4. Pharmac's Budget win

A change of direction: the budget for all hospital medicines will now be managed by Pharmac. Photo: John Sefton

Pharmac was a big winner in Budget 2018 and as Thomas Couglan reports, that will lead to some big savings.

Pharmac became the unlikely focus of attention on Thursday after what was initially reported as a massive $200 million cut delivered by Finance Minister Grant Robertson’s Budget. 

But, despite shouted claims to the contrary by Simon Bridges in Parliament, Pharmac is actually receiving a tidy boost in funding.

The Combined Pharmaceutical Budget, or CPB, will be increased by $114.2 million to $985 million in 2018/19.

The "cut" that caught the eye of those scanning the Budget documents is a saving that the health system will reap as a result of Pharmac taking greater control of pharmaceutical purchasing for DHBs. 

Robertson has ambitious goals for this saving. In the next financial year, he hopes to save $29.3 million from the health budget, rising to $34.8 million in 2019/20. The saving nearly doubles in 2020/21 and 2021/22  to reach a total saving of $194.7 million over four years. 

“On the cards for fifteen years”

Pharmac chief executive Sarah Fitt told Newsroom that yesterday’s change was part of an expansion in Pharmac’s remit that had been on the cards for fifteen years. 

Pharmac was established in 1993 to curb the price of prescription medicines. 

It uses a number of measures to cut the cost of medicines, including a tendering process in which the manufacturers of generic drugs competitively bid each other down. It also negotiates with pharmaceutical companies to buy in bulk for the whole country. 

The scheme was initially focused on community pharmacies and primary care. Hospitals, then run under Crown Health Enterprises, were left out of the system and procured their own pharmaceuticals. 

“For the first 15 or 18 years the focus was very much on medicines in the community,” Fitt said.“ DHBs totally did their own thing.”

This changed under the previous Labour-led Government and Health Minister Annette King. 

Pharmac began to involve itself in the procurement of hospital medicines in 2002.

Prior to this, “patients would be on one brand in the community and they would go into hospital and be on a different brand,” Fitt said. 

“There was a lining-up of what was being used in hospitals and what was being used in the community.”

Pharmac assumed control for purchasing cancer medicine on behalf of DHBs in June 2011. Prior to this, DHBs funded their own cancer medications which lead to "postcode lottery" treatment depending on which DHB you lived in.

Since the decision 50 percent more patients have been treated with funded cancer medicines. 

“All cancer medicines got treated like community medicines and hospitals had to claim for it in the same way that a community pharmacist claimed,” Fitt said. 

Pharmac also took on vaccines and haemophilia treatment, broadening the scope of the organisation. 

“We manage the budget on behalf of the DHBs, we make the decisions about what gets funded, we do the deals, if we want to add a new expensive medicines onto the schedule, it’s up to us to sort that out,” Fitt said. 

But the piecemeal changes in Pharmac’s remit created an unusual divide in the way medicines were procured. Cancer, vaccines and haemophilia treatments were procured by Pharmac under the CPB, but DHBs continued to manage their own budgets for other medicines. 

“There was always this weird thing from the hospital’s point of view that the cancer medicines were not part of the hospital budget but all other medicines were,” Fitt said. 

“What’s happened now is just tidying that up,” she said. 

“It moves the rest of the hospital medicines across so there is just one big budget”.

Hey big dispenser

Pharmac still has a large role to play in the world of hospital medicines. Since 2013 it has managed the Hospitals Medicines List, the list of medicines that hospitals are allowed to use. DHBs can’t just use whatever they want, but until now they have managed their own budgets. 

Currently Pharmac and DHBs put a budget bid to the Heath Minister for their pharmaceuticals. 

Under the new proposals, Pharmac will manage the entire pot of funding itself. Fitt said that, knowing the types of medicines and the quantities used by DHBs, Pharmac would be able to procure the same number of medicines currently used in the DHBs for less, freeing up extra funding for new medicines. 

“We can negotiate much harder, we can free up more money for new medicines.”

She said that, based on experience with taking on cancer medicine, Pharmac anticipates it will take time for the full savings to flow through, hence the smaller savings predicted over the next two years and the much larger savings forecast from 2021 onwards. 

Pharmac has calculated that its model has saved the health system over $5.9 billion over the last decade. 

If Pharmac were forced to buy the same number of medicines it used in 2017 at the price it paid in 2007, it would require a budget of $2.4 billion. Bargaining and competitive tendering over the decade meant that it paid just $849.6 million. 

The success of the model has raised the ire of US President Donald Trump who appeared to target agencies like Pharmac in comments made earlier this week.

"In some cases medicine that costs a few dollars in a foreign country costs hundreds of dollars in America. The same pill with the same ingredients, in the same package, made in the same plant and that is unacceptable," he said. 

There are fears that should the USA re-enter the TPP it would demand extended patent periods for certain medicines, extending the time before a cheaper generic version could be developed.