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Australian Journal of Pharmacy : November 2006
economics health economics Pharmacy Guild of Australia, director, health economics, Dr Michael Tatchell N a few short months Treasury’s sec- ond Intergenerational Report (IGR) will be published. Under the Government’s Charter of Budget Honesty Act 1988, Treasury is required to produce an IGR every five years which assesses ‘the long term sustainability of current govern- ment policies over the 40 years following the release of the report, including by taking account of the financial implica- tions of demographic change’. The first IGR, released as part of the May 2002 Federal Budget, was roundly criticised for its narrow focus, its unrealis- tic assumptions and its flawed conclu- sions. Nevertheless, its publication not only generated vigorous debate on Aus- tralia’s ageing population and its long- term implications for Commonwealth Government finances, but also was the catalyst for a range of government policy measures, particularly relating to the Pharmaceutical Benefit Scheme (PBS). So, what has changed since the first IGR was released more than four years ago? In particular, do the Government’s recent cost-containment initiatives alter the IGR’s long-term growth predictions for the PBS? Answers to these questions are contained in an Access Economics Review of the IGR, commissioned by Medicines Australia, and published in September 2006.1 The 2002 IGR Treasury’s 2002 IGR painted a bleak pic- ture for Commonwealth Government finances over the 40 years to 2042. The IGR found that: • without policy adjustment, the current generation of taxpayers will impose a higher tax burden on the next genera- tion; • by 2041–42, the gap between Com- monwealth spending and revenue will grow to around 5 per cent of GDP or $87bn in today’s dollars; • Commonwealth health and aged care Intergenerational Report revisited I spending will grow significantly due to the increasing cost of new procedures and new medicines; and • the PBS will grow faster than other com- ponents of health expenditure—by more than five-fold over the next 40 years, from 0.6 per cent of GDP cur- rently, to 3.4 per cent in 2041–42. The IGR suggested policy priorities to address these future challenges should include ‘those that increase the economy’s capacity to generate revenue and those that reduce the growth in government spending’. The PBS was singled out as a key priority area for spending restraint—‘rapid PBS growth over the past decade means it could be one of the most significant areas of future spending pres- sure on the Commonwealth’. There is no doubt that the 2002 IGR has been one of the main factors behind the government’s spate of recent PBS pol- icy increases designed to rein in PBS growth. These have included: • the 30 per cent increase in patient co- payments; • the 12.5 per cent generic pricing mea- sure; • the increase in safety net thresholds; • changes to the Safety Net 20 Day Rule; and • the Fourth Community Pharmacy Agreement. But how will these changes, projected to trim $2.2bn off the PBS over four years, impact on the IGR’s projections? IGR Review The Access Economics Review says sev- eral factors have changed since 2002. The rate of PBS spending growth has slowed, but discretionary spending by the Federal Government, including a series of tax cuts and family benefit increases, has increased at a rapid rate. Using modelling methods similar to those used by Treasury for the 2002 IGR, and taking into account the effects of the Costs and benefits One telling criticism of the IGR’s PBS analysis is its preoccupation with costs. This may well have skewed the IGR’s results as medicines have been shown to improve health outcomes and quality of life, and contribute to improved health and longer life expectancy. Access Economics shows that including a simple view of the potential benefits of PBS medicines ‘may have a significant impact on future Federal budget deficits and could reduce the burden on future taxpayers by close to 20 per cent, even if the PBS spending growth predicted in the 2002 IGR were to occur’. The future of the PBS should not be assessed on cost alone, but in terms of ‘value for money’ by recognising both costs and benefits. Conclusion Access Economics’ review of the 2002 IGR is timely and its main conclusion heartening: ‘even if current efforts to restrain PBS spending are allowed to wane over coming years, the future of the PBS now appears rather more secure than the original IGR feared’. We await next year’s second IGR with great interest and antic- ipation, particularly with regard to Trea- sury’s revised projections for PBS growth over the next 40 years. 1. Access Economics: Intergenerational Report Review. Canberra, September 2006. ¦ THE AUSTRALIAN JOURNAL OF PHARMACY VOL.87 NOVEMBER 2006 ? 63 recent slow down in PBS growth, the Review contends that the PBS will con- tinue to grow relative to GDP—not by 3.4 per cent as predicted by the IGR but by about 2.5 per cent of GDP in 2041–42. This means that some 46 per cent of the projected relative growth in PBS costs in the 2002 IGR has already been countered by recent policy changes. This is not sur- prising; early changes in the projection period have magnified effects over time due to the ‘magic’ of compound interest.