Monday, May 26, 2008

Regulating pharmaceutical monopolies

Joshua Gans has a good post on the Australian Pharmaceutical Benefits Scheme (PBS). The scheme uses the bargaining power of the Pharmaceutical Benefits Advisory Committee (PBAC) that derives from its ability to 'list' drugs eligible for government subsidies to curb the price demands of monopolistic pharmaceutical producers. Unless drugs are 'listed' (and supplied at a maximum government-subsidised price to the consumer in 2007 of $30-70) they are seldom prescribed by doctors so listing is very much sought after.

But listing is only provided by the PBAC if it judges drugs to be effective and not excessively expensive. This drives producers to offer drugs at lower prices and saves Australians a lot of money for their drugs - they are much cheaper than in the US even accounting for implied subsidy costs. Joshua has a couple of good posts on this topic himself but also points to a new NBER study showing that the PBS scheme saves on average a year of life for Australians by encouraging the use of the most recently developed drugs. I cite the abstract:

We examine the impact of pharmaceutical innovation on the longevity of Australians during the period 1995-2003. Due to the government's PBS, Australia has much better data on drug utilization than most other countries. We find that mean age at death increased more for diseases with larger increases in mean drug vintage. The estimates indicate that increasing the mean vintage of drugs by 5 years would increase mean age at death by almost 11 months. The estimates also indicate that using newer drugs reduced the number of years of potential life lost before the ages of 65 and 70 (but not before age 75). During the period 1995-2003, mean age at death increased by about 2.0 years, from 74.4 to 76.4.

The estimates imply that, in the absence of any increase in drug vintage, mean age at death would have increased by only 0.7 years. The increase in drug vintage accounts for about 65% of the total increase in mean age at death. We obtain a rough estimate of the cost per life-year gained from using newer drugs.

Under our assumptions, using newer drugs (increasing drug vintage) increased life expectancy by 1.23 years and increased lifetime drug expenditure by $12,976; the cost per life-year gained from using newer drugs is $10,585. An estimate made by other investigators of the value of a statistical Australian life-year ($70,618) is 6.7 times as large as our estimate of the cost per life-year gained from using newer drugs. We discuss several reasons why our estimate of the cost per life-year gained from using newer drugs could be too high or too low.


Anonymous said...

The study says that if you get a drug earlier, it adds one year to life. And under the PBS the cost of the life is $10,000, much less than the value of the life.

So far, so good. But I am sure the drug companies would argue that if they got paid more than the low ball prices the PBS screws out of them, they'd bring more drugs onto the market more quickly, and there;s be even bigger additions to life expectancy.

Anonymous said...

kk, harry is the best

Jack Lacton said...

Finding the line between ensuring drugs get to people who need them at a price they can afford and leaving drug manufacturers with the tens of billions of dollars they need to invest to bring new drugs to market is a tricky thing.

In Europe, drug companies are taxed heavily. In the USA they can make a buck. It is no fluke, therefore, that two-thirds of the world's drugs are developed in the US.

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