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Pharmaceutical prices: reforms 2007

Partner Institute: 
Centre for Health, Economics Research and Evaluation (CHERE), University of Technology, Sydney
Survey no: 
van Gool, Kees
Health Policy Issues: 
Pharmaceutical Policy
Reform formerly reported in: 
Pharmaceutical pricing
Current Process Stages
Idea Pilot Policy Paper Legislation Implementation Evaluation Change
Implemented in this survey? no no no yes yes no yes
Featured in half-yearly report: Health Policy Developments 10


The Pharmaceutical Benefits Scheme (PBS) provides Australians with subsidised access to medicines. The Scheme has experienced high expenditure growth in recent years, prompting the Government to argue that reform of the program is necessary for it to remain sustainable. A number of reforms have already been implemented to curtail expenditure growth (see e.g. van Gool 2005). This survey will report on the latest round of reforms that affect the pricing of pharmaceuticals subsidised by the PBS.

Recent developments

In July 2007, the Government introduced a number of changes to get better value from market competition among brands of generic (off-patent) medicines and, at the same time, isolate some medicines from price competition. In effect, the reforms will convert the existing single formulary into two formularies (Searles et al 2007):

  • F1 formulary will contain single brand drugs that are not deemed interchangeable on an individual patient basis with therapeutically equivalent products.  It contains both on patent and off patent medicines that are not substitutable with other brands or medicines.
  • F2 formulary will contain drugs for which there is at least one additional product that is considered clinically interchangeable. Most generic medicines will fall in this category.

For F1 medicines there will be no mandatory price reductions. For F2 medicines there is already the requirement for a 12.5 per cent price reduction when the first new brand of a medicine is listed on the PBS. The latest round of reform will, from 1 August 2008, call for a further reduction in the prices of these medicines consisting of:

  • A price drop of 2 per cent a year for three years for medicines where price competition between brands is low; and
  • A one-off price drop of 25 per cent for medicines where price competition between brands is high. 

Australia's system of reference pricing will continue - albeit the establishment of two formularies will have an important impact. That is, whilst reference pricing will exist within each formulary, there will be no such mechanism between F1 and F2 medicines.  Depending on the interpretation of  "interchangeability at the individual patient level", this could isolate F1 medicines from price competition. For example, pharmaceutical manufactures may argue that their new drug, whilst equivalent to existing medicines on average, may be more effective for some population groups and therefore should be categorised as F1.

The Government is also introducing measures for taxpayers (i.e. the government) to reap more of the benefits of generic price competition. Prior to these initiatives, the beneficiaries of price competition were primarily pharmacists when wholesale prices for some medicines fell below the government agreed PBS price.  This new initiative introduces compulsory price disclosures for generic medicines to ensure that the reimbursement by the PBS is not above their market price. In other words, the PBS agreed price should more accurately reflect market prices over time (Department of Health and Ageing 2007a).

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Characteristics of this policy

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

The government's broad aim of alligning the price the government pays through the PBS for medicine with the actual market price is laudable. Politically, the government seems to have neutralised stakeholder opposition by (1) conceeding that some medicines (F1) are not subject to these initiatives and (2) increasing dispensing fees for community pharmacies. 

Purpose and process analysis

Current Process Stages

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

Initiators of idea/main actors

  • Government
  • Private Sector or Industry

Stakeholder positions

As reported previously (van Gool 2005), the Government announced the first of what turned out to be many reforms to the PBS.  Initially, the Government sought an automatic 12.5% price reduction for all medicines that came off-patent.  It was clear that at the time of this announcement, industry had not been consulted and was clearly against the proposal. Subsequently,  some companies did not agree to lower prices and as a result four brands of medicines listed on the PBS will be subject to an additional patient contribution above the normal PBS co-payment (currently $4.90 for concessional patients and $30.70 for general patients). In addition, one company convinced the Government that their product (Lipitor®) was more effective than other products in their class and therefore worthy of special consideration (ie not be subject to a price reduction). 

Since then, the government has consulted more widely with Medicines Australia (representing innovative pharmaceutical industry) and the Pharmacy Guild of Australia (representing community pharmacists). These two organisations have given their support for the latest round of reforms - although both warn of the potential risks to their respective members and seek close scrutiny of the reform's impact.

Actors and positions

Description of actors and their positions
Minister for Healthvery supportivevery supportive strongly opposed
Private Sector or Industry
Medicines Australia (Pharmacuetical Industry lobby group)very supportivesupportive strongly opposed
Pharmacy Guildvery supportivesupportive strongly opposed
current current   previous previous

Influences in policy making and legislation

Since 2005, the Government has held a majority of seats in both houses of parliament.  This means that the influence of the legislature is much reduced.

