13 May 2022

Who’s the PBS promise really helping?

Comment PBS Pharmacy Political

What seems like a generous election pledge to cut the price of medicines may come from ulterior motives.


A great article this week from Paul Smith in Australian Doctor questions whether one of the key healthcare cost-of-living policy offerings from both political parties, to drop the price of medicine to the general public by about 25%, is potentially just a Pharmacy Guild scheme that might end up lifting the overall dollar burden to the public while securing guild-supported pharmacies more price protection from the buying power of Chemist Warehouse and one or two other big pharmacy chains.

The argument goes like this: if you reduce the co-payment by $10.00 from $42.50 to $32.50 (Labor quickly offered $12.50) then you are going to prevent the big chains such as Chemist Warehouse applying significant discounts to every script that falls between a cost of $32.50 and $42.50, and that might end up costing the public — not saving it.

Any script that costs less than the co-payment level of $42.50 can be discounted by Chemist Warehouse as much as they like, and they do discount quite a bit, in order to attract foot traffic out of the smaller pharmacy operators down the street and into their stores. What they lose in script margin they can more than make up for in selling a lot of perfume and vitamins. That’s their business model.

Over $42.50, and Chemist Warehouse can discount only $1 per script.

This is a form of price fixing designed specifically to protect non-corporate-aligned pharmacy owners, which the guild mostly represents. The discounting is restricted to drugs sold below the co-payment level set by the government.

How does this play out in the community?

Let’s try a sample of one punter – myself.  I was shocked at the price difference for scripts between my long-time community pharmacist and the Chemist Warehouse that moved into the suburb about 10 years ago. So I promptly left my trusted local community pharmacy for the savings on offer from what I knew was a pretty voracious and greedy corporate, with reasonably average customer service.

Recently, after years of guilt, I returned to my community pharmacist, whose two-fronted shop was now reduced to a single shop front, and who now sold fast photos, among other strange services to make ends meet, while the Chemist Warehouse not 50 metres away had grown from one shop front to three in the same time.

Notwithstanding those considerations, I was taken aback when I picked up my first new bunch of scripts, which I calculated was at least 40% more expensive than at Chemist Warehouse.

Smith points out in his article that the numbers to work out if patients might actually end up worse off are complex so he isn’t entirely sure what the outcome might be. You have to understand the detail of how many scripts are off-patent and cheaper than the co-payment level now, the volume being sold above and below the co-payment level, the level and volume of discounted scripts that Chemist Warehouse and others put in play. And pensioners don’t even come into the equation because their co-payment is $6.80, not $42.50.

I’m almost solely on scripts that are off patent, such as Lipitor and Coversyl, and therefore most of my scripts are way under the $42.50 payment mark.

Like it or not, Chemist Warehouse knows their numbers, and their business modelis working. Many of us have left the long-term community pharmacist for the savings and perfume range of Chemist Warehouse’s increasingly large-footprint shops.

Chemist Warehouse railed against the policy of dropping the co-payment with a concerted media campaign that suggested the policy would reduce their ability to discount on a huge range of medicines, eating into their ability (civic duty even) to provide the public with lower-cost drugs.

The problem here is that neither Chemist Warehouse nor the Pharmacy Guild have the public’s wellbeing and hip pocket as their first priority, and are instead looking to advance their own agendas.

If you dive into the actual PBS numbers, you can see this fairly clearly. You also see that it’s pretty much a three-card election policy trick in terms of being a significant saving to the public overall in terms of cost of living.  

A couple of quick riders on the numbers before we dive into them:

  •  I’m bad at maths and sometimes my logic is a bit screwy too, but anyone wanting to cross-check can find all the raw PBS data here
  • As well as the hard numbers, there are a few assumptions you need to make that can’t be formally confirmed anywhere I can find – such as, what is the average discount that a big pharmacy chain applies to PBS medicines that cost between $30 and $42.50 today.

The basic numbers

Below is a ready reckoner number chart you can use to work out what actually is going on with this policy and what the guild and Chemist Warehouse are trying on.


PBS Scripts July 2020 to July 2021

The first thing to keep in mind here is that most of the PBS subsidy is consumed by pensioners, who have a co-payment of $6.80 and who don’t factor into this calculation at all. That makes the idea that patients are up for a 25% saving of medicines immediately misleading to the general population as this election carrot applies only to a very limited portion of the PBS. 

For an immediate perspective on how bold this policy isn’t, if you drop the co-payment price from $42.50 to $30, you are putting in play only $136 million in scripts out of a total PBS cost of $12.5 billion.

So the government is putting at risk only about 1% of its total PBS cost base here. This isn’t the impression you get listening to the co-payment policy announcement and spruiking.

