Health Policies on
Pharmaceuticals
Luke Connelly
Professor of Health Economics
Centre for the Business and Economics of Health
E: l.connelly@uq.edu.au
Overview
• Policies on pharmaceuticals
– in context of policies on medical technologies generally
– i.e., pharmaceutical innovation is a subset of health
technology innovation
• Technology as the major driver of health expenditure
growth
• Economic evaluation as the “fourth hurdle”
– Safety, efficacy, effectiveness,
– cost-effectiveness
Health Expenditure Growth
Current Health Expenditure (%GDP), 1960-2014
18.0
16.4
16.0
14.0
12.0
Australia
10.0
8.8
8.0
6.2
Canada
New Zealand
United Kingdom
United States
6.0
4.5
4.0
2.0
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
0.0
Source: OECD (2016).
Life Expectancy (T10, OECD)
69.1
73.7
Source: Derived from OECD 2013 in (AIHW 2014, Figure 3.2, p.69) and AIHW (2014, p.82).
Health Expenditure Per Person
2003-2013, Constant Prices, $A
+22.9%
+27.8%
Source: AIHW (2015, Table 2.15, p.33).
Health Expenditure (%GDP)
Source: AIHW (2015, Table 2.14, p.31).
What Drives Health
Expenditure?
Ageing?
Source: AIHW (2014, Figure 1.3, p.11).
Age
1973
2013
<25
45%
32%
>65
9%
14%
Insurance?
• Ubiquitous health insurance
– Social insurance (Australia ≈ 100% coverage)
– Private insurance (≈ 43% hospital table coverage) (APRA 2016)
• Expenditure (AIHW 2014):
– Governments: 67.8%
• Australian Government: 41.2% of total funding
• States/Territories: 26.6% of total funding
– Individuals, private insurance, other non-government sources:
32.2%
Source: Adapted from Australian After Hours Doctors (2016).
Income?
Australia, GDP Per Capita (Constant Prices), 1960-2014
70000
60000
50000
40000
Real GDP per capita
30000
20000
10000
0
1950
1960
1970
1980
1990
2000
2010
2020
Source: IMF in Quandl (2016).
New Medical Technologies?
Health Expenditure Growth Due to “The Residual” (1992-03 to 2002-03)
Source: Productivity Commission (2005, Table 3.2, p.53).
Watch the Panel Discussion:
Link to Global Leadership Series:
Zweifel, Birch, Gannon, Connelly
Cost-Effectiveness as the “Fourth Hurdle”
The First Hurdle: Safety
• Is the technology (pharmaceutical/procedure) safe?
The Second Hurdle: Efficacy
• Does the technology (e.g., pharmaceutical/procedure) have
the capacity to produce the desired effect?
Effectiveness
• Does the technology (e.g., pharmaceutical/procedure)
actually produce the desired effect, in practice?
– This question is usually answered via randomised controlled
trials (RCTs)
– Note that a residual question is whether or not the technology
works when administered under non-trial conditions.
• e.g., are there any aspects of behaviour of patients/practitioners
under “normal” conditions that modify effect?
Cost-Effectiveness
• Is the technology cost-effective?
– The broader question is whether or not its benefits outweigh its
(opportunity) costs
– Cost-benefit analysis (CBA) is rarely performed, though.
– Typically, cost-effectiveness analysis or cost-minimisation
analysis is performed
• Superior?
• Non-Inferior?
Pharmaceutical Policy in Australia (PBS)
• Pharmaceutical Benefits Scheme (PBS
http://www.pbs.gov.au/ ) is a central part of the
Australian Medicare system
– Introduced in 1984
– Subsidises a large number of prescription medicines
• Not all medicines (including prescription medicines)
are “on” PBS.
Subsidies versus Approval to Market
• Not all drugs that are approved for sale receive a subsidy.
• The Therapeutic Goods Administration (TGA) is the regulatory
authority that determines whether or not products with a
therapeutic claim may be sold on the Australian market
– https://www.tga.gov.au/about-tga
• TGA approval to market does not imply public subsidies for
therapeutic products.
