Briefing to the Incoming Minister (text extract)

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Briefing

T O T H E I N C O M I N G M I N I S T E R O F H E A LT H

2005

Contents

1. 2. 3. 4. 5. 6. 7. 8. OVERVIEW PHARMAC’S ACHIEVEMENTS PHARMAC’s challenges NZ’s top spending areas – where the money goes PHARMACEUTICAL FUNDING ISSUES Medicine funding TNF alpha inhibitors Cancer drugs Tendering High cost medicines Statins Flu vaccine Pharmaceuticals not funded HEALTH SECTOR ISSUES Pharmaceutical budget and long-term planning Industry relationship Changes in the pharmaceutical industry Research and development Pharmaceutical funding and pharmaceutical research Maori and Pacific Island health Rebates Joint Therapeutic Goods Agency PHARMAC’S FRAMEWORK PHARMAC’s origins PHARMAC’s structure Commerce Act exemption Decision-making Decision process The Board Management PHARMAC’s advisory committees Pharmaceutical budget Prioritisation of funding Issues management The Pharmaceutical Schedule PHARMAC’S METHODS Price competition Promoting the responsible use of medicines Special Authorities and Exceptional Circumstances Review of Operating Policies and Procedures (OPPs) Growth of pharmaceutical expenditure International relationships and comparison COMMUNICATIONS Ministerial briefings Political briefings Media Website The Annual Review APPENDICES: 2 3 3 4 6 6 7 7 7 8 8 8 8 10 10 10 10 10 11 12 12 13 14 14 14 14 16 17 18 18 18 20 22 22 22 23 23 23 25 25 26 27 28 28 28 28 28 28 29

P H A R M AC TO DAY

OV E RV I E W New Zealanders have had subsidised access to pharmaceuticals since the 1930s. Since 1993, the Pharmaceutical Management Agency (PHARMAC) has managed the list of medicines that are subsidised by the Government. Successive governments have been concerned to make a comprehensive range of medicines as affordable as possible for patients. PHARMAC achieves this by managing the New Zealand Pharmaceutical Schedule that lists all subsidised medicines, along with any restrictions on eligibility for subsidy. The Community Pharmaceutical Budget for 2005/06 is $582.86 million, a 3.2% increase from $565 million in 2004/05. The budget is set by the Minister of Health, and PHARMAC is charged with getting the best value (in terms of health gain) on pharmaceuticals when deciding which drugs should be subsidised, and at what levels. PHARMAC wants to improve the health of New Zealanders through the allocation of pharmaceutical spending. Since its inception in 1993 PHARMAC has been successful in providing access to more than 150 new medicines while managing expenditure within budget. Considerable resources are put into assessing new pharmaceutical spending to ensure that when funding decisions are made they are based on sound data that can demonstrate positive effects on New Zealanders’ health. As with any area of healthcare, there are greater demands on pharmaceutical funding than the available budget can cope with, so PHARMAC’s constant challenge is to balance the needs of patients (equitable access to healthcare) with the needs of taxpayers (responsible management of the costs they ultimately bear). The PHARMAC Board, or the Chief Executive under Delegated Authority, makes the decisions on listings, subsidy levels, and prescribing guidelines and conditions, with independent medical advice from the Pharmacology and Therapeutics Advisory Committee (PTAC) and its specialist sub-committees. Decisions are made under PHARMAC’s decision criteria which are defined in the Operating Policies and Procedures. PHARMAC HAs fOuR MAIn AREAs O f A C T I V I T Y: • Making pharmaceuticals affordable for patients: PHARMAC’s core activity is agreeing the level of subsidisation pharmaceuticals will have to ensure that patients can afford them. PHARMAC does this by contracting with pharmaceutical suppliers, and publishing the subsidy in the Pharmaceutical Schedule. PHARMAC assesses the drug’s effectiveness and cost, and by working with pharmaceutical companies agrees the level of subsidy. • Publishing information for patients and prescribers: PHARMAC’s Demand Side team promotes the responsible use of pharmaceuticals, which involves developing and distributing information to prescribers, pharmacists and the wider public, and working with external agencies on issues such as appropriate prescribing. • Managing hospital pharmaceutical spending: PHARMAC was authorised to negotiate contracts for the supply of hospital pharmaceuticals for District Health Boards in 2002. • Assisting DHBs with other purchasing: PHARMAC has been increasing its assistance to DHBs by contracting for the influenza vaccine, recombinant blood, radiological contrast media, and bulk intravenous fluids. This helps ensure consistency and lowers the cost to DHBs.

