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Pharmaceutical pricing

Partner Institute: 
Centre for Health, Economics Research and Evaluation (CHERE), University of Technology, Sydney
Survey no: 
Kees van Gool
Health Policy Issues: 
Pharmaceutical Policy
Current Process Stages
Idea Pilot Policy Paper Legislation Implementation Evaluation Change
Implemented in this survey? no no no no yes no no


The Pharmaceutical Benefit Scheme (PBS) provides public subsidies for prescribed medicines in Australia. The Government is implementing a new policy to reduce the amount it pays for new brands of medicines listed on the Pharmaceutical Benefits Scheme. When a manufacturer seeks to list a generic medicine already included on the PBS, they will need to offer a minimum 12.5% price reduction in the Government price for the medicine.

Purpose of health policy or idea

The Federal Government has argued that in general Australia pays a higher price for its generic medicines when compared to other countries with public subsidy schemes. For example, it pays $41.98 for Norfloxacin 400mg (an antbiotic) whereas the UK and NZ price are $26.07 and $25.29 respectively.

Once a patent expires for a medicine, other pharmaceutical manufacturers can produce equivalent products and have them listed on the PBS under their own brand name. Some of these manufacturers offer a reduction in the price for PBS subsidy purposes, thereby setting a new benchmark PBS price, but many do not.  

During the 2004 Federal Election campaign, the Minister for Health announced that when a manufacturer seeks to list a generic medicine already included on the PBS, they will need to offer a minimum 12.5% price reduction in the Government price for the medicine. As the PBS is based on a reference pricing system, the 12.5% price reduction will set a new benchmark price for each group of medicines that is deemed to work in the same way or have the same health outcomes.

The Australian Government has identified that around $300 million worth of savings can be made annually through this measure, representing around 5% of total government outlays on PBS pharmaceuticals.

At the time the policy was announced, the Minister stated that he would negotiate with industry groups to implement this measure.

Main points

Main objectives

These changes aim to benefit taxpayers and patients by reducing the price of pharmaceuticals following increased competition from generics.  It may also encourage consumers to use more generic medicines.

Prior to the introduction of the price reduction measure, about 10 per cent PBS expenditure was spend on generic brands - and around 20% by volume of sales. On average, the cost to the PBS of generic drugs is just three per cent less than formerly patent-protected drugs. Australia has not gained the same benefit from generic drugs as other countries such as the US, Britain and New Zealand where generic drugs comprise about 50 per cent of the market and generally cost much less than the formerly patent-protected drug. For example, aciclovir (a drug used to treat viral infections) dropped by 8 per cent when generics came in but still has an Australian price more than five times the price in UK. Even more remarkable is the case of fluoxetine (an anti-depression drug) which dropped by over 40 per cent after the listing of a generic version but remains six times as expensive in Australia as in the UK.

Type of incentives

This measure creates a number of incentives:

·        Manufacturers may want to claim special status for their products so that they are not grouped with similar other drugs and thereby avoid the 12.5% price reduction.

  • Consumers may increase their use of generic products if the 12.5% reduction leads to a new price that is below the general co-payment of $28.60.  For example, prior to this measure a drug costing $30 would be subsidised by the government by $1.40 and the consumer would pay the general co-payment amount of $28.60.  After the 12.5% reduction, the consumer only has to pay $26.25 (and the government pays nothing).

Groups affected

Tax payers if the projected savings are realised, Patients if this measure leads to more drugs with a price below the general co-payment level, Manufacturers because they may receive lower prices when their products go off patent

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Characteristics of this policy

Degree of Innovation traditional rather innovative innovative
Degree of Controversy consensual controversial highly controversial
Structural or Systemic Impact marginal marginal fundamental
Public Visibility very low high very high
Transferability strongly system-dependent system-neutral system-neutral

Price falls following the introduction of competition is one of the fundamental principles of competitive markets. Australia's pharmaceutical pricing policy has over recent years deviated from this principle. In setting prices, much greater emphasis is placed on the effectiveness of the product than on the cost of producing that product. This pricing scheme has set the conditions for an inflationary environment. Furthermore, in the past, any potential benefits that may have arisen from lower production costs have flowed almost completely to manufacturers and not to consumers or taxpayers, and generic competition have not resulted in substantial reduction in prices for taxpayers and consumers. 

This policy tries to redress this in a small (because it is one-off) way and should therefore be regarded as an innovative policy.  

Political and economic background

The announcement was made towards the end of the 2004 federal election campaign and it was clear that industry had, at that stage, not been consulted - although there was a promise that it would be consulted when implementing the measure. The announcement was also one of the very few 'savings' measures announced by the Government during the election campaign - which set new records for spending commitments.

Following the reelection of the government, the Minister commenced negotiations with Medicines Australia (representing mainly innovative manufactures) the Generic Medicines Industry Association, the Pharmacy Guild and consumers.

