Brian Easton explains the background to how the government got into its cancer drugs muddle

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

If you don’t understand how things work you make foolish mistakes. To explain how the government got into its cancer drugs muddle, we need to explain first how New Zealand’s pharmaceutical purchasing system works.

There is a parallel between Pharmac and the Reserve Bank of New Zealand. The Government sets the monetary policy framework with its legislation and the Policy Target Agreement (PTA) between the Governor and the Minister of Finance (plus some other minor matters, but they are all in public). The Bank then implements the monetary policy, independently of the Government. Which is a good thing, given how complicated the monetary system is together with the tendency of politicians, and others, to want to interfere for short-term purposes. (In the previous framework, Prime Minister Rob Muldoon would literally ring the Governor directing him to alter the monetary settings for political purposes, such as impending by-election.)

Similarly, Pharmac implements the Government’s purchasing of pharmaceuticals within a statutory framework. It includes the prior institution, Medsafe, which determines whether a drug is safe, although that says nothing about its effectiveness. That Medsafe decides a drug is safe does not automatically mean the pharmaceutical is available free on the public health; if it is not, it can be used in New Zealand but must be privately purchased.

The equivalent of the PTA is that each year Parliament votes a sum which Pharmac uses for its total pharmaceutical expenditure. Like everything else to do with the public health, there is never enough. So Pharmac tries to purchase drugs as cheaply as possible. Where a drug is off-patent and there is competitive supply, it seeks the cheapest high-quality supplier. An individual tablet may cost only cents (like paracetamol before the retail markup).

In order for Pharmac to fund a medicine, it needs:

- to identify a clear health benefit for New Zealanders;

- a deal with a medicine supplier;

- enough money in the budget to fund it this year and in future years;

- and to have consult on the proposal with everyone who as an interest.

Once these align, Pharmac can work quickly to fund the medicine.

Most of the drugs which Pharmac funds are off-patent. However, most of its expenditure is on drugs which are on-patent and supplied by a single Big Pharma (although sometimes there may be close alternatives). They are very expensive because of the patent monopoly. It is there to provide Big Pharma with the incentive to develop new drugs. (A common figure mentioned for the cost of development of a drug is a billion dollars, but there is a lot of variation, and many potential drugs prove ineffective which may mean the development costs are wasted.) That means there is a big margin between the cost of producing the drug and the price that the Big Pharma thinks is justified by its investment.

The margin varies by country. For instance, HIV-Aids medication is supplied cheaply to poor Africa. I do not discuss the issue further; it is quite complicated. What is relevant here is that the margin means that Pharmac has the opportunity to beat the price down from the top rate the Big Pharma charges (typically to the USA).

Big Pharma loathes the arrangement. (What if every country in the world followed this practice; it is unique to New Zealand?) They have even tried to abolish Pharmac in trade deals we have negotiated (particularly with the US). New Zealand has been staunch because the effect could be close to doubling the cost of the public pharmaceutical budget.

Those negotiations can be fraught given that they are between a monopsonist (single-purchaser) Pharmac and a monopolist (single supplier) Big Pharma. For obvious reasons they are commercially secret. Or rather, I thought it would be obvious; I presumed that was the reason that there was no explicit provision for the costs of additional drugs in the May budget. At the extreme, if it was stated $1m had been set aside to purchase drug X, you don’t have to be very smart to work out what Big Pharma would do. (In their turn, Big Pharma don’t want any other country to know what prices they are charging New Zealand.)

However, the negotiations aside, the great problem Pharmac faces is which drugs to fund, given its limited budget. Some drugs are going to miss out.

I shan’t go through the full evaluation procedure but an economist might summarise it as Pharmac trying to get as much bang as it can for each buck – the economist’s ‘bang’ is usually measured in years of quality life. (For other considerations see here.) For instance, suppose Pharmac had to choose between spending the same amount on a cardiac medication which extended life for ten years and some cancer medication which extended life for ten months, most of us would think the choice is a no brainer.

Not everyone, because those suffering the cancer would still demand that their drug be funded. Very often they blame Pharmac, which is unfair because Pharmac is limited by the funds made available to it – to its ‘PTA’ target.

Gee, it has taken a lot of explanation to get to the most recent controversy – and I have left bits out. It is clear though that many who get involved in the pharmaceutical disputes have not understood even the above simplification.

Opposition politicians easily get swayed by public demands for a particular drug, making promises which in government are difficult to keep at the simplified level of their thinking. Hence the current fiasco.

After much political muddling (and, one suspects, a lot of hard administrative work) the government has announced it would give Pharmac extra funding of $604 million over the next four years to cover ‘up to 54’ new medicines including 26 cancer treatments. That includes all the 13 cancer drugs National promised during its election campaign, or replacements that are ‘as good or better’. Observe that the announcement gives Pharmac room to negotiate rather than be an easy walkover by Big Pharma. Moreover, it allows Pharmac to fund other drugs which it judges are as effective at improving quality of life of sufferers.

The funding comes out of the contingency operating allowance the budget provides for new policies and unexpected changes. That is exactly what the reserve is for, although I, among others including the Treasury, have expressed concern that the amount provided in the budget is too small. (here) It is now smaller.

The Labour Opposition joined the chorus pointing out the Coalition Government was failing to keep its election promises. Curiously, during the election campaign Labour failed to get across that the Ardern-Hipkins Labour Government had markedly increased Pharmac funding by more than 70 percent (excluding that for Covid), while Pharmac funding under the Key-English Government was near stagnant. The National-led Government’s recent policy announcement represents a major break from the earlier National Government.

Hopefully, that means it has come to grips with how Pharmac works and is committed to make it work, leaving Pharmac to make the technical decisions. There is always the fear that the Big Pharma will prevail and that Pharmac will be neutered, to the taxpayers’ cost.

The other concern is that it seems likely that we could get a better bang for our health buck by spending additional funds on reducing some of the intolerable waiting lists in the public health system. However, there are no ‘Big Pharma’ to stoke public indignation. And the contingency operating allowance is getting smaller.

*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.