TGA
• The Therapeutic Goods Administration (TGA) in Australia
regulates the sale/marketing of all goods for which a
therapeutic claim is made:
“including prescription medicines, vaccines, sunscreens,
vitamins and minerals, medical devices, blood and blood
products”
• Even cough lozenges…
• See https://www.tga.gov.au/tga-basics
Pharmaceutical Benefits Advisory Committee
• Australia first country to introduce mandatory economic
evaluations of all new proposals to list pharmaceuticals on the
PBS for subsidy
– In 1993
• PBAC is the statutory authority that makes decisions on
whether or not to list a drug for public subsidy.
PBAC
• Submissions to the PBAC follow a clearly defined process.
• PBAC has two sub-committees
– Economics Sub-Committee
– Drug Utilisation Sub-Committee
• http://www.pbs.gov.au/info/industry/listing/participants/pba
c
• The PBAC decisions are published (see above).
Source: https://pbac.pbs.gov.au/
Statistics
Source (this section):
http://www.pbs.gov.au/statistics/asm/2015/australian-statistics-on-medicines-2015.pdf
See:
https://www.whocc.no/
PBS Listings (example):
Selected Indicators
• Pharmaceutical spending per capita in Australia is
approximately 35% of the level of US spending per
capita.
• despite the fact that Australians consume
approximately 139% of the quantities of
pharmaceuticals as residents of the US (Danzon and
Furukawa 2005).
Selected Indicators
• Australia’s Pharmaceutical Benefits Advisory
Committee (PBAC)
– recommends drug submissions for listing at a
considerably lower rate (49.6%) than its UK
counterpart (87.4%) (Clement et al. 2009)
Selected Indicators
Selected Indicators
Source: George, Harris and Mitchell (2001, p.1103).
Lamda
• The cost-effectiveness threshold (or ICER threshold)
is sometimes denoted ƛ
• What are the implications of setting lambda at a
particular level?
• Let’s say it’s $76,000, for argument’s sake…
Goldilocks Pricing
• See Varian (1997) in Shapiro and Varian (1999)
– Goldilocks pricing and versioning for information
goods.
• My version, applied to pharmaceuticals (which are
also “information products”) does not require
“versioning”, just pricing.
Profit-Maximising IP Owners:
• Take lamda…(=$76,000)
• Take the denominator of the ICER (ΔQALYs)
– Let’s suppose the manufacturer’s intervention produces 10
QALYs, on average, and it has good evidence.
• Then, just solve for price.
• $76,000/10=$7,600 per intervention.
Class Exercise: Third-Degree Price Discrimination
Class Exercise
• Break into teams of 3-4.
• Task
– You have been retained as consultants to help a pharmaceutical
company devise a profit-maximising strategy to launch its patentprotected drug in three target markets.
– The target markets have different propensities to pay.
– Advise the company how and when to launch its drug in each of these
markets.
– Explain the strategy, conceptually, using economic tools.
Third-Degree Price-Discriminators:
• How does this price look?
• If you can segment the market, don’t launch here if
it establishes a lower price for your product than you
may get elsewhere.
• Launch decision (timing?, launch at all?) depends on
your other markets (inter alia).
But, Consumers and IP Owners:
• IP owners may be able to strike a deal with the
monopsony buyer (Australian Government) for
confidential pricing arrangements:
– the price listed on the PBS may not be what the
government actually pays; and
– risk-sharing arrangements may also be available.
Advantages
• Lower prices and quicker access for Australian
consumers
• Lower opportunity costs of launching early in
Australia
– turns early launches into profit-maximising strategies
ceteris paribus.
Evidence on Drug Launches and Delays
• Danzon, Wang and Wang (2005)
– study drug launches across 25 OECD countries 1994-1998
– of 85 new chemical entities (NCEs) launched only 55% of
the potential launches actually occurred.
– US: 73 launches
– Australia: 43 launches
– New Zealand 13 launches
Does Australia Have it “About Right”?
