest.

How are medicine prices set?

The PBS is split into two categories:

– F1: new, patent-protected medicines with no competition

– F2: medicines with multiple brands, including generics.

F1 medicines

To be listed^[9] on the PBS, a new medicine goes through the following process:

1. It’s evaluated for safety, efficacy and quality.

2. A panel of experts (including doctors, pharmacists, epidemiologists, health economists, health consumer advocates and a pharmaceutical industry representative) recommends which medicines should be listed on the PBS, based on effectiveness, safety, cost-effectiveness and the total cost on the budget of the medicine versus alternative treatments.

3. If the panel recommends a medicine, the price and details of the listing may be further negotiated with the government. (If the panel rejects a medicine, companies may revise their application and re-submit.)

4. Finally, the health minister, and subsequently the Cabinet, formally approves or rejects the panel’s recommendation. If approved, the medicine is listed on the PBS.

The Minister for Health (back) formally approves or rejects the panel’s recommendation. Dave Hunt/AAP^[10]

F2 medicines

Generic medicine companies may apply to list another brand on the PBS after a medicine loses patent protection. When this happens, the medicine moves from F1 to F2. Immediately, it incurs a mandatory price discount^[11].

Generic medicine companies may offer pharmacists discounts on the PBS list price (for example, ten for the price of nine). Pharmacists then encourage patients to switch to the cheaper medicine.

Companies must disclose these discounts^[12] to the government, resulting in further price reductions.

Is the PBS system unique?

Australia is not special. Many countries use similar assessments to determine whether governments should subsidise new medicines, including the National Institute for Health and Care Excellence (NICE) in the United Kingdom, Canada’s Drug Agency, and Pharmac in New Zealand.

Small differences exist, including whether the list of medicines is a positive (and they’re subsidised) or negative (meaning they’re not subsidised), whether the lists are established at the central level (such as the PBS in Australia) or local level (such as by province in Canada) or a mixture, and how co-payments are set.

Generic medicine companies in Australia may offer pharmacists discounts on their products. National Cancer Institute/Unsplash^[13]

The biggest outlier is the US^[14]. Similar to its health system, the medicines system is a complex and decentralised mix of public and private organisations, including government agencies, independent organisations, health-care providers and payers such as health insurers.

What are the benefits of the PBS?

The PBS ensures all Australian patients have access to highly effective medicines. This contributes to a high life expectancy, while keeping health-care costs low^[15] relative to other developed countries.

This has been achieved by keeping prices down for both F1 and F2 medicines. By doing so, it creates room in the government budget to fund other new medicines.

Without the PBS, either taxes or co-payments would have to increase, or fewer medicines funded.

Other benefits include having a level playing field for all medicines, while maintaining flexibility to fund highly effective medicines for patients with unmet needs.

What are the drawbacks of the PBS system?

No system is without its drawbacks and risks. The PBS’s drawbacks^[16] include:

• limited patient involvement in the process
• the high frequency of re-submissions and delays to PBS listing^[17]
• companies being unwilling to submit off-patent medicines for PBS listing due to high costs and low rewards
• the ongoing lack of high-quality clinical evidence about medicines to treat rare diseases and certain patient populations, such as children.

Another issue is medicine shortages^[18]. When PBS-listed brands aren’t available due to supply chain issues, other non-PBS listed brands may be available at full cost to the patient. Increased medicine costs can discourage patients^[19] from filling necessary prescriptions, which can have longer-term impacts on health and health expenditure.

Finally, companies have argued^[20] Australia’s small market size plus low PBS prices can make it financially unviable to bring new medicines to Australia.

The PBS is a crucial part of Australia’s health system, making essential medicines affordable, while keeping costs down. Like any system, it has its challenges and there is ongoing debate about whether and how the system should change.

Read more: Will the US trade war push up the price of medicines in Australia? Will there be drug shortages?^[21]

References

1. ^{^} urged Trump (www.abc.net.au)
2. ^{^} defended the scheme (www.9news.com.au)
3. ^{^} important (www.mja.com.au)
4. ^{^} roadblocks (www.jstor.org)
5. ^{^} 930 different medicines (www.pbs.gov.au)
6. ^{^} Lukas Coch/AAP (photos.aap.com.au)
7. ^{^} co-payments (www.pbs.gov.au)
8. ^{^} 8.4% (www.pbs.gov.au)
9. ^{^} listed (www.pbs.gov.au)
10. ^{^} Dave Hunt/AAP (photos.aap.com.au)
11. ^{^} mandatory price discount (www.pbs.gov.au)
12. ^{^} disclose these discounts (www.pbs.gov.au)
13. ^{^} National Cancer Institute/Unsplash (unsplash.com)
14. ^{^} The biggest outlier is the US (www.ohe.org)
15. ^{^} high life expectancy, while keeping health-care costs low (ourworldindata.org)
16. ^{^} PBS’s drawbacks (www.aph.gov.au)
17. ^{^} high frequency of re-submissions and delays to PBS listing (www.cambridge.org)
18. ^{^} medicine shortages (www.abc.net.au)
19. ^{^} medicine costs can discourage patients (onlinelibrary.wiley.com)
20. ^{^} companies have argued (www.pwc.com.au)
21. ^{^} Will the US trade war push up the price of medicines in Australia? Will there be drug shortages? (theconversation.com)