Pharmac good, subsidies bad

Dr Bryce Wilkinson
Insights Newsletter
7 August, 2020

Last week, The New Zealand Initiative released a new research report: Pharmac: The Right Prescription?

Pharmac’s core role is to get the best health benefits from medicines for New Zealand within a fixed budget. Its incentive is clear. The lower it can negotiate the prices, the greater the quantity for medicines it can fund.

The report benchmarks Pharmac’s price performance against Australia’s Pharmaceutical Benefits Scheme. Pharmac’s absolute and relative performance is remarkable.

First, the quantity aspect. Prescriptions per capita rose 30% in Australia, from 6% in 1993 to 8.1% in 2017 (years ended June). In New Zealand they rose 90%, from 5.1% to 9.6%. The year ended June 2010 was the cross-over year.

Second, the pharmaceutical budget. In 2017, gross subsidy spending per prescription was only 10% higher than in 1993 for New Zealand. In Australia, it was four times higher. In 2018, Australians were paying, converted to New Zealand dollars, twice what Kiwis were paying per capita ($543 versus $275). Furthermore, Pharmac negotiates bigger rebates, as a percentage of gross spending than does Australia.

When Pharmac achieves lower prices for imported medicines it increases real national income. Otherwise, lower prices would benefit consumers at the expense of local producers.

Pharmac's cost control achievements are impressive. But they are not the full picture. They do not prove that the system is improving Kiwis’ wellbeing, or even their overall health.

Exactly, what is the problem for which the subsidy system is the remedy? There should be a presumption against subsidising people not in financial need. And those in financial need may often prefer a cash option.

The current system cuts again both presumptions. Are there good public policy reasons for doing so? The report recommends that Government set up a process for clarifying the real purpose of the subsidies.

Without the subsidy, people not in financial need would pay for medicines out-of-pocket, or via insurance policies. They would consume a different mix of prescription medicines. That might be good.

An offsetting consideration is that Pharmac might be less able to negotiate low prices if fewer people were subsidised.

The report also recommends that Pharmac be required to benchmark its price performance against the world’s best. Doing so would reveal if its performance was faltering as its role changed.

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