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How a country of just 4 million can teach Canada how to bargain

A version of this commentary appeared in the Toronto Star, Mark News and Straightgoods.ca

Canadians spend a lot of money (public and private) on health care and much of that is spent on drugs — some $23.4 billion 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% of the brand name equivalent.

In New Zealand, a small country of just 4 million people, they do things a bit differently.  They don’t rely on law to set prices, they use the market itself.  An arm’s length government agency, Pharmac, is allocated a budget from government and within that budget it makes the best decisions it can on what drugs to fund for New Zealand’s health insurance plan.

Unlike Canada all Kiwis are covered for medicines and pay just a few dollars out-of-pocket at the pharmacy for each medication.  Pharmac is small, just 60 people, and its job is to wrestle with the Goliaths in the pharmaceutical industry to negotiate from them the best prices and overall deals they can.  What enrages the drug industry is that Pharmac is prepared to say no to things like me-too drugs and new innovations, and simply walk away from the 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 — and thereafter the drug could be included in the insurance plan.

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

Pharmac of course is not without its critics and in New Zealand there are concerns 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 access.  But it is important to remember, as much as we conveniently ignore the fact, that in health care, money spent on one thing simply can’t be spent on another.

This feisty behavior on the part of a small country at the edge of the world is now the focus of attention of our neighbor to the south, the US.  New Zealand is in the process of free trade negotiations with Singapore, Brunei, Chile, Australia, Malaysia, Peru and Vietnam and the partners are looking to include the US.  Ironically as part of this “free trade” negotiation New Zealand is being pressured to give up its market approach.

Big Pharma’s latest move has been to rally 28 US Senators to write to President Obama singling out Pharmac as flouting intellectual property rights.  But they are 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 US private health insurers 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-price posted for drugs for their insured populations.

Post the Christchurch earthquake, New Zealand’s relatively small economy is on shaky ground and it may be prepared to concede much in exchange for better access to US markets, particularly for its dairy products.  No matter what the outcome of this David vs. Goliath battle, there is much to be learnt from the Pharmac experience for Canada.  Drug companies release and heavily promote drugs of relatively small benefit and bring enormous pressure, particularly upon provincial governments and other public payers, to cover these drugs.

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

Colleen M. Flood is the Canada Research Chair in Health Law and Policy, Faculty of Law at the University of Toronto.  She is also an expert advisor with EvidenceNetwork.ca.

May 2011

This work is licensed under a Creative Commons Attribution 4.0 International License.