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News & Trends - Pharmaceuticals

Why should Australia lower its discount rate to align with global standards?

Health Industry Hub | April 8, 2024 |

Pharma News: Internationally, Health Technology Assessment (HTA) guidance commonly advocates for a 3% real annual discount rate, yet the suitability of this rate has not been thoroughly scrutinised. In a recent journal article, Cohen et al. aim to pinpoint an appropriate discount rate tailored to high-income countries, recognising its pivotal role in shaping projected cost-effectiveness and subsequent resource allocation recommendations.

Australia’s discount rate of 5% diverges from international best practices. While Canada employs a rate of 1.5%, Japan utilises 2%, and both Germany and Singapore adhere to 3%. Scotland, the UK, and New Zealand employ a rate of 3.5%, whereas Ireland and France settle on 4%.

The authors highlight disparities in HTA guidelines across 32 high-income countries. Among them, 22 offer no explicit rationale for their recommended discount rates, while 8 cite market interest rates, 3 to consistency, and 3 to Ramsey Equation factors.

Meanwhile, stakeholders in the pharmaceutical industry advocate for a reduction in Australia’s discount rate, which has remained unchanged since its establishment in the 1990s. They argue for its adjustment to align with international standards.

In 2022, the Pharmaceutical Benefits Advisory Committee (PBAC) acknowledged Australia’s discount rate could be reduced for medicines and vaccines. The medicines industry is calling on the Government to implement the reduction now.

In its review, the PBAC noted that adoption of a 1.5% base-case discount rate for all medicines “would make it an outlier, as 1.5% is the lowest discount rate used in all countries surveyed by both Medicines Australia and CHERE and is only used as a standard discount rate by one other country (Canada).”
The independent report from Centre for Health Economics Research and Evaluation (CHERE) concluded that “there may nonetheless be a case for reducing the PBAC’s base-case discount rate in line with economic theory and international practice. However, any change to the PBAC’s base-case discount rate should be informed by an empirical analysis of the estimated cost to Government, price impacts, cost-effectiveness thresholds, approval and displacement of therapies, and a range of knock-on policy impacts likely to result across the health sector.”

The PBAC’s advice was that the discount rate should be no lower than 3.5% – 4% per year “should the Government make a broader policy decision to change the standard base-case discount rate for economic evaluations of health interventions after considering cross-portfolio implications and the HTA Review”.

Cohen et al. assert that the downward trend in consumption growth and real interest rates suggests a need for HTA guidance to lower recommended discount rates to a range of 1.5% – 2+%. Such a revision is poised to improve the projected cost-effectiveness of treatments with long-term benefits and amplify the consideration of long-term dynamics in drug pricing, particularly in response to reduced prices stemming from the loss of market exclusivity.

The prevailing practice of employing a high discount rate, reflective of economic conditions from three decades ago, implies that the Australian government is inadvertently prioritising short-term, acute, and symptomatic treatments which influences policy outcomes. Bringing the nation’s discount rate in line with other highly developed countries would represent a neutral position, eliminating biases rather than favouring specific products.

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