Talks of a trade dispute between the United States and Australia over the cost of medicines have no doubt left many Australians scratching their heads.

What is the Pharmaceutical Benefits Scheme?

The PBS provides Australians with subsidised medicines, keeping out-of-pocket costs low for consumers. To receive the subsidy from Australian taxpayers, all drug companies (not just US ones) must submit evidence to the Pharmaceutical Benefits Advisory Committee (PBAC), which assesses if the drug is cost-effective compared to existing alternatives. This process ensures Australian taxpayers get value for money for drugs and that the government is not wasting money on drugs that are too costly for the benefits they provide.

With limited resources, the federal government needs to decide which drugs to subsidise.

Can the US influence the price for consumers?

The US has long argued the PBS does not adequately recognise the value of developing innovative pharmaceutical products, as it focuses on demonstrating drugs provide value for money.

US drug companies have recently labelled the PBS “egregious and discriminatory”. When they negotiate with the Australian government, they want to achieve higher prices they say reflects the cost of developing these drugs in the first place. They know that higher prices increase their profits.

The PBS acts to keep prices low, and so benefits consumers. Price negotiations are conducted between the federal government and each drug company separately for each drug. So, it is difficult to see how the US government could influence these specific negotiations between a private and often global pharmaceutical company and a sovereign government.

In any case, the price consumers pay is determined by the amount of subsidy from the federal government. Whether the cost of a drug to the Australian government is $50 or $5,000, consumers still pay A$31.60 (or $7.70 with a concession card).

How about drug tariffs?

Then there’s the potential for tariffs on Australian pharmaceuticals exported to the US. In 2023, Australia exported US$1.06 billion worth to the US, representing 40% of its total pharmaceutical exports of about US$2.6 billion.

If Trump imposes tariffs, this will increase the prices of Australian drugs sold in the US relative to US manufactured drugs. For Australian patented drugs where there are no alternatives, this would hurt US consumers whose only option would be to pay higher prices and consume less. For other drugs, demand for drugs manufactured in the US would increase, supporting its local manufacturing.

The demand for drugs manufactured in Australia would fall (by how much is uncertain), creating incentives for Australian manufacturers to become more efficient. This may mean moving manufacturing overseas in the long term to countries with lower tariffs or to increase marketing efforts in other countries.

Where to now?

It’s difficult to know how these trade negotiations will play out and we’ll likely be hearing more about them in coming weeks. Overall, though, it is difficult to see how the US can influence the prices that Australians pay for pharmaceuticals, especially with the recent pre-election announcement of further reductions in drug costs for patients to $25.

Frequently Asked Questions

Q: Can the US influence the price of medicines in Australia?

A: It is difficult to see how the US can influence the prices that Australians pay for pharmaceuticals, especially with the PBS process of negotiating prices separately for each drug.

Q: What is the Pharmaceutical Benefits Scheme (PBS)?

A: The PBS provides Australians with subsidised medicines, keeping out-of-pocket costs low for consumers. It ensures Australian taxpayers get value for money for drugs and that the government is not wasting money on drugs that are too costly for the benefits they provide.

Q: What is the impact of tariffs on Australian pharmaceuticals?

A: Tariffs on Australian pharmaceuticals could increase the prices of Australian drugs sold in the US, potentially hurting US consumers. This could also create incentives for Australian manufacturers to become more efficient or to move manufacturing overseas in the long term.

Q: What is the current co-payment for PBS medicines?

A: The current co-payment for PBS medicines is A$31.60 for most PBS medicines, or $7.70 with a concession card.

Q: How much do tariffs on Australian pharmaceuticals affect Australian patients?

A: Tariffs on Australian pharmaceuticals could potentially lead to drug shortages in Australia, as the demand for drugs manufactured in Australia would fall, creating incentives for Australian manufacturers to become more efficient or to move manufacturing overseas in the long term.