­­If the guild had g succeeded in convincing the government to drop the price to $19 from $42.50, that’s quite a bit more money in play – about $547 million, or about 4% of the entire PBS cost base. But even this is small in relative terms – it’s pretty much a pea and thimble on the part of the government.

If the guild had somehow convinced the government to go down to a $19 co-payment, it would have sliced a cool 30% or so off the discounting power of Chemist Warehouse, which would have been a pretty good market manipulation on behalf of its members.

As to the question of whether the price drop will convert to 25% off what non-pensioners pay now in co-payment, we know it won’t do that because the big chains significantly discount most of the scripts they sell that are priced under the co-payment level .  The real price paid for drugs under the co-payment level is the average discounted price, not the reported price on the PBS.

Whether non-pensioner patients will actually pay more for their drugs as a result comes down to just how much these chains are discounting on drugs that are currently costing the PBS between $30 and $42.50.

According to the 2021 PBS data, if we were paying the rack rate for every script between these prices today, we’d be forking out about $136 million (the government is suggesting that in 2022 this will be about $150 million).

How many of the big chains discount, how much do they discount on average, and how much of the total market for drugs that cost between $30 and $42.50 does that represent?

The latest estimate of market share for Chemist Warehouse is around 23% with about 300 stores. That isn’t share of script sales but an estimate of the entire share of pharmacy sales. Terry White supposedly has 500 stores nationally but size and turnover of each store counts in terms of total share of total sales. Its share has been estimated at only 13%, so its stores are a lot smaller and sell a lot less. They are also not as aggressive at discounting scripts, probably because their lower retail turnover and smaller shop footprints mean they need more margin from their script business.

In the face of these unknowns, you have to make a few calculated guesses as to what is going on.

Let’s assume that between Chemist Warehouse’s aggressive discounting and milder discounting between the remaining bigger chains, the average is that 40% of scripts get discounted (that  is, almost all scripts under co-payment at the chains) at a rate of at least 40% per script (I do have one data point here: my invoice for the same scripts between Chemist Warehouse and the local community pharmacy).

If the government drops its co-payment level to $30, then of the $136 million in scripts that have a price of between $30 and $42.50 today, only about $22 million is being discounted away.

Let’s double that to $44 million for no good reason and make a few observations around discounting, actual savings to patients and campaign promises that seem big but are pretty lame in the scheme of things:

  • In the overall market, there isn’t that much discounting going on, so to some extent, the guild is crying wolf on Chemist Warehouse. Chemist Warehouse has 300 stores out of an estimated 5800 across Australia. Obviously, if you live near one, competition is fierce,  but there just aren’t that many in competition across the whole country in the scheme of things to justify the guild’s stance on the chain.
  • Whether it’s $22 million or $44 million, the discounting isn’t enough to make a great argument for the policy resulting in the cost of scripts increasing overall to the general public if you pull the co-payment down. Yes, some punters (I suspect myself ironically) might end up with some combination of scripts that results in their paying a little more, but overall, the government is taking somewhere between $100 million to $120 million off the table in direct costs to patients.
  • $100 million in savings to patients, against an overall cost base of $12.5 billion, and a campaign promise that was pitched awfully like massive across-the-board savings to your spend on drugs each year, is pretty lame in context, and reasonably misleading on the part of both major parties.

It all leads to the (not) surprising conclusion that the co-payment promise by both parties  was always deliberately designed as an illusion of good value and mostly a waste of everyone’s time (but fortunately not much money).

Something to say?

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2 Comments on "Who’s the PBS promise really helping?"

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Matt Cohen
Guest
11 days 15 hours ago
Not sure that this is right. There are still a lot of medications that are still on patent (mainly newer treatments such as for diabetes) that cost non-health care card holders $42.50 each. 2- 3 of these a month adds up, and these patients will have significant savings. The cost of continuous blood glucose monitoring for type 1 diabetes is also scheduled to drop from $185 – $300 per month (depending on the type) to the cost of a PBS prescription in July 1. Dropping the PBS price from $42.50 to $30 – $32.50 per month will mean an additional… Read more »
Oliver Frank
Guest
11 days 16 hours ago
“The problem here is that neither Chemist Warehouse nor the Pharmacy Guild have the public’s wellbeing and hip pocket as their first priority”. This highlights the conflicts that pharmacists in community pharmacies face. As health professionals, the first duty of pharmacists is to advise and to do only what they believe to be in the best interests of the patient. This includes advising the patient about the most appropriate care (medicines and other goods and services), and the most economic way to get that appropriate care, *irrespective of whether that advice earns the pharmacist the highest possible fee or income*.… Read more »
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