A productive dose of medicines

The pressure of healthcare costs in the future will bring better health outcomes, predict Kieran Schneemann and Brendan Shaw. Healthcare costs will be the major source of future budgetary pressure, according to the federal government Productivity Commission draft report, Economic Implications of an Ageing Australia. Bad news? No, good news!

When it comes to future healthcare costs, and particularly to spending on innovative medicines, this budgetary pressure needs to be recognised for what it is and what it will achieve: increased individual health and well-being, more cost-effective healthcare treatments and increased workplace participation and productivity.

Health outcomes link to productivity

Consider this: the levels and direction of health expenditure are critically linked to health outcomes.

Better health outcomes obtained with modern innovative medicines lead to higher gross domestic product (GDP) through an increase in workforce participation and productivity.

Improvements in workforce participation are integrally linked to health. The Australia's Demographic Challenges report demonstrates that poor health leads to early retirement, frequent absenteeism through sickness or injury and lost productivity.

In 2001 the lost earnings from people unable to work due to schizophrenia, for example, was AUD$488 million, according to an Access Economics report. The report found that improved outcomes were dependant, for example, on access to recently developed antipsychotic medications which could reduce a projected $1 billion health burden associated with the illness.

Reducing human capital depreciation

The Productivity Commission report makes a similar and very important point.

The development of effective treatments for Alzheimer's disease could significantly reduce the need for aged care and health costs for the elderly. A number of innovative medicines are in the development pipeline that will target this disease.

International data supports the vital link between innovative medicines and improvements in health and productivity.

Pharmaceutical technical progress has increased per capita output via its effect on employment rate and hours worked per employed person. Each successive vintage of innovative medicines has produced a progressive increase in per capita output. The use of new medicines reduces the rate of human capital depreciation.

Good health raises per capita incomes by improving labour productivity. Better health also leads to a greater incentive to save -- lower mortality means saving for retirement becomes a major priority for individuals.

Getting the health policy mix right

The challenge now is to take the debate one step further and ensure that the future policy mix is formulated following an assessment of the impact of the use of medicines on health outcomes, productivity, workforce participation, health spending and economic growth.

Without such assessment we may end up with the wrong health policy mix.

The Pharmaceutical Benefits Scheme (PBS) is built on the premise of cost-effective or value-for-money operations. Medicines represent the best, cost-effective, non-invasive therapies, often avoiding the need for higher treatment costs incurred through hospital, aged care and other medical services.

A greater commitment to and recognition of the benefits of the PBS will result in lower rates of growth in other areas of health. The comparatively higher growth rate of the PBS is, in reality, its virtue.

The higher growth in per capita spending on pharmaceuticals compared to other major components of health spending over the last 20 years represents the substitution of more cost-effective pharmaceutical-based treatments for other more expensive forms of treatment that involve hospitals and Medicare.

This trend represents a switch to a more effective mix of health system, particularly once the full balance of health outcomes is taken into account.

A future of improvement

Rising health costs are not necessarily a problem if they produce improvements in health and productivity, particularly if incomes are rising at the same time. But it is crucial that the spending is not wasted.

While the cheapest policy option to curb future healthcare costs remains premature death, there can be little doubt that spending on innovative medicines is the next best, one that is probably more appealing to Australia's ageing population and to those who are concerned with creating wealth for the nation through increased workplace participation and productivity.

Kieran Schneemann is the chief executive and Dr Brendan Shaw the senior policy manager at Medicines Australia.