- Brendan Shaw
Jane Fonda, mix tapes & Australia's 5% discount rate: when time, health economics and ethics collide
Updated: Mar 25, 2022
How much do you value your future health?
How much do you value the future health of your kids and your grandkids?
And how much do you think the Australian government values these things?
Well, based on our recent report on the matter … not much!
A recent report for Medicines Australia prepared by Biointelect and Shawview Consulting, Submission to the PBAC on the Base Case Discount Rate, reviewed the discount rate that Australia’s Pharmaceutical Benefits Advisory Committee (PBAC) uses to evaluate the cost-effectiveness of medicines and vaccines compared to other countries.
The ‘discount rate’ is the annual rate used in health economic evaluations to adjust the future value and costs of medical technologies into present day values.
It accounts for the basic economic concept that people value benefits achieved and costs incurred in the future less than they do if these occurred today.
Essentially, it’s a recognition that people generally like to enjoy good things now rather than wait years for them. There’s a whole economic theory and methodology about this you can read more about if you’re interested in this, both in health economics and in broader economic theory.
For example, a vaccine that might protect a population from a deadly disease might cost a lot of money up front, but in the long run the benefits over 20, 30, 40 or 50 years might be that it eliminates that disease from society. While the potential benefits long in the future need to be discounted – or de-valued – to account for the fact that they may occur a long time in the future, the costs occur today.
Using an unduly high discount rate under these circumstances could disadvantage long-term treatments like vaccines from being accepted as cost-effective. Another recent Shawview Consulting report discusses the issues for vaccines in particular.
How does Australia compare?
The point is that the discount rate used in Australia by the PBAC is much higher than that used by almost every other industrialised, high-income country in the world when evaluating health technologies.
The Biointelect/Shawview Consulting report found that while most other high-income countries today use discount rates of between about 1% and 3% per year, for decades Australia’s PBAC has been using a 5% discount rate.
Source: Medicines Australia. 2022. Submission to the PBAC on the Base Case Discount Rate, Submission prepared by Biointelect and Shawview Consulting, January, p. 5, https://www.shawview.com/publications, accessed 25/3/2022.
If you’re reviewing the cost-effectiveness of a new vaccine to prevent an infectious disease, a cure for cancer or hepatitis C over the course of a generation or two, it can make a big difference to the cost-benefit evaluation you’re doing.
Source: Medicines Australia. 2022. Submission to the PBAC on the Base Case Discount Rate, Submission prepared by Biointelect and Shawview Consulting, January, p. 17, https://www.shawview.com/publications, accessed 25/3/2022.
Using a 5% discount rate makes it harder to justify investing in long-term medical treatments, therapies and preventative health measures that improve the health of the Australian population.
Yet, that’s exactly the approach Australia has been using.
It’s one of the reasons Australia is so slow to fund these things and why Australians are often towards the back of the global queue in waiting for these medical technologies.
Valuing the health of our kids and future generations
So, why does this matter?
It matters because, ultimately, the rate used to discount the value of future health benefits of health interventions is a judgement society makes about how much it values the future long-term health of its children, grandchildren and future generations.
There have been many medicines and treatments for things like hepatitis C and HIV and vaccines for things like cervical cancer, shingles and meningococcal disease that have been rejected for Australian government funding by the PBAC in the past , in part due to the excessively high discount rate it uses.
While the governments of other high-income countries use a discount rate of as low as 1.5% to estimate the value of the lives of future citizens, the Australian government uses 5%.
As the father of three Australian children, I get quite annoyed about this.
How is it that governments in places like Belgium, Canada, England, France, Germany, Japan, the Netherlands and even New Zealand value the health of children and future generations in their countries more than the Australian government?
Having an unduly high discount rate of 5%, as Australia’s PBAC does, de-values the long-term benefits and impact of medical technology for current and future generations.
Australia’s 5% discount rate is more akin to that recommended for a low-income, poor country in places like sub-Saharan Africa.
In our own analysis we found that Australia tends to sit in a group of countries that are mostly comprised of middle-income countries from Asia, Latin America and Eastern Europe.
As an apparently rich, world-leading country, Australia should be able to do better than this.
