How inefficient private health insurance, drug manufacturers and distributors drive up costs.

Dec 30, 2016

In parliament, forty years ago on 27 September 1967, Gough Whitlam described the factors driving up the high cost of healthcare in Australia. The same vested interests drive up costs in Australia at the expense of the taxpayer and the community. John Menadue. 
Mr WHITLAM (Werriwa) (Leader of the Opposition) – Mr Deputy Chairman, one of the problems in discussing health policy in Australia is the lack of reliable official information. This is only partly the result of the capacities of the Minister for Health (Dr Forbes). In large part, it stems from the Government’s laisser-faire attitude to health policy in this country. The Government sees its role as largely a passive one – of subsidising a hotch-potch of private medicine, voluntary insurance, private and public hospitals, State and local interests. The Minister is content to authorise the payment of bills which others present, with occasional intervention when abuses become too blatant. Its research is limited very largely to the narrow medical field with little recognition of the importance of economic research and planning of health services.

Last year the Commonwealth itself spent $278m on health expenditure through the Department of Health alone. Governments, either directly or indirectly, find about 60% of health costs. Yet the Commonwealth Department of Health lacks the proper economic research staff to evaluate the efficiency of this spending. This is not the fault of the very capable and dedicated staff which the Minister has. In fact, he gets better than he deserves, but there is not sufficient staff. In a letter to me of 3rd April this year, the Minister said:

Some research is undertaken in the field of health economics. There are five officers employed in the Research Section of my Department . . .’

The Canadian Research and Statistical Division, by contrast, has eighty such officers. The Minister did add that economic research is sometimes undertaken by others in the Department. Despite this reservation it is quite clear that the Department of Health does not and cannot conduct comprehensive research in health economics in Australia – the subject on which the Minister for Health has chosen to lecture this House on at least two occasions in the last 6 months.

The absurdity of the situation is no more clearly illustrated than by the inability of successive Ministers for Health to provide official figures on total health costs in Australia. In 1965, the former – and the next – member for Hughes, Mr L. R. Johnson, asked the Minister for Health for the total health expenditure in Australia. The Minister replied:

In the absence of details … the total expenditure on health in Australia . . . cannot be provided’.

Early this year I was bold enough to say that health costs in Australia were relatively higher than those in the United Kingdom whose scheme is so widely criticised as inefficient and costly. In a comic performance in the House in March, the Minister disputed my contention and charged me with loose use of facts. It turned out in subsequent correspondence that the Minister did not know the facts. In the letter to which I have referred the Minister said:

I have no ‘official’ figures available of the estimated annual total expenditure on health in Australia. However, the draft WHO report, ‘The Cost and Sources of Health Services’, quotes $7 15.7m as the estimated annual expenditure on health services in Australia in 1960-61. This amount represented 4.9% of the gross national product for that year.

Following this revealing reply I put a question on the notice paper asking for figures from other countries, including the United Kingdom. The Acting Minister for Health, the Minister for Civil Aviation (Mr Swartz), would not disclose publicly what these figures were but was prepared to confirm the figures for Australia which I have quoted. The Acting Minister, however, did write to me on 11th May a letter which stated that the United Kingdom spent 4.2% of its gross national product on health at that time – that is, less than Australia. This description of events does reveal several important facts. The least important is the unreliability and deviousness of the Minister for Health in matters of health economics. The more important facts are first the lack of proper economic research and evaluation of health expenditure in Australia. The Commonwealth Government cannot even provide an ‘official’ figure of health costs. The second fact is that our health facilities are costly and very costly indeed in terms of the benefits they provide. The Australian Labor Party does not and would not propose a health service similar to the United Kingdom system. With all the defects of the United Kingdom system, however, total health costs are lower in the United Kingdom than in Australia. This year, total health expenditure will exceed $ 1,000m and will probably top $1,1 00m, of which over $600m will be provided by governments. In my speech on the Budget, and on many other occasions, I have pointed out that a great deal of excess cost is due to the lack of a balanced national hospital system and the inefficiency and cost which inevitably results from voluntary insurance. When the Minister for Health can say with complete indifference that it is no concern of his if the Hospitals Contribution Fund of New South Wales buys an aeroplane, can we really expect an efficient health system?

