A new report by the Grattan Institute says that reducing manufacturing costs could be the best way to cut up to a billion dollars from the health budget.

The report says the way to savings is through bigger adjustments to generic drug prices through the “price disclosure” mechanism.

Essentially, it recommends lowering the price of generic drugs by paying pharmaceutical manufacturers less for them.

“More than $1 billion could be saved annually by introducing improved purchasing arrangements and benchmarking the prices the PBS pays against those paid in comparable countries such as New Zealand,” says Dr Stephen Duckett, director of the health program at the Grattan Institute.

“Sacking bureaucrats never seems to go out of fashion, but the new Commission of Audit will have to look beyond the usual suspects to make substantial inroads into health spending,” Ducket said in a statement about the report ‘Australia’s Bad Drug Deal 2013’.

There is some risk in the idea though, as the cost of reducing pharmaceuticals would hit the small handful of manufacturers, and several thousand pharmacies.

In the lead-up to the recent federal election, the Pharmacy Guild petitioned against changes instituted by the Labor government to speed up price reductions. A counter campaign was launched by the Consumers Health Forum, which explained that consumers would benefit from lower prices. Still, the Pharmacy Guild gathered more than a million signatures.

“There’s going to be very few other [cost-cutting] initiatives which don’t impact adversely on consumers,” Dr Duckett says.

“This one actually helps consumers.”

The report goes on to suggest a revised system with an independent body to set drug prices, which would then be benchmarked against a range of other countries.

More information is available from the full Grattan Institute report available here in PDF form.