PHARMAC’s ACHIEVEMEnTs

I n T H E PA s T Y E A R A C H I E V E M E n T s H AV E I n C l u D E D • Providing new or wider access to subsidised treatments for raised cholesterol, severe pain, HIV/AIDs, hepatitis C, Type 2 diabetes, chronic obstructive pulmonary disease, glaucoma, breast cancer • Funding nine new medicines on top of the 146 new medicines funded since 1993, while managing spending within budget • Providing access to subsidised medicines for at least 13,000 new patients in the 2004 financial year alone • Maintaining pharmaceutical spending within the $565 million budget in 2004/05 • Running information campaigns such as the Wise Use of Antibiotics, One Heart Many Lives, Adult Asthma Management • Helping ensure that all New Zealand have equitable access to subsidised medicines by implementing the Maori Responsiveness Strategy • Working with DHBs to manage spending on pharmaceutical cancer treatments, and ensuring nationally-consistent access to pharmaceutical cancer treatments • Producing new pharmaceutical technology assessments for DHBs through the Hospital Pharmaceuticals Assessment Process • Providing access to high cost medicines, and medicines for people with rare conditions. PHARMAC’s CHAllEnGEs: • Continuing to manage pharmaceutical expenditure within the allocated budget in the face of increasing costs for new pharmaceutical technologies • Strengthening relationships with patients, health professionals and other interested parties. Ensuring that patients are aware of what medicines are available, and are accessing them equitably • Maintaining robust processes for assessing the effectiveness of medicines, cost utility analysis and decision making • Maintaining public confidence in PHARMAC’s processes in the face of concerted lobbying by pharmaceutical suppliers and patient lobby groups • Overcoming data collection issues to track accurately pharmaceutical spending in the hospital sector • Gaining access to better health information to be able to accurately measure health outcomes.

nZ’s TOP sPEnDInG AREAs

WHERE THE MOnEY GOEs Table 1: Percentage of total pharmaceutical expenditure by therapeutic group1 THERAPEuTIC GROuP Cardiovascular & blood – including cholesterol lowering drugs Nervous system – including anti-depressants & anti-psychotic drugs Alimentary tract & metabolism Respiratory & allergies – including asthma Oncology and Immunosuppression (cancer drugs) Table 2: Top 10 Drug Groups2 DRuG TYPE Anti-ulcerants Blood pressure management Statins – cholesterol lowering Anti-psychotics Diabetes and diabetes management Anti-depressants Immunosuppressants Anti-epilepsy Antibiotics Inhaled corticosteroids metered dose inhalers for asthma COsT EXCl GsT (MIllIOns) 2005 $63.9 $57.9 $54.9 $45.0 $39.3 $27.5 $26.3 $20.7 $16.2 $14.9 1997 $27.1 $93.0 $19.9 $4.5 $24.5 $29.2 $8.0 $9.8 $35.6 $17.4 PREsCRIPTIOns 2005 1.21 million 2.70 million 1.10 million 347,007 838,200 925,940 34,670 357,354 2.73 million 478,710 1997 715,845 1.68 million 154,851 229,455 483,615 583,789 16,643 239,566 3.42 million 323,800 % O f T O TA l E X P E n D I T u R E 24% 21% 21% 9% 6%

Table 2 shows the number of prescriptions for most drugs has risen since 1997. Expenditure has grown at a lower rate, however, mainly through price reductions being negotiated. This is most noticeable with blood pressure drugs and anti-depressants, where expenditure has fallen while the number of prescriptions has risen. Antibiotics have shown a decrease in both expenditure and volume, consistent with the aims of PHARMAC’s Wise Use of Antibiotics campaign. There has been considerable extra expenditure on antipsychotic medications and cholesterol-lowering statins. Both these drug groups can demonstrate data showing good long-term health outcomes. Growth in spending on immunosuppressants (drugs for conditions such as hepatitis, multiple sclerosis, organ transplants) reflects expenditure on a number of new and comparatively expensive agents. Expenditure reductions for blood pressure drugs has been the result of falling drug prices.

NB: Figures for 2004 Financial Year Expenditure figures do not include rebates

nZ’s TOP sPEnDInG AREAs

WHERE THE MOnEY GOEs COnTInuED Graph 1: PHARMAC’s impact on expenditure

Graph 1 illustrates the impact PHARMAC has had in managing pharmaceutical expenditure in New Zealand. The blue line is an illustration of how expenditure would have tracked without the intervention of PHARMAC, while the purple line shows actual (and forecast) expenditure.

