Robert Kemp is Manager of Pharmaco Economics and Director of Newcastle Health

The pharmaceutical subsidy scheme in Australia works in the public interest by keeping prices low while assuring access to drugs across most of the drug classes. By separating the approval to market drugs from the decision to subsidise them, the Commonwealth is able to take advantage of its position – to ‘free-ride ’ on research and development expenditure in other countries. The first part of this paper examines the factors which allow Australia to free-ride. The second part explores some international and domestic factors which may influence the sustainability of the free-riding strategy. Pharmaceuticals make up only 10.5 ␣ per cent of the total health care budget of Australia, a country where 8 ␣ per cent of gross domestic product is spent on health care. On a per capita basis, Australian expenditure on drugs is about 45 per cent that of the United States and much less than that of the European Community (Spivey, Wertheimer & Rucker 1992). As a small market, sales in Australia do not significantly affect the pharmaceutical research and development taken on by the multinational drug firms. The current policy allows Australia to ‘free-ride ’ on research paid by others, and on the profitable sales under patent protection in other countr ies. Australian health care policies, in particular the Pharmaceutical Benefits Scheme, work to keep prices on pharmaceuticals low by international standards. It is the goal of this paper to explain the factors which allow the Australian free-ride and to identify possible causes of the erosion of this privilege. The distribution, prescription and use of pharmaceuticals at prices below world average result from a combination of (a) other countries’ policies for the development of new therapies; (b) the market structure an