Legislative outcome


Actors and influence

Description of actors and their influence

Minister for Healthvery strongvery strong none
Private Sector or Industry
Medicines Australia (Pharmacuetical Industry lobby group)very strongvery strong none
Pharmacy Guildvery strongvery strong none
current current   previous previous
Minister for HealthMedicines Australia (Pharmacuetical Industry lobby group), Pharmacy Guild

Positions and Influences at a glance

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

Adoption and implementation

It is clear that some groups have had a major influence in changing the policy (as reported in survey round 6. See van Gool 2005). 

By establishing two formularies, more products from the innovative pharmaceutical industry will be listed on the F1 formulary and therefore protected from the automatic price reductions imposed on F2 medicines. Furthermore, the definition for F1 medicines is fairly broad making it easier for pharmaceutical companies to argue that their product should be exempt from price competition.

In addition, community pharmacies stand to gain an increase in dispensing fees as well as an additional $1.50 for every medicine dispensed that will cost the patient no more than the standard co-payment. This last initiative is aimed at providing pharmacies with an incentive to dispense generic medicines in favour of premium brand pharmaceuticals.

The Department of Health will establish a stakeholder reference group to provide updates on implementation progress and seek feedback on a range of issues. It comprises representation from the Australian Medical Association, the Australia Self Medication Industry, the Generic Medicines Industry Association, Medicines Australia, the National Pharmaceutical Services Association, the Pharmacy Guild of Australia and the Pharmaceutical Society of Australia.

Up to this point (October 2007) legislation has been passed by parliament and the classification of F1 and F2 medicines has been published (Department of Health and Ageing 2007b). Automatic price reductions for F2 medicines are scheduled to start in August 2008. Potential price reductions based on price disclosure rules are scheduled to start in August 2009.

Monitoring and evaluation

The Department of Health and Ageing has indicated that it will monitor the impact of the reforms on all medicines but has not detailed how or when it will do this.  It is clear that the Government aims to fullfill a number of objectives from these reforms (Department of Health and Ageing 2007a):

  • Greater use of generic medicines
  • Reduced PBS prices for F2 medicines
  • Allignment of PBS prices and market prices
  • Fewer medicines withdrawn from the PBS
  • fewer additional co-payments (above standard copayment rates)

Expected outcome

The implementation process has only just commenced and the full effect of these policies will not be felt for a number of years. Nevertheless, these reforms were critically examined by a number of experts and these were published in a recent issue of the Medical Journal of Australia. In this issue, Searles et al (2007) argued that:

  • Drugs in F1 will not be compared with those in F2 for pricing purposes, even if clinical trial data show them to be equivalent (or even inferior) for the same clinical indication. This undermines the evidence-based approach to reference pricing currently used in the PBS.
  • Other changes require compulsory price disclosures and price cuts for generic medicines. While positive, these amendments are unlikely to deliver generic medicine prices as low as those in other developed countries. This is important, in view of growing evidence of the unaffordability of prescription medicines in the Australian community.

In the same MJA issue, Faunce (2007) argues that the creation of the F1 formulary is part of the Australian and United States Free Trade Agreement and may lead to a situation where "patented drugs are insulated from post-listing reference pricing against generics and required price drops may, in the short term, tempt governments to increase the extent of patient cost-sharing (perhaps through differential means-tested copayments) for high-cost patented medicines. Furthermore, the pharmaceutical companies wishing to protect their F1 status may pursue pharmaceutical patent battles in Australia more aggresively that could delay the introduction of cheaper generic medicines.

Impact of this policy

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

These policies are firmly aimed at reducing the price government pays for medicines, especially for off-patent generic medicines.  This set of initiatives comes about after suggestions that Australia has been able to negotiate relatively cheap prices for innovative patented medicines but appears to be paying a premium for generics. The likely success of these policies (given the objectives ascertained from government documents) will hinge on:

  • the degree to which the Government is willing to accept pharmaceutical companies' arguments for F1 listing.
  • the degree to which it can succesfully implement full price disclosure.


Sources of Information

Department of Health and Ageing (2007a). Strengthening Your PBS - Preparing for the Future. Canberra. Available at

Department of Health and Ageing (2007b). Formulary listing. Canberra. Available at$File/Formulary%20Allocations_1%20September%202007.pdf

Searles, A., Jefferys, S., Doran, E. and D. Henry (2007). "Reference pricing, generic drugs and proposed changes to the Pharmaceutical Benefits Scheme", Medical Journal of Australia, 187 (4): 236-239. Available at

Faunce, T. (2007). "Reference pricing for pharmaceuticals: is the Australia-United States Free Trade Agreement affecting Australia's Pharmaceutical Benefits Scheme?" Medical Journal of Australia, 187 (4): 240-242. Available at

Van Gool, Kees (2005). "Pharmaceutical pricing", Health Policy Monitor (6) 2005. Available at

Reform formerly reported in

Pharmaceutical pricing
Process Stages: Implementation

Author/s and/or contributors to this survey

van Gool, Kees

Suggested citation for this online article

van Gool, Kees. "Pharmaceutical prices: reforms 2007". Health Policy Monitor, October 2007. Available at