PHARMACEuTICAl funDInG IssuEs

MEDICInE funDInG PHARMAC’s role is to obtain the best health outcomes for the available dollar spent on pharmaceuticals. Where funding is available and evidence is produced that a new treatment is cost-effective, PHARMAC lists new medicines. nEW PRODuCTs lIsTED In 2004-05 Ezetemibe Fentanyl Influenza vaccine (Vaxigrip) Insulin pen needles Blood glucose test meters Lopinavir with ritonavir (Kaletra) Pioglitazone Tiotropium Zuclopenthixol T O TA l : 9 T R E AT s Raised cholesterol Severe pain Influenza Diabetes Diabetes HIV/AIDS Type 2 diabetes Chronic obstructive pulmonary disease (COPD) Mental illness

PRODuCTs WITH WIDER ACCEss 2004-05 Silver sulphadiazine (available on prescription) Pegylated interferon (access criteria widened) Letrozole (access criteria widened) Ondansetron (increase in number available on prescription) Insulin needles (increase in number available on prescription) Quetiapine (access criteria widened) Candesartan (access criteria widened) Citalopram (removal of endorsement) Olanzapine (access criteria widened) Phenobarbitone (increased age limit) Insulin syringes (increase in number available on prescription) Paracetamol (added to PSO list) Hyoscine (access criteria widened) Tropisetron (increase in number available on prescription) Lamivudine (access criteria widened) Gluten free foods (removal of requirement for Special Authority renewal) T O TA l : 1 6

n O W AVA I l A b l E T O T R E AT Burns Hepatitis C First line, advanced breast cancer Nausea Diabetes Schizophrenia Congestive heart failure Depression Acute mania in bipolar disorder (mental illness) Epilepsy Diabetes Pain Nausea Nausea Hepatitis B Gluten intolerance

PHARMACEuTICAl funDInG IssuEs

PHARMAC has undertaken a significant investment programme over the past two years. In 2004, PHARMAC subsided 15 new products and a further nine were subsidised in 2005. This programme of investment is set to continue, as the 2006 budget includes a significant increase for new investments. The indicative three-year funding path also allows for continued increases in access to new medicines. Despite this investment programme, PHARMAC faces pressure to fund more medicines, some of which offer little benefit to patients. New medicines tend to be more expensive than those they replace, and are often aggressively marketed by their suppliers. To help manage this, PHARMAC sometimes uses a targeting mechanism (Special Authority) to ensure that the cost effectiveness of these new treatments is maintained. In some cases, PHARMAC also enters into risksharing agreements with the suppliers, which result in expenditure above an agreed level being rebated back to PHARMAC and, ultimately, DHBs. New Zealand. The cancer treatments “basket” ensured there was equity of access to cancer treatments throughout New Zealand. However, the emergence of newer agents to treat cancer in subsequent years has highlighted a lack of an effective process to add new treatments to the basket. PHARMAC assesses new pharmaceutical cancer treatments but can only make recommendations to DHBs regarding funding, and requires the agreement of all 21 DHBs before a treatment can be added to the “basket”. This leads to delays in new treatments being approved. In 2004 DHBs agreed that PHARMAC would take over funding pharmaceutical cancer treatments. PHARMAC consulted on a proposal to streamline the process for approving funding for new pharmaceutical cancer treatments in early 2005, and is implementing a twoyear transition period. This will enable accurate data to be gathered on pharmaceutical cancer treatments used in DHB hospitals and in the community, so that expenditure levels can be estimated and funding transferred to the pharmaceutical budget by July 2007.

T n f A l P H A I n H I b I TO R s TNF Alpha Inhibitors are new-generation drugs for the treatment of rheumatoid arthritis. One of these treatments, etanercept (Enbrel), has been funded for juvenile rheumatoid arthritis (JIA) since January 2004. JIA primarily affects children aged under 18 but under the funding criteria, patients diagnosed with JIA before they are 18 can continue treatment into adulthood. TNF Alpha Inhibitors, or biologicals, are expensive treatments, costing $30,000 per patient per year. In April 2005 PHARMAC asked the three suppliers for proposals to examine making the treatments available for other patients with rheumatoid arthritis. In May 2005, the Human Rights Commission informed PHARMAC that a complaint had been laid about access to etanercept being age-related. PHARMAC has been requested to take part in mediation with a Christchurch-based group regarding the complaint. This process is on hold as PHARMAC completes the commercial process it initiated. TEnDERInG Tendering for the purchase of off-patent medicines has been an effective way of ensuring supply of smallvolume products and for achieving price reductions. Tendering is one of the most common business tools used by both governments and the private sector to purchase goods and services. In pharmaceutical markets a single supplier of a medicine is common, as any medicine on patent has no generic alternative. Tendering is a process that continues a single supplier when the medicine comes off patent. PHARMAC ran its first tender (for one product) in 1996, and since then has grown the annual process to the extent that some 40 percent of all medicines now purchased are sourced through the tender. Typically, the tender produces savings in the region of $20 to $25 million per year, though this can vary depending on which products are tendered. In many cases, enormous efficiencies can be made, and price reductions of more than 90 percent are achievable. For example, in 2002 PHARMAC tendered for the hay fever drug cetirizine (Zyrtec), which had --

