Transparency and Pharmac New Zealand – Interview

Gareth MorganHealth, Tax and Welfare

Interviewer: Why is Pharmac under fire for not being transparent and accountable? Is that really the case?

Geoff: Well, Pharmac has to negotiate a limited budget with American pharmaceutical companies. So those negotiations are done behind closed doors. Of course, the pharmaceutical companies think if that was brought out into the open a bit more they’d have a bit more advantage in the negotiation process.

Interviewer: So it’s really just a matter of good commercial practice?

Geoff: Yeah, I mean, Pharmac is as accountable and transparent as it can be. There are a few other things they maybe could do, but pretty much as much as it could be.

Gareth: But what they’re doing is they’re pitting one pharmaceutical company against the other, so they’re trying to get the best deal. So they might bundle up a special drug that only one company’s got, but bundle that up with a deal on more common drugs that quite a few companies have substitutes for, and they try to get a pricing deal. If you were to disclose all that, then you can’t get a competitive tender. So it’s absolute nonsense to suggest that they should be transparent in that process. That would be the end of Pharmac.

Interviewer: So what you’re saying is it actually works in the taxpayers’ favor for them not to be transparent.

Gareth: Yeah, as long as Pharmac is subject to peer review and its processes do what they purport to do, which is to get the maximum benefit for each dollar. But you wouldn’t have that peer review being conducted by the pharmaceutical companies. That really is the wolf in the henhouse. So that is done, that stuff. So they haven’t got a leg to stand on the drug companies.

Interviewer: Now, consumers have to pay for the drugs they use anyway, or their insurance company does, so why do we need a central agency controlling this?

Geoff: There’s actually a big public subsidy that goes into the drug bill as well. It’s part of our public health system, so you do pay a little bit. The consumers do pay a little bit. But if something’s prescribed by your GP, then the government is throwing in a bit of money too.

Gareth: And the other thing is it gives it market power because it’s bulk buying. It’s like the Government Stores Board, you know, buying the pens. Except here, they’re buying the penicillin, and they need bargaining power up against these monoliths, these big companies. So if they bulk up and they’re buying for four and a half million people rather than your local doctor buying for five, they can’t get screwed to the same extent by these companies. So from our point of view, because it’s the taxpayers’ dollars here, it’s absolutely vital we do that. And the proof is in the eating of the pudding. The drug bill is being contained. The output per dollars spent on drugs has gone through the roof. I mean, it’s an unbelievable success story.

Interviewer: From a user’s point of view, there are still some cross subsidies going on with certain groups getting bigger benefits than others. So is there some distortion still creeping through here?

Geoff: Well, how Pharmac operates is that they are trying to get the maximum value out our pharmaceuticals spend possible. So they just don’t look at how they can save money. They also look at what the benefits of the different drugs are. If they can save money elsewhere in the health system, then they’ll invest in that drug. So the idea is that they’re trying to get the maximum number of healthy life years, if you like, make us live longer as much as possible for the amount of money that we put in.

Gareth: In fact, that Pharmac model that Geoff’s just explained, if we could apply that right across the health system, rather than having blimming politicians going and poking their noses in, deciding this year they’d like more money on tonsils and less on hips, we’d have a far more coherent regime and we’d save a hell of a lot more money. And we would probably spend more money on drugs too as a result actually, Mr. Drug Company, because we wouldn’t have these overly expensive operations being conducted when a drug could do the job. So what we would advocate is that the Pharmac model is applied right across the health system and you would depoliticise it.

Interviewer: And by doing that, do you genuinely think that we will end up with a healthier and more productive economy?

Gareth: Well, if you’ve got healthy people, you do. So you just get a far bigger bang for your health dollar. I mean, the health sector spend is the fastest growing spend in all of the
government accounts by a mile. It’s a huge bloody thing. So we’ve got to control it, and everybody wants to live until infinity, so the demand for it when things are so-called free, it’s just you can’t get them all the time, but they’re free if you can, is without limit. So we have to make sure that each dollar spent in that health system goes as far as possible. Pharmac does that with the drugs, but we’ve got to do it everywhere, not just with drugs.

Geoff: At the moment, in the rest of the health system, it’s really the people that are getting the money spent on them are those that yell the loudest. It’s not really the people that actually necessarily need the treatment the most.

Gareth: So you go down to the hospital and say, ‘If you don’t deal with me now, I’m going to ring up 2ZB or I’m going ring up my M.P. and I’m going to make a hell of a noise and you’ll be on Morning Report in the morning.’ Well, you’ve got the doctor over a barrel. So what happens? The doctors have told us this, on the frontline, they’ll deal with that squeaky wheel just to get them out of their bloody hair. Well, that’s wrong when the squeaky wheel only needs a plaster taken off, and there are some people there who aren’t as loud who are actually going to die in a week.

Interviewer: Both of you have made comments in the past about the elderly getting a disproportionate weighting of benefits around the drug system. So is that something that we still need to address?

Geoff: Well, not from the drug systems so much, but the rest of the health system for sure, yeah. Again, Pharmac manages those issues pretty well, but certainly across the rest of the health system. I mean, there’s a report just come out that talks about how much money is spent on the last year of life. It’s just a bit over $20K, in Counties Manukau, they found they spent on every person that was in the last year of their life. So it’s pretty expensive, and the added benefit from that money may be a few extra weeks or months of life perhaps, but the real question is about whether it could be better spent elsewhere.

Gareth: Which would go down like a cup of cold sick with the elderly, but that’s the reality of having limited resources. You’ve got to allocate them, and there’s got to be winners and losers.

Interviewer: So is there evidence at all that Kiwis are in fact suffering as a result of having a regulated drug spend?

Geoff: Well, Pharmac was created in 1993, and since then, we’ve had probably the best control of drug spending of anywhere in the world. So actually, when you compare us with other countries, we do spend less than most other countries spend on drugs as result of that.

Gareth: And the blimming drug companies reckon that that’s a measure of poor performance. It’s actually the opposite.

Geoff: Yeah, Pharmac’s been doing exactly what we wanted it to do. In terms of effectiveness, which is the key thing, it’s incredibly effective in terms of, as we were saying before, the return that you get for the money spent.

Gareth: I can’t add to that. I mean, New Zealanders don’t get necessarily the best health care in the world, but that’s because of the amount of money that’s available to be spent on it isn’t the most per capita in the world, and that’s because the income in the country, per capita, is not the highest in the world. So by far and away the biggest driver of what you can spend on your health system is what income and what tax base you’ve actually got to do that. But for our given income that has to be spread, Pharmac does a fantastic job in terms of getting value for money for the limited money it’s got.

Interviewer: Just one more question. Tell me how Pharmac could be improved.

Gareth: They could take over the whole health system.

Interviewer: Right.

Gareth: That’s what we’d like to see and get the politicians out of it.

Transparency and Pharmac New Zealand – Interview was last modified: December 15th, 2015 by Gareth Morgan
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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.