It Pays to Drive a Hard Bargain

Canadians spend a lot of money (both public and private) on health care, and much of that is spent on drugs: The country spent some $23.4 billion on drugs in 2008. Provincial insurance plans are desperately trying to cope, looking to initiatives like the recently passed Ontario law that caps prices of generic drugs at 25 per cent of the brand-name equivalent.

In New Zealand, which is home to just four million people, things are done a bit differently. The government doesn’t rely on the law to set prices; it uses the market itself. The government allocates a budget to Pharmac, an arm’s-length government agency, which, staying within that budget, makes the best decisions it can on what drugs to fund for New Zealand’s health-insurance plan.

Unlike Canadians, all Kiwis are covered for medicinal costs, and pay just a few dollars out-of-pocket for each medication they get at the pharmacy. Pharmac is a small government agency made up of just 60 employees, and its job is to wrestle with the Goliaths in the pharmaceutical industry, negotiating the best prices and overall deals that it can.

What enrages the drug industry is that Pharmac is prepared to say no to things like "me-too drugs" and new innovations, and to simply walk away from a deal if the price of the drug is too high given the health benefit promised. Being willing to say no means that Pharmac can negotiate prices with drug companies. If the price comes down, the cost-effectiveness ratio improves, making it possible for Pharmac to include the drug in the insurance plan.

It pays to drive a hard bargain: The Organization for Economic Co-operation and Development found that, in 2008, New Zealand spent approximately C$316 per capita on drugs, compared to the $864 per capita that Canada spent and the $1,104 per capita that the U.S. spent. And there is little appreciable difference between the range of drugs funded in New Zealand and those funded in other countries of comparable wealth.

Pharmac, of course, is not without its critics, and there are concerns in New Zealand that some new drugs should be funded that are not. The government, however, can increase the size of Pharmac’s budget – as it has done over the last few years – if it considers that resources are better spent there than on, for example, reducing wait times for elective surgery or primary care.

This feisty behaviour on the part of a small country at the edge of the world has garnered the attention of the U.S. New Zealand is in the process of having free-trade negotiations with Singapore, Brunei, Chile, Australia, Malaysia, Peru, and Vietnam, and the partners are looking to include the U.S. in these negotiations, as well. It is ironic that, as part of these “free trade” negotiations, New Zealand is being pressured to give up its approach to managing drug prices.

Big Pharma’s latest move has been to rally 28 U.S. senators to write to their president, Barack Obama, singling out Pharmac as flouting intellectual-property rights. But the industry giant is blowing smoke, as Pharmac does not – by law or other means – compromise patent rights. What it does is leverage taxpayers’ bargaining power to insist on lower prices. This is exactly what private health insurers in the U.S. do: They use their market power to negotiate with drug companies using many of the same strategies that Pharmac does – and they would never pay the sticker prices for drugs.

In the aftermath of the Christchurch earthquake that occurred in February, New Zealand’s relatively small economy is on shaky ground. As a result, New Zealand may be prepared to concede much in exchange for better access to U.S. markets – and, in particular, dairy products. No matter what the outcome of this David-versus-Goliath-type battle, Canada has much to learn from Pharmac’s experience.

Drug companies release, and heavily promote, many drugs that are of relatively small benefit, and put enormous pressure on provincial governments and other public payers to cover them.

A little bit of market pressure back wouldn’t go astray.

Photo courtesy of Reuters.