Purpose and process analysis

Current Process Stages

Idea Pilot Policy Paper Legislation Implementation Evaluation Change
Implemented in this survey? no no no no yes no no

Origins of health policy idea

The policy measure was announced by the Minister for Health in a media release towards the end of the election campaign. The announcement was slightly odd in that it was one of the very few 'savings' announcements made by the government and it appeared as though industry had not been consulted.

From subsequent statements made by the Minister and the Department of Health it was clear that the detail of the policy measure had not been worked out or agreed. For example, the Department released four different versions of a "questions and answers" information sheet as it worked through the detail of the policy.

Similar price reductions have been sought elsewhere - for example in France (see report by IRDES on "drug delisting and reduced reimbursement"). 

Initiators of idea/main actors

  • Government
  • Providers
  • Patients, Consumers

Approach of idea

The approach of the idea is described as:

Stakeholder positions

The government has consulted widely on the implementation of this measure, including with Medicines Australia, the Generic Medicines Industry Association, the Pharmacy Guild of Australia and the National Pharmaceutical Services Association (pharmaceutical wholesalers) and Consumers' Health Forum of Australia.

The industry has put out different savings estimates for this measure which were considerably higher than those stated by the government. The industry has told the government that while it does not welcome price reductions, it respects the government's right to implement this new policy.

The Government has released several versions of a "questions and answers" sheet that aims to explain the detail of the policy measure.

Since the implementation of the policy in April 2005, four companies have not agreed to accept lower prices. As a result four brands of medicines listed on the PBS will be subject to a Special Patient Contribution in addition to the normal PBS co-payment. For these medicines the difference between the existing price for the drug and the new benchmark price will become a Special Patient Contribution (SPC). SPCs are normally paid by the patient in addition to the relevant co payment (currently $4.60 for concessional patients and $28.60 for general patients).

In addition, one company has convinced the Government that their product (Lipitor®) is more effective than other products in their class and therefore worthy of special consideration (ie not be subject to a price reduction). 

Actors and positions

Description of actors and their positions
Minister for Healthvery supportivevery supportive strongly opposed
Pharmaceutical companiesvery supportiveopposed strongly opposed
Patients, Consumers
Consumer associationsvery supportivesupportive strongly opposed

Influences in policy making and legislation

As part of its negotiations with industry, the Government has been persuaded that this policy change does not require legislative amendments.

Legislative outcome


Actors and influence

Description of actors and their influence

Minister for Healthvery strongvery strong none
Pharmaceutical companiesvery strongstrong none
Patients, Consumers
Consumer associationsvery strongweak none
Minister for HealthConsumer associationsPharmaceutical companies

Positions and Influences at a glance

Graphical actors vs. influence map representing the above actors vs. influences table.

Adoption and implementation

It appears as though a number of changes have been made to this policy during the course of its development and implementation. 

Since the initial announcement, the Government has made a number of concessions, including:

  • Implementing the measure through agreements between government and manufacturers, rather than make legislative changes.
  • Making the 12.5% price reduction a once-off.
  • Allow companies to not reduce the price of their product- but thereby make the patient co-payment larger.
  • Allow manufacturers to make the case that their product is more effective than others in their reference price group. If this proposition is accepted, the Government can agree that this warrants a higher price compared to others in its class.

Monitoring and evaluation

When the Minister of Health announced this policy, it was anticipated that the first major impact of the policy would be felt after the 1 August 2005 -when the first of the statin cholesterol lowering drugs comes off patent. 

However, with the recent decision by the Government to exclude Lipitor® from the price reduction arrangements, those savings estimate have been reduced by around $60 million a year (or around 20% of the total savings envisaged by this policy in the first four years).

No formal evaluation of the policy has been announced although it will be fairly easy to monitor its impact given the open access to aggregate administrative data.

Results of evaluation


Expected outcome

This policy should help reduce the financial burden of pharmaceutical expenditure to taxpayers and patients. The extend to which this policy is successful in achieving real savings will depend on the Government's ability to not concede special  arrangements for drugs - like it did with Lipitor®. 


Impact of this policy

Quality of Health Care Services marginal marginal fundamental
Level of Equity system less equitable four system more equitable
Cost Efficiency very low high very high

Quality: The policy's impact on quality is marginal. 

Equity: Where the 12.5% price reduction leads to a fall in price below the general co-payment of $28.60, access will be increased because of lower out-of-pocket payments.

Efficiency: This policy seeks to redistribute some of the rents from increased competition from manufacturers to consumers and taxpayers. It should reduce the price paid for products and therefore lead to greater efficiency.


Sources of Information

For ministerial media releases see: and

For Department of Health and Ageing fact sheets on the 12.5% price reduction policy go to:

For further information on the PBS go to:

Author/s and/or contributors to this survey

Kees van Gool

Suggested citation for this online article

Kees van Gool. "Pharmaceutical pricing". Health Policy Monitor, October 2005. Available at