Gareth Morgan – Letter to Tim Groser on Pharmac

Gareth MorganHealth, Tax and Welfare

There has been a lot of coverage on the issue of Pharmac as part of the negotiations for the Trans Pacific Partnership. The Government have got behind Pharmac, but haven’t ruled out any changes as long as the overall package is in New Zealand’s best interests.

In response we wrote this letter to emphasise that free trade deals with the US are not always what they are cracked up to be – just witness the Australian example.


25 May 2011

Hon Tim Groser
Minister of Trade
Dear Tim

We agree that true free trade can make everyone better off, and we support the Government in pursuing such deals. It is basic economics of competitive advantage; focus on what you are best at, and then trade with other people for the stuff you need. The more people you have to trade with, the greater range of stuff you can get, and the better off you’ll be. Free trade has contributed to the post World War II boom which has created untold wealth and lifted billions of people around the world out of poverty. No arguments from us on that score.

Unfortunately, despite its rhetoric, the United States’ adherence to free trade is selective. Its claim that free trade is best for everyone is often honoured in the breach – for example when it demands market access for its subsidised agricultural production.

We understand the temptation to cement the good bilateral relations that exist with the United States into a trade deal. However, experience tells us we should be wary. A net benefit from these agreements for both parties is not always a given. Just calling something a free trade arrangement doesn’t make it one in reality. Australia’s free trade deal with the United States appears not to have been in their best interests: Australia’s imports from the United States have risen far faster than their exports. As a result Australia’s trade deficit with the United States has grown even larger in recent years, although it is difficult to know how much of this is due to the relative changes in currency values. Similarly, even under NAFTA Mexico’s farmers have struggled to compete with the heavily subsidised American agricultural industry.

As you no doubt know, American drug companies and 28 senators (many with well-documented links to the drug industry) are lobbying hard for Pharmac’s powers to be curbed as part of the forthcoming Trans Pacific Partnership (TPP) deal.

In response to growing concern about the TPP, the Prime Minister has assured us that any deal we sign will have to be “overall in New Zealand’s best interests”. We also understand you have stated that the “fundamentals” of Pharmac are not up for negotiation. However no member of the Government has ruled out changes to Pharmac as part of the negotiation.


Even if New Zealand can negotiate a deal that sacrifices Pharmac for the good of our meat or dairy exporters, there is no guarantee this will leave most New Zealanders better off. While most Kiwis are touched by Pharmac at some stage in their lives, the lack of a tax on capital means that improvements in farm income usually get capitalised into higher land prices, making it impossible to substantiate that the benefits that trickle down to the average Kiwi justify the cost. Without analysis to the counter, it would be silly to assume they do.

So long as the public’s health is a public good in New Zealand, not a private one as it is in the US, then minimising the cost of the drugs we need is a responsibility the Government must take seriously.  Aggregating drug purchases in order to achieve buying power is logical. The pharmaceutical industry is arguing for greater transparency over Pharmac and a right to appeal their decisions. They argue that Pharmac’s assessment and prioritisation of drugs should be independent of funding. In the absence of wider reform in the health sector, these changes will simply herald a return to the days of granting the drug companies a license to print money. They undermine the very reason that Pharmac was established – to stop the incessant growth in the drugs budget. Pharmac needs to be able to negotiate with these drug companies, in return they are free not to deal with Pharmac and sell direct to the public if they wish to do so.

In our view the real issue revealed by the lobbying of the pharmaceutical industry is that the rest of the health sector is not more like Pharmac. Expanding the Pharmac model so that money is spent in the most cost effective way possible right across the health sector would allow us to see more clearly whether we are spending the right amount on drugs compared to other, non-drug treatments. Money could then be shifted around the health sector in a transparent fashion, and spent in the ways that give us the most health benefits for each dollar spent.

Until the Pharmac model is expanded however, the amount of money that gets spent on pharmaceuticals compared to the rest of the health budget is still, unfortunately, a political decision. As such it may well be politically appropriate for the Government to choose to put more money into pharmaceuticals through the Pharmac model as part of making a free trade deal. However any of the other reforms proposed by pharmaceutical lobbying would be a seriously backward step in the way we manage our health spending.


Kind regards

Gareth Morgan and Geoff Simmons

Authors of “Health Cheque” (2009),

Gareth Morgan – Letter to Tim Groser on Pharmac was last modified: December 15th, 2015 by Gareth Morgan
About the Author

Gareth Morgan

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Gareth Morgan is a New Zealand economist and commentator on public policy who in previous lives has been in business as an economic consultant, funds manager, and professional company director. He is also a motorcycle adventurer and philanthropist. Gareth and his wife Joanne have a charitable foundation, the Morgan Foundation, which has three main stands of philanthropic endeavour – public interest research, conservation and social investment.