When the Australian government is reviewing whether to fund new medical treatments, it should value the long-term health of our kids, our grandkids and future generations more than poor, low-income countries.
Australia’s ‘set and forget’ 5% discount rate
So, why has Australia got such a high discount rate?
Well, this is where the story becomes almost funny if it wasn’t so ridiculous.
There are two main reasons why today Australia, one of the richest countries on the planet, uses a discount rate that unduly discounts the value of human life in the future.
Australia was one of the first countries in the world to introduce health technology assessment (HTA) to evaluate medicines and vaccines public reimbursement, under the Pharmaceutical Benefits Scheme (PBS).
Back in the 1980s, when Australia was developing its PBAC guidelines, the then clinicians and economists drafting the guidelines had to insert some sort of discount rate, so they plumped on 5%.
The first PBAC guidelines, drafted in 1990 and finalised in 1995, included guidance on the use of a discount rate of 5%. The original guidelines stated:
“Discounting of future costs and benefits is a standard feature of economic evaluation. Costs or benefits are discounted at an annual rate of 5%. For discussion of the rationale, see Chapter 6 of the Background Document.”
Unfortunately, for decades, this ‘Background Document’ to justify the 5% discount rate could not be found. It had been lost to history.
But, in a breakthrough, our research uncovered this paper and discovered that the Australian government’s rationale for choosing a 5% discount rate back in 1990 – the rate still used today – was (drumroll):
“ …. the recommendation of the New England Journal of Medicine that 5% be used seems reasonable. This is also the rate suggested by the Canadian Government for studies in that country.”
Now, the first thing to note is there is no reference to what article from the NEJM the Background document refers to. Our research for our report could not find it.
The second thing to note is that Canada’s discount rate today is …. (wait for it) … 1.5%. However, Canada did have a 5% discount rate back in the 1980s.
Which leads to the second main reason why Australia today has a discount rate that is usually recommended for a low-income country in sub-Saharan Africa.
The Australian government has not formally reviewed it since those long-ago days from the 1980s.
You don’t need a PhD in economics to know that the world has changed a lot since the days of Jane Fonda’s aerobics, mix tapes, thin leather ties, Pacman and VHS video tapes.
Since the 1980s, the theory and practice of health economics has evolved, economies have developed, technology has improved, and the community’s expectations about the future and society have changed since then.
And one of the things that has changed is how much people value their health, their future and that of their kids and future generations. Our response to things like climate change and an ageing population are examples of this.
I’m grossly oversimplifying here. You can read more about this in our report and in the economic literature on discount rates.
The point is that while many other high-income countries over many decades have reviewed their assumptions and updated their policies on discount rates to reflect changing community standards and economic circumstances, Australia has not.
Despite all the changes since Bob Hawke was Prime Minister, Australia today still keeps flogging its developing country, VHS video tape 5% discount rate.
And this matters because the practical effect is that it contributes to the PBAC rejecting a range of new medicines, therapies and vaccines for funding that save lives over the long-term.
So, what should the PBAC do?
It should reduce its discount rate. Now. Substantially.
The good news is that under the new Medicines Australia - Australian Government Strategic Agreement, the government has committed to reviewing the PBAC base case
discount rate against international health technology assessment (HTA) best practice.
Medicines Australia's submission calls on the PBAC to reduce Australia’s reduce discount rate from its current 5% to 1.5%.
It would be simple to do this. There’s no legislative change required, and no budget submission needed.
It essentially requires the PBAC to cross out ‘5%’ on page 65 of its own current Guidelines, and insert ‘1.5%’, and then implement the decision.
A stroke of the pen would bring Australia into the 21st century, at least as far as its PBAC discount rate is concerned.
The fact is, Australia is short-changing Australian children, grandchildren and future generations when it comes to new healthcare technologies like the latest vaccines for infectious diseases, newly-emerging potential cures for diseases.
To be fair, during the 1980s a 5% discount rate might have made sense.
However, more than 30 years later, in 2022 it makes no sense and, frankly, is difficult to defend on economic or ethical grounds.
And, for a country that prides itself on its health system and often likes to claim the moral high ground in health economics issues, it is embarrassing on an international scale.
It’s time to fix this, for our kids’ and grandkids’ sake.