Last week, Treasurer Joe Hockey made a “case for change” in the way government spends money. His focus was largely on macro policy settings, such as pension entitlements, including access to schemes such as the Pharmaceutical Benefits Scheme (PBS), which he noted was the tenth-largest category of government spending.

Australians can access medicines listed on the PBS for A$36.90 (or A$6 for concession card-holders) and the government picks up the tab, at just under A$9 billion per year.

If we are to spend money wisely, the federal government will also need to focus on micro reforms, such as the price it pays for combination therapies – combinations of two or more pharmaceutical drugs in a single tablet.

A paper we published today in the Medical Journal of Australia shows that fixing the pricing of combination therapies would save around A$120 million annually – a nice windfall for any government looking for budgetary savings.

Benefits

Doctors are increasingly prescribing combination therapies in Australia, particularly for people with long-term chronic conditions such as diabetes and cardiovascular disease. The Pharmaceutical Benefits Scheme (PBS) spends around A$600 million per year on combination drugs to treat these two diseases.

Combination therapies have advantages for patients, as they are generally cheaper than purchasing the drug separately and mean patients need to swallow fewer pills.

Some studies have shown use of patients given combination drugs are more likely to continue to take them long-term. A recent analysis of combination blood pressure-lowering agents, for example, found people were 21% more likely to comply with their prescription than those taking individual therapies.

Costs

The problem with the use of combinations in Australia is the cost to government. Our Medical Journal of Australia analysis shows that, while combinations are initially cheaper or an equivalent price to the individual therapies, they end up costing the taxpayer much more.

How does this happen?

Initially, pharmaceutical companies seek listing of combination therapies on the PBS after they are evaluated by the Pharmaceutical Benefits Advisory Committee (PBAC). Most combination drugs are generally listed on the basis of cost-minimisation, which means the combination produces the same clinical benefit to the separate components, at the same or lower price.

Pricing problems arise down the track, as any subsequent reductions in the price of the combination drug are not necessarily linked to equivalent reductions in the price of the component drugs.

This is a growing problem, as many combination drugs involve using older, off-patent medication, the prices of which have been declining over the past few years through a system known as price disclosure. This is a market-based pricing mechanism for off-patent medications, which bases future drug prices on the actual cost of the drugs when supplied to pharmacies. Competition between drug manufactures drives prices lower, as the manufacturer seeks to cut the supply price in order to win market share.

When there is only one brand of a combination therapy, the combination’s cost is linked to its component drug therapy items. So when prices of the components fall, these price reductions flow onto the price of the combination.

But when there are multiple brands of the same combination (even if the brands are supplied by the same manufacturer), the rules change: the cost is subject to price disclosure but there is no link between the price of components and the price of the combination drug.

Clopidogrel + aspirin

The current pricing arrangements have had a significant impact on the way many combinations are priced relative to their component therapies. A prime example is the combination Clopidogrel with aspirin, which prevents blood clots forming in hardened blood vessels and reduces the risk of heart attack, stroke and premature death.

The PBAC recommended listing the combination on the PBS for the treatment of heart disease and stroke on a cost-minimisation basis and it became available in late 2009.

On initial PBS listing, the price of the combination was set at one cent cheaper than the cost of Clopidogrel. This was maintained until a month before the PBS subsidy for Clopidogrel was due to decline by 18%, due to the price disclosure mechanism.

At that time (September 2011), the same manufacturer introduced a new brand of the aspirin-Clopidogrel combination and this changed its status on the PBS formulary. From that time onward, the cost of combination and the individual components were not linked and the marginal cost of adding aspirin has been as high as A$1.36 per tablet.

Towards reform

We need a new pricing framework to ensure these medications are a cost-effective option for government and patients. The most obvious reform is to permanently link the dispensed price of fixed-dose combination therapies to their individual components, rather than just for an initial period after its listing on the PBS.

There could be a case for paying more for a combination therapy if they can be shown to improve adherence in a general practice setting and thereby reduce risk factors for these chronic diseases. A fraction of the money saved could be reinvested to evaluate how effective combination therapies are in practice.

In the current fiscal climate, the A$120 million a year savings that could come from a new pricing framework are too good to for the Abbott government to pass up.