One other important cause of high health costs in Australia is drug costs, particularly in the ethical field. In the last 6 years, Commonwealth payments for pharmaceutical benefits have risen from $59m to $104m, an increase of almost 80%. In his annual report the Director-General of Health, speaking of pharmaceutical benefits, said:

I have to again report an upward trend in costs … the levels of prescribing for . . . new drugs were not compensated for by corresponding declines in the use of the older drugs in the particular groups. Prescribing at the government’s expense is, as I have said before, simply prescribing at the community’s .expense. One of the major problems in administration of the Scheme is the assessment of whether the cost to the community of pharmacological treatment is being inflated by the use of high priced drugs where less expensive drugs would be more effective. This complex problem is the subject of a continuous study in my department and it is our objective, in co-operation with the medical profession, to reduce it as far as it is reasonable and practicable to do so.

We wish the Director-General every success. There is certainly room for improvement in a country whose expenditure on medicines is amongst the highest, if not the highest, in the world. Research undertaken by the Institute of Applied Economic Research at the University of Melbourne shows that in 1960-61, the latest year for which comparable figures are available, expenditure of $167m on medicines in Australia represented 1.4% of our national income compared with 0.7% in the United Kingdom, 0.8% in Sweden, 1.3% in Canada and 1.1% in the United States. Not only is expenditure very high but it is growing very rapidly as the Director-General concedes. Between 1960- 61 and 1963-64 total expenditure on medicines rose by just over 20% to over $200m in the latter year. This year expenditure on medicines in Australia will be in the vicinity of $250m. Only a small part of this could be attributed to local research costs. A survey conducted by the Australian Pharmaceutical Manufacturers Association showed that 46 pharmaceutical companies spent less than $l.Sm on local research in 1964-65 – about 1% of sales.

The report of the Director-General reveals that the total cost of pharmaceutical benefits under the national health scheme in 1966-67 was $104m. Over $40m, or about 40%, went in remuneration to chemists. This represented 64% mark up on manufacturers costs. In Britain the comparable mark up for drugs sold under the national health scheme is 31%. I quote from the ‘Australian Journal of Pharmacy’, July 1967. The University survey to which I referred pointed out that the cost of distribution of all medicine in 1963-64 represented 46% of the total retail price. The costs of distribution took $80m out of the total expenditure of $2 15m. These distribution costs are very high indeed. In general, chemists in Australia operate on a margin of about 40% on all lines compared with only 25% in Britain.

Several factors account for the high cost of distribution. The public has in general welcomed the change in the nature of grocery retailing. But legislation in various States restricts the expansion of chain store chemists. The retailing of pharmaceutical goods is rife with restrictive practices which penalise the consumer. The growth of friendly societies is restrained. In New South Wales recently the Federated Pharmaceutical Service Guild of Australia showed concern when a large chain store chemist proposed dropping the 49% prescription fee on the supply of contraceptive pills. The result of this ‘unethical’ behaviour by the chain store was that the Guild was forced to cut the retail price by 20%. The removal of restrictive practices and the introduction of more competition would bring even greater benefits to the consumer and to the taxpayer, who pays so much of the drug bill. The high costs of distribution are in part the result of the large number of chemists in the community. We probably have the world’s highest ratio. In 1964-65 there were 9,085 registered medical practitioners in private practice and 5,375 pharmaceutical chemists approved under the National Health Act. So each chemist serviced only 1.7 doctors, ls it any wonder that distribution costs are high and are kept high to give a return to each chemist? in the case of ethical drugs, which are the most important and fastest growing item, even the consumer is not greatly concerned with the price when the national health service meets all but the first 50c on any prescription which in large measure the doctor who prescribes is not concerned with price. The demand for these ethical drugs is greatly influenced by expensive and persistent advertising which is directed not at consumers but at prescribing doctors. Competition results in the promotion of numerous brands, intensive detailing and publicity in professional journals and through the mail. The doctor who prescribes but does not pay is subject to considerable promotion pressure. If doctors prescribed by generic name rather than the proprietary or brand name of the drug, the whole reason for promotion would be lost. Without brand names there could be no advertising war.

