Pharmac Bashers Need a Dose of Reality

Gareth MorganHealth, Tax and Welfare

Free trade is a great thing. It’s basic economics: 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.

Despite being the chief advocate for free trade, the United States has a reputation for negotiating trade deals that turn out to have more fish hooks in them than a Japanese long-liner. Could the Trans Pacific Partnership deal be shaping up to be another example? Behind the scenes, drug companies are spreading misinformation to undermine our state monopoly drug purchaser Pharmac.

The official argument from the drug companies is that Pharmac is anti-competitive. Anyone who looks at the pharmaceutical industry and reckons that is a competitive market has to be a bit loopy. It is an oligopoly at best, with a handful of huge players running the show across the entire globe. Pharmac is a little bit like forming a union to have equal bargaining power with big employers – it negotiates and purchases medicine on our behalf. In New Zealand, the public’s health is regarded as a social good, so we levy taxes and the state provides the public health services. We have rejected the private competition model for this sector. The US is slowly coming around to the fact that places like Canada and New Zealand deliver a better average health service. The US system is great if you are crook and have the bucks, it sucks if you don’t.

The drug company claims that Pharmac has failed are based on the fact that New Zealand’s pharmaceutical budget is much lower and is growing slower than other countries. To suggest this is a bad thing completely misses the point of having Pharmac in the first place. If anything this is a sign of Pharmac’s success. While spending in most health sectors around the world (ours included) has been out of control, since its inception in 1993 Pharmac has stuck to its budget. So now spending is lower than elsewhere, and makes up a lower proportion of our otherwise bloated health system.

Another claim is that our access to medicines is much lower than overseas. Wakey wakey, folks. New Zealand is not as rich as the countries we like to compare ourselves to. We may have just overtaken Greece in the OECD rankings, but this is hardly of our own doing. Our income per capita continues to slip behind Australia, and will probably continue to until we strip-mine the Coromandel Peninsula. We have fewer resources, and so can afford fewer pharmaceuticals. Pharmac is actually the envy of other countries which have far deeper pockets than us.

Pharmac’s job is to get the best value for the budget it manages, and it does this job very well. It does this by buying the medicines that add the most years of healthy life for the money spent, and striking the best deal with the pharmaceutical giants. Clearly these bullies are not used to someone standing up to them in the playground. As a result, Pharmac spends around one fifth of the amount on statin drugs – which lower cholesterol levels and so reduce the risk of a heart attack – than the Aussies do. Given the colossal size of our heart disease problem this makes a huge difference to our drug bill. And this is what we should judge Pharmac on: not how much it spends, not whether it buys the latest unproven experimental drugs, but the value it gets for every dollar spent.

National shot itself in the foot on the whole Herceptin issue. At the time it was a cynical political vote grab, but now it faces the consequences. In overruling Pharmac it implicitly agreed with the arguments of the drug companies and gave their arguments weight. Now the question is whether the Nats will realise their mistake and stand up for Pharmac.

If we decide as a nation that we want more pharmaceutical spending, which National clearly did in the last election, it should have given the extra money to Pharmac and let it work out how to spend it. That way it can ensure we get the greatest number of extra healthy lives from every dollar of spending. Rationing like this isn’t a pleasant job – someone always misses out and will inevitably complain. Not everyone likes the decisions that Pharmac makes. But at least these decisions are made in a fairly transparent, evidence-based way. There is no better way of making these difficult decisions.

The problem is not Pharmac, the problem is that the rest of the health system isn’t more like Pharmac. If the rest of the health system was more like Pharmac then we could more easily see where the best place is to put any extra money. That is why since publishing the book Health Cheque with co-author Geoff Simmons, I have been advocating the formation of an independent body to prioritise all new health spending. This body would need to be led by health professionals. Under such a system we could see if we could keep more people alive by spending more on drug X and less on operation Y. That is the only way we would really know if the amount we are spending on drugs makes sense or not. In the meantime, the current system is working pretty darn well.

But of course the drug oligopoly wishes it could control our drug budget, and will no doubt be seeking the backing of US government negotiators. Tough. Leave Pharmac alone, America, just buy our butter and wool and we’ll buy your Harley-Davidsons. Or get lost and we’ll deal with China instead.

Pharmac Bashers Need a Dose of Reality 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.