Institutions do Matter: How the Pharmaceutical Management Agency of New Zealand Achieves Lower Drug Prices than the Pharmaceutical Benefits Scheme of Australia

The Pharmaceutical Management Agency of New Zealand (PHARMAC) and the Pharmaceutical Benefits Scheme of Australia (PBS) are government agencies that administer national pharmaceutical procurement for their respective countries. Although Australia buys twelve times more drugs by value (and five times more drugs by volume), PHARMAC achieves drug prices that are six to eight times lower than those achieved by the PBS. How is this possible? This outcome is mainly due to the different institutional foundations of each agency. A comparative analysis showed that philosophies of healthcare delivery changed significantly after the PBS was founded in 1944, and PHARMAC’s modern design – it was established in 1993 – gave it an advantage over the PBS when negotiating drug prices. PHARMAC is an independent institution whose enabling legislation grants immunity from anti-competitive laws; this immunity was upheld during litigation soon after its establishment. PHARMAC is also required to stay within a fixed annual budget, and has protection from political and popular pressure. These factors allow PHARMAC to use very aggressive bargaining strategies when negotiating terms with pharmaceutical companies. One successful strategy has been sole supply tendering for generic drugs, which creates a zero-sum, winner- takes-all incentive for suppliers to offer the lowest possible price. This also has the effect of implementing mandatory generic substitution, which generates maximum cost savings for the government. In contrast, the PBS is part of the Australian Department of Health. The Minister of Health has authority over any decisions made. The PBS operates under highly prescriptive legislation, which also specifies the criteria for drug price reductions. These statutes are complex, containing loopholes and causing unintended consequences. While some price reductions have been achieved compared to the rest of the world, the PBS has been unable to match the low prices achieved by PHARMAC. While PHARMAC’s track record is enviable, it will be challenged by changes mandated by the Trans-Pacific Partnership free trade agreement, which is still under negotiation