CA n C E R D R u G s In 2001 the Minister of Health agreed a list of cancer drugs that were to be funded by DHBs throughout

PHARMACEuTICAl funDInG IssuEs

come off patent. As a result of tendering this product, its price dropped from $26 to $2.50 for a pack of 30 tablets. New Zealand is a small market and without supply contracts there would be no mechanism to provide continued access to small-volume medicines for New Zealand patients. Tendering has been vital to ensuring these drugs remain available in New Zealand. The success of the PHARMAC tender has caught the attention of healthcare systems in other countries. In early 2005, a delegation from the Belgian Senate visited New Zealand to examine this country’s pharmaceutical funding programme, and the tender system in particular. s TAT I n s The story of access to cholesterol-lowering statins is a good example of how a cautious approach to funding new pharmaceuticals can produce good long-term health outcomes while expenditure is managed. Statins have been funded in New Zealand since 1989, and they were restricted to patients with the greatest health need. In the mid-1990s there was considerable clinical debate regarding the appropriateness of wider access, although at that time the high price of statins at over $1000 per patient per year meant that open access to the potentially large patient group would have swallowed up to 40 percent of available drug funding. This would have seriously compromised PHARMAC’s ability to fund any other new medicines. In 2002, PHARMAC reached an agreement with Merck Sharp and Dohme which led to a price reduction for simvastatin. At a cost of only about $50 per patient per year statins are now subsidised for virtually anyone who needs them. There is good quality evidence showing statins can improve people’s health in the long term, and PHARMAC is promoting their use through its One Heart Many Lives campaign.

HIGH COsT MEDICInEs One of the most challenging areas of funding is for patients with diseases which are relatively uncommon and for which treatments are extremely costly. Examples of this include some conditions requiring enzyme replacement therapy, some types of cancer and some cardiac conditions. Treating these conditions with pharmaceuticals can cost hundreds of thousands of dollars per patient per year. PHARMAC uses a number of mechanisms to ensure these very high cost medicines are targeted to patients who are most likely to benefit from the treatment. These include the use of expert panels of clinicians to assess applications, Special Authority criteria and direct supply to patients. PHARMAC also funds some high cost medicines through its Exceptional Circumstances scheme. These types of treatment present a special challenge to PHARMAC, as the small number of patients, high cost and sometimes poor cost-effectiveness means they may not compare favourably with other, less expensive treatments for much larger patient groups. To add to this challenge, advances in technology suggest there will be increasing numbers of “genetically targeted” medicines and other new medicines developed to treat small numbers of patients at extremely high cost. In recognising this issue, PHARMAC has initiated a review of the way it considers funding of high cost medicines to look at whether these treatments should be assessed differently to other medicines. --

f l u VA C C I n E PHARMAC began purchasing influenza vaccine for the Government-funded influenza immunisation programme in 2004-05. In late February 2005, a manufacturing problem was identified with the Vaxigrip brand of vaccine, which had been sourced for the funded programme. This caused a delay in the implementation of the programme while alternative supplies were obtained. A review of the vaccine purchasing strategy has been completed. From 2006 there will be at least two brands of influenza vaccine included in the publicly-funded programme. This will ensure that if problems arise with one brand, there will be some pre-ordered back-up available. Australia also uses a multi-source strategy for its publicly-funded influenza vaccine campaign.

P H A R M AC E u T I CA l s n OT f u n D E D PHARMAC has developed a reputation for its tough but fair approach to medicine funding, and is acknowledged as performing its role effectively.