• Actually…we don’t know.
Allocative Efficiency
In Other Sectors:
• The “Value of a Statistical Life” is used to make public
policy.
• See Abelson (2007).
• For an extensive treatment see Connelly (2013, link)
and the other submissions to Victorian Parliament.
What is Current VSL?
• Abelson (2007) provides a good overview of the
issues and ultimately recommends Australia adopt a
value of a statistical life (VSL) of $3m-$4m for a
“healthy prime age individual” (p.19)
– assuming 40 years of life lost: $151,000 per lifeyear saved (approx. $176,250 (AUD2013)).
What is Current VSL?
• Aldy and Viscusi (2007, p.9) “The most plausible
labor market estimates involve VSLY values in the
$300,000 [USD] range”.
• Or, more recently, about $10m (US) for a “primeaged individual”.
Problem?
• The adoption of a different threshold values as
decision rules across sectors is a source of potential
inefficiency
– e.g., if a threshold of $75,000 per LY were applied to
“health sector” investments; and a $225,000 threshold
were applied to road safety investments…
Problem?
– some investments that pass the threshold test in the latter
would fail the threshold test in the former; and
– the social return to public investments would not be
maximised.
• Also see Birch and Gafni (2006) on the “Silence of the
Lambda”.
For Discussion (Class Exercises)
• Temporal distribution problems
– Discounting
– Health promotion/prevention
• Alternative purchasing models
– Patent “buy-outs”?
– See Kremer 1988
For Discussion (Class Exercises)
• Use of stated preferences
– In health economics
• For utilities
• For willingness-to-pay (QALY)
• Challenges arising
– New technologies in, e.g., genetic testing
Other Matters
• Level playing field?
– New technologies
– Extant listings
– On- and off-schedule interventions
• Private health insurance
• Consumer choice and literacy
Selected References and Other Sources
AIHW (2014), Australia’s Health 2014, AIHW: Canberra.
AIHW (2015), Australia’s Health Expenditure 2013-2014, AIHW: Canberra.
APRA (2016), Private Health Insurance: Statistical Trends, APRA: Sydney;
http://www.apra.gov.au/PHI/Publications/Pages/Statistical-Trends.aspx, Accessed 9 March 2016.
Australian After Hours Doctors, http://www.1300homedr.com.au/, Accessed 9 March 2016.
IMF in Quandl (2016), GDP Per Capita, https://www.quandl.com/collections/australia/australiagdp-growth, Accessed 9 March 2016.
Connelly LB (2013), Valuing Health-Risk and Resource Trade-Offs, Invited Evidence Presented to
the Victorian Parliament Road Safety Committee, Parliament of Victoria: Melbourne.
References
Cullis JG and Jones P (2009) Public Finance and Public Choice: Analytical Perspectives, Oxford
University Press: Oxford.
Danzon PM and Furukawa MF (2003) Prices and Availability of Pharmaceuticals: Evidence from
Nine Countries, Health Affairs, Vol.W3: 521-36.
Danzon P, Wang YR and Wang L (2005) The Impact of Price Regulation on the Launch Delay of
New Drugs—Evidence from Twenty-Five Major Markets in the 1990s, Health Economics , Vol.14:
269-92.
Gafni A and Birch S (2006) “Incremental Cost-Effectiveness Ratios: What Explains the Silence of
the Lambda?”, Social Science and Medicine, 62(9): 2091-2100.
References
George B, Harris A and Mitchell A (2001) “Cost-Effectiveness Analysis and the Consistency of
Decision-Making: Evidence from Pharmaceutical Reimbursement in Australia (1991 to 1996),
Pharmacoeconomics, 1103-1109.
OECD (2016), OECD Health Statistics 2015, OECD: Paris; http://www.oecd.org/health/healthsystems/health-data.htm, Accessed 9 March 2016.
Productivity Commission (2005) Impacts of Advances in Medical Technology in Australia,
Productivity Commission: Canberra.