Dear Pharmac – do things differently: what David Seymour’s expectations could mean for the drug-buying agency

Associate Health Minister David Seymour’s recent letter of expectations to drug buying agency Pharmac could fundamentally change the way the organisation makes decisions. Some of these changes could also make Pharmac’s job harder and its decisions more unpopular.

The letter has received considerable coverage due to the minister’s expectation that Pharmac pay less attention to embedding te Tiriti o Waitangi in the health sector. This has already seen the departure of one director.

But some of Seymour’s other expectations have received less scrutiny than they deserved.

Pharmac currently has one core job (its statutory objective): to secure the best health outcomes within the amount of funding provided.

Seymour’s letter calls for a reform of the funding model to account for “positive fiscal impacts”. This would require a change in Pharmac’s statutory objective and could end up hurting more than helping some New Zealanders.

Considering productivity

Pharmac evaluates new medicines by looking at their cost and any savings they might make to the rest of the health system. This is then compared with the additional health gains of the new medicine.

Currently, a medicine is funded when it delivers sufficient value and there is the budget for it. If the medicine doesn’t deliver enough value, or if Pharmac can’t currently afford it, it goes on their options for investment list.

In his letter, Seymour asked Pharmac to ensure it:

Updates its decision-making and evaluation models to include the wider fiscal impact of funding or not funding a medicine or medical device to the whole of government, and has tools to consider the wider societal impact.

Pharmac is being asked to consider a drug’s impact on economic productivity. This means assessments would consider whether a medicine helps people remain at work because they don’t get sick, or helps return them to work after an illness.

Globally, 60% of drug agencies consider the broader impacts of medicines to varying degrees, but there’s no clear agreement on the best approach. Some countries include the costs and health outcomes of caregivers or parents while others look at time away from work.

Time away from work – lost productivity – can be measured using a “friction cost” approach (which counts the hours not worked until another employee takes over a sick person’s work), or a “human capital” approach (where the indirect cost is the amount of time lost due to illness, valued at the market wage).

But there is a risk those who aren’t considered “productive” and those in low-wage jobs could be deemed less important to treat. This could include older people, those with disabilities and their carers, those with conditions that mean they might never work, and those facing discrimination in the workplace (women, Māori and Pasifika, for example).

If Pharmac is to consider productivity, then the government needs to acknowledge this could exacerbate existing inequities.

Greater patient involvement

An international study published in 2021 recognised Pharmac for it’s openly consultative practice in developing its “factors for consideration” model.

But in his letter of expectations, Seymour says he expects Pharmac to do more to involve patient groups and whānau participation in the decision-making process.

This sounds positive, but it could trigger more involvement from the pharmaceutical industry. Many patient advocacy groups receive funding from industry organisations. A recent Australian study found AU$34 million had been provided to patient organisations by pharmaceutical companies over a four-year period, often when the companies’ drugs were under review for public reimbursement.

These sorts of conflict of interest will need to be managed, particularly in a country with a very active lobbying sector and few safeguards, even at the highest levels of government.

Separation of roles

Pharmac is also asked to consider separating the roles of value assessment and procurement. According to the minister:

The organisation might […] benefit from a more functionally separate procurement process.

Having both roles allows Pharmac to negotiate more effectively with the pharmaceutical industry – something unique to New Zealand. Separating them potentially risks Pharmac’s ability to negotiate, by limiting how information about value can be used.

Currently, Pharmac actively manages the pharmaceutical schedule in their role as a purchaser. They use a range of pricing and negotiation strategies.

Many of the less cost-effective treatments go on the options for investment list in the hope that a deal can be worked out later. Pharmac negotiates deals to fund these slightly lower-value medicines by getting a better deal on other treatments.

This might involve bundling products from the same pharmaceutical company or negotiating a lower price for an upcoming tender for a more widely-used drug.

If assessment is separated from procurement, these sorts of deals are unlikely to happen. This means Pharmac will need to say “no” to funding a given item more often due to its limited budget, and each of these decisions risks causing more problems for the government.

The part of Pharmac (or another agency) doing the value assessment would no longer be able to ask if a treatment is affordable. Instead, it will have to decide how much each year of healthy life is worth, and use this in its decision making.

Companies will increase the price of new drugs to match this new figure, which makes even the better-value drugs more expensive, and increases pressure on the limited pharmaceutical budget.