A respected think tank believes the federal government wastes millions of dollars each year on expensive drugs when cheaper ones are just as good.
In a new investigation into the Pharmaceutical Benefits Scheme, the Grattan Institute says Australia is paying too much for drugs covered by the scheme, wasting $320 million a year.
It says drug companies are charging more than their drug is worth when cheaper options are equally effective and safe for most people.
"The extra costs do not reflect extra benefits for patients and they are mostly paid by the government," the institute says in a report released on Sunday.
It says a policy that has been in place since 1998, which allows patients to switch to a better-value drug, has been watered down, allowing more and more drugs to escape the policy.
It urges the government to implement a policy that compares broader groups of drugs - as it used to do and as other countries still do - and use comprehensive data rather than surveys selected by drug companies.
"Patients should be told if they pay a premium so they can switch drugs to avoid it," it says.
"Getting the policy right would cut government spending without risking health.
"In the longer term, patients will save too."
The institute also recommends that Australia establish an independent drug purchasing agency, like New Zealand's PHARMAC, to negotiate drug prices.
The Grattan Institute has previously advised the government to negotiate better prices for drugs, as other countries do.
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