Undoubtedly there are benefits to be achieved by brand name prescribing.

Quality and precision in drugs, however, can be just as well if not better assured by thorough public drug testing and evaluation. Honourable members have been given examples of the lower prices resulting from generic prescribing. There is a marked variation between prices charged by various drug houses for the sale of their products to some large buyers, such as hospitals, and the prices paid to pharmacists under the national health service. One explanation is that the scale of institutional buying allows reductions due to packing and bulk purchase. In some instances also, manufacturers regard their sales to hospitals as a form of promotion: They will get young doctors used to prescribing certain drugs.

The method of prescribing, however, is clearly of importance. Figures were prepared several years ago in Australia comparing the prices of certain drugs to hospitals using generic names in their ordering and prices of the same drugs sold by chemists under various brand names. The price to hospitals of 1,000 prednisone 5-milligramme tablets was $9.42. Chemists selling the same quantity under brand names charged between $80 and $120. Tetracycline capsules cost hospitals $15.40 for 100. Chemists sold the same quantities of the drug for $26.90. For Ariane and related drugs the prices paid to chemists under the national health service were in general about 300% higher than those paid by hospitals for the same drug. The Kefauver inquiry into the drug industry in the United States, whose report the drug lobbies have been trying to discredit, spending enormous sums in the process, revealed even more spectacular examples of excessive costs resulting from prescribing by proprietary or brand names rather than by generic names. The drug reserpine was available to the public at $5 per thousand or $65 per thousand; prices of penicillin G tablets ranged from $2 to $40 per thousand tablets; and prices of secobarbital ranged from $10 to $30 per thousand. In each case the lower price was the result of generic prescribing and the higher price the result of prescribing by brand name. The companies in the United States benefiting from brand name prescribing as revealed by the Kefauver report are well known companies that have flocked to Australia to profit from the drug bonanza under our national health service. In 1964, two-thirds of the ethical market in Australia was held by American firms and their subsidiaries and the rest was largely occupied by Swiss, German and British firms. The Kefauver report also showed the great benefits which accrued when bulk buying by the United States armed forces introduced some price competition in the market.

In Australia there is insufficient price competition in the drug field. In a large area of the ethical field there is no price competition at all. Almost all competition is in the promotion field and is directed at the doctor to persuade him to prescribe a certain brand. It is time we set about reversing the situation through competitive tendering for drugs and more generic prescribing. About 70% of all expenditure in the ethical field is under the pharmaceutical benefits scheme. The Commonwealth is in a strong position to force substantial economies and savings in our drug bill. Through negotiation it has secured some price reductions. But it is time it used its power in the market to really force price reductions. For a government that says that it believes in competition it shows little concern with the lack of price competition in large areas of our drug market. Advances in drugs have brought great advances in health standards throughout the world. That is not disputed. But it is clear that in Australia we are being forced to pay too much.

I have shown before the wastes in our health system which inevitably result from voluntary insurance and the duplication and inefficient running of our hospital services. In the drug field – at both the manufacture and distribution level – costs are excessive. This is inevitable when a government subsidises private costs which it cannot control. The public gets the worst, not the best, of both worlds – inadequate private services and high public costs. This excessive cost is the direct result of the Government’s timid and laisser-faire attitude to health in this country. It cannot avoid responsibility by trying to hide behind the provisions of the Constitution. Can we expect a fundamental examination of our health services when the Government cannot provide an estimate of health costs in this country? In terms of its benefits, ours is an extremely expensive health system – if it can be called a system.

We can – and a Labor government would – build an alternative public health service within the limits of present health expenditures in Australia. The drug field is a good area in which to start making some economies.

See link to Hansard:;query=Id%3A%22hansard80%2Fhansardr80%2F1967-09-27%2F0156%22


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