The Eco-nomic Institute

Changes to Australia’s Pharmaceutical Benefits Scheme (PBS) are to commence from 1st July 2026. While patient co-payments will remain the same (for now), it’s important we take a broader view about what these changes are and what they might mean for Australia, its people, and the pharmaceutical manufacturers selling to Australia. 

What is PBS?

PBS is an Australian government scheme that highly subsidises the cost of prescription medications, making them significantly cheaper, or entirely free, for its citizens and permanent residents. The scheme, formed in 1948, is managed by the Department of Health, Disability and Ageing, which also oversees Medicare, the TGA (Therapeutic Goods Administration), the National Blood Authority and the NDIS (National Disability Insurance Scheme). The department is represented in Parliament currently by Mark Butler, a cabinet minister, both the Minister of Health and Ageing, and the Minister for Disability and the NDIS. There are 2 other minister positions, and 2 assistant minister positions who also report to Butler.

The first Department of Health was established just over 100 years ago, in 1921, largely in response to the Spanish flu pandemic, becoming responsible for managing the Quarantine Act and other public health measures around prevention of infectious disease across the nation. It existed like this for over 60 years, until 1987, when it was dissolved, and responsibilities merged to form the new Department of Community Services and Health. Since then, it’s gone through a number of redevelopments and reiterations: it became the Department of Health, Housing, and Community Services in 1991; the Department of Health, Housing, Local Government and Community Services in 1993, which lasted 6 months before it was abolished and replaced with the the Department of Human Services and Health; lasting 3 years before being replaced in 1996, when the new Government created the Department of Health and Family Services; lasting 2 years before being abolished by the next Government in 1998 and replaced with the Australian Federal Department of Health and Aged Care; this lasting 3 years before being abolished in 2001 and replaced with the Australian Federal Department of Health and Ageing. 

In 2013, upon recommendation of the Abbott government, the governor-general then issued an Administrative Arrangements Order to abolish the Australian Federal Department of Health and Ageing and replace it with the Australian Federal Department of Health. Nine years later, in 2022, the governor-general issued another Administrative Arrangements Order, reverting the name back to more-or-less what it was, becoming the Department of Health and Aged Care, to reflect the department’s renewed commitment to aged care reform. Following another Administrative Arrangements Order in 2025, the department was renamed the Department of Health, Disability and Ageing, and the NDIS scheme, which had been part of the Department of Social Services, was brought over into the department. 

Health is multi-faceted, determined also by factors such as housing, socioeconomic status, and cultural and social influences, and the history of this department reflects larger ongoing debates around what is health, what are the needs of its citizens, and what is the Government’s responsibility in providing healthcare to its people. How these departments are structured and how their machinery for governance operates have real implications for budget allocation, spending, and, ultimately, the efficacy and efficiency of policy outcomes in helping shape the health and wellbeing of the Australian people. 

So what is changing to the PBS from 1st July 2026?

• Co-payments will remain the same (for now)
• What will be changing are the calculation methods that affect wholesale pricing and subsidisation, as it applies to pharmacies (public and private hospitals, and approved medical professionals will continue to operate under the current structure). Specifically, the calculation method of the Wholesale Mark-Up Price (WMU) is changing, to now be based on the Ex-Manufacturer Price for the pack quantity dispensed, rather than the Relevant Quantity method which is currently used. 

How medicines are priced under current wholesale arrangements:

The cost of medicines under the PBS in Australia is regulated by the First Pharmaceutical Wholesale Agreement, which sets out agreements for wholesale mark-ups and community service obligations, between the Australian Government and the National Pharmaceutical Services Association (NPSA), the association that links the Australian government to industry, ensuring purchase and distribution of medications across Australia. 

The current Relevant Quantity method means that medicines sold are reimbursed based on specific amounts of active ingredients within the medicine sold, as defined by the Australian Government. This aims to standardise pricing, importantly across brand/manufacturer, as well as quantities. However, pharmacists have had to calculate how many Relevant Quantities were being sold for each packet of medicine dispensed, and these numbers would not always align. As well as obvious pricing challenges, the trickle down public health effects of this means patients could possibly be under-prescribed or over-prescribed, also affecting access and distribution across the nation. 

Calculations are now based on the number of pack quantities dispensed, derived from the Ex-Manufacturer Price. The ex-manufacturer price, sometimes called the ex-factory price, is the baseline price of a good as it leaves the manufacturer’s warehouse (cost of production + manufacturer’s profit). The Australian Government regulates (via the First Pharmaceutical Wholesale Agreement) what the wholesale mark-up in Australia is allowed to be, controlling the retail price on medications to consumers, and indirectly (and sometimes directly) influencing price purchase negotiations. 

A shift in this calculation method reflects ‘truer’ market dynamics. Most medicines are bought in packs, not by Relevant Quantity, and the price of medicine isn’t stable: buying a pack of 10 often reflects a cheaper price per 1 unit than if only purchasing a pack of 1 or 2 units. It also better regulates wholesale mark-ups, which are now divided into 4 tiers based on the Ex-Manufacturer price of the medication, rather than the Relevant Quantity, which, as mentioned earlier, can get messy when Relevant Quantity doesn’t easily align with pack quantity. While for lower cost medicines especially this may save the Australian government (and hence it’s taxpayers) money, shifts in the tier structure of the wholesale mark-up actually will often reflect higher profits to pharmacies for middle and high cost medicines. 

What does it all mean for the Australian people?

These is no difference (yet) to the out-of-pocket expenses paid for by Australians, as it’s the Australian Government who will be footing any increases in the bill. As well as providing critical medicines to the Australian public, the government also wants to support the growth and continued presence of Australian pharmacies, which play an important role within our healthcare system as primary healthcare providers, particularly in rural communities, where access to healthcare is already a challenge. These changes aim to help improve access to health for Australians all around the country, and may also help reduce the considerable health gap between urban and rural communities. Nevertheless, taxpayers shouldn’t be naive about the fact that any changes to Government spending ultimately may have medium to long-term implications on their tax dollars. 

What does it mean for pharmaceutical companies?

These changes will ease trading. Negotiating on ex-manufacturer price rather than relevant quantity will empower manufacturers to be more bullish with their prices and profit margins. It will also indirectly begin to compensate for brand power. Positive relations with manufacturers will become even more important. 

What does it mean for the Australian Government? 

These new wholesale price calculations will ease subsidy calculations to pharmacies, while supporting both Australians and Australian pharmacies, and ensuring improved access and allocation of medicines across Australia. It may also lead to improved savings when it comes to purchasing certain medicines, however for certain medicines, the Australian Government may now be signing a larger bill both to the manufacturers, as well as the dispensing pharmacies. 

In conclusion:

These changes better reflect market dynamics, and may play a positive role in improving health access and outcomes for Australians, as well as positively influencing pharmacists and pharmacies across the country, however spending by the Australian government should be closely monitored over the next 12-24 months.