The Grattan Institute report, by health program director and former top bureaucrat Stephen Duckett and Grattan health fellow Peter Breadon, evaluates the effectiveness of therapeutic price premiums, a policy which is supposed to make patients pay the difference between an expensive drug and its cheaper equivalent. One aim of the policy is to put pressure on drug companies to drop their prices to reduce the risk of patients switching from their drug to a less costly equivalent.

But the pair argue that while the idea behind the policy is good, it is "broken" in Australia because the scheme covers too few drugs, premiums charged are too small, and patients are often unaware of whether their drug attracts a premium.

Australia only charges premiums on two drugs, both blood medications for which patients pay an extra $3.50 per script.

But the report authors said these premiums cover less than $2 million of the $22 million in extra cost incurred by taxpayers due to patients using higher-priced drugs instead of the cheapest equivalent drug in that class.

Germany applied such an approach to more than 30 classes of drugs, while the Netherlands applied this approach to all drugs.

While the authors found Australia's policies were placing downward pressure on the prices of some drugs, they argued making premiums cover the full difference between more expensive drugs and their cheapest equivalents in seven  classes of drugs would save $320 million a year, enough to pay for 60,000 hospital visits.

Part of the problem was a lack of awareness among patients and doctors about how premiums operated. Unlike in Germany, Australian doctors are not required to inform patients when they prescribe them a drug which carries a premium.

Doctors are able to order their patient be exempt from paying the premium if there is a medical reason for them not to change drugs, but exemptions are only ordered in one per cent of cases, which the authors said suggested a lack of knowledge of the policy among patients and doctors.