PHARMACEuTICAl funDInG IssuEs

However, this does not prevent patient interest groups lobbying for access to new medicines on behalf of patients. While it is understandable that these groups carry out such activity, it is PHARMAC’s experience that these patient interest groups always see their needs as having the highest priority. It is PHARMAC’s role to take a more objective stance and make decisions taking into account any health impact on patients, the impact on pharmaceutical spending, and health spending as a whole. New investments require continued increases in funding through the pharmaceutical budget, while savings programmes (such as tendering) also continue. Access to new medicines that are not funded are normally those issues that generate the most comment in the media. to new treatments being approved in New Zealand by Medsafe and funding applications being received and assessed by PHARMAC. • Access to human growth hormone – administered by an expert panel of endocrinologists. PHARMAC has sought clinical advice on widening access. • Temozolomide – a new treatment for some types of brain tumour. PHARMAC is assessing the evidence for the use of this medicine to treat glioblastomas (brain tumours).

Recent media issues include:

• There are calls from NZ clinicians involved in a yet to be published study to widen access to Herceptin, a treatment used for breast cancer. It is already funded for some patients, however it is claimed the new study found benefits for patients with early breast cancer. The cost implications of this are significant, potentially more than $25 million per year even with careful targeting. • Access to aromatase inhibitors for early stage breast cancer – some women with early breast cancer are now eligible for aromatase inhibitors. Further access widening is under consideration by PHARMAC. • Alzheimer’s treatments – funding has been declined as there is growing evidence that the drugs (known as cholinesterase inhibitors) are not effective at slowing progress of the disease. Britain’s National Institute of Clinical Excellence (NICE) has recently withdrawn its recommendation for the drugs to be used for moderate to mild Alzheimer’s Disease. • Cox-2 Inhibitors – PHARMAC declined to fund this class of drugs as it considered, on clinical advice, that their modest additional benefits were not justified by their comparatively high price, and there were concerns over their safety. Two of these drugs, Vioxx and Bextra, have been withdrawn internationally following concerns they raise the risk of heart attacks. • Listing new treatments for HIV/AIDS – this is subject

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H E A lT H s E C T O R I s s u E s

P H A R M AC E u T I CA l b u D G E T A n D l O n G TERM PlAnnInG The pharmaceutical budget was traditionally set on a year-to-year basis. However, following submissions from the pharmaceutical industry and a desire from PHARMAC for a mechanism to ensure better long-term planning, the Minister of Health approved an indicative three-year funding path for the pharmaceutical budget from the 2004-05 year. The indicative three-year funding path allows PHARMAC to plan its investment decisions. The Government has also agreed to an investment programme that will continue into future years. The investment programme is vital to ensure New Zealanders’ access to medicines is not constricted. Having funding projected into future years also gives an assurance to the pharmaceutical industry and doctor and patient groups that PHARMAC is committed to spending more on pharmaceuticals to improve New Zealanders’ health. C H A n G E s I n T H E P H A R M AC E u T I CA l I n D u s T RY The drug industry is global, comprising a number of large multinational companies and smaller biotech companies, some of which are owned by the larger multinationals. In recent years there has been a continuing rationalisation of the industry, which has seen corporate activity such as the mergers of Pfizer and Pharmacia; and Aventis with Sanofi-Synthelabo. Internationally, the pharmaceutical sector’s profitability has come under pressure with a declining pipeline of new drugs, expiring patents and the growth of generic medicines. Additional attention has been brought to bear on the industry by a number of scandals including the withdrawal of Vioxx, and continuing and emerging concerns about the safety of the antidepressant drugs known as SSRIs (selective serotonin reuptake inhibitors). Pharmaceutical companies face a double squeeze – with declining pipelines of new drugs to replace the looming expiry of “blockbuster” patents, and the high cost of new medicines causing purchasers internationally (particularly Governments) to examine cost-management structures. In the past year Pfizer has rationalised its global sales operation, with GlaxoSmithKline commenting it would follow suit. These are global companies, and many of these international commercial decisions have a significant impact on New Zealand, such as the downsizing of Novartis and GlaxoSmithKline in New Zealand. Some companies have re-examined their presence in New Zealand and decided to base themselves offshore. Such a move does not restrict New Zealanders’ access to these companies’ products, as PHARMAC is able to, and will continue to, source medicines for New Zealand from companies who do not have an administrative presence in this country.

I n D u s T R Y R E l AT I O n s H I P New Zealand has a comparatively small pharmaceutical sector, with companies supplying both branded products and generic (off-patent) medicines. The industry is fragmented, with a number of large companies and many smaller ones, some of whom are based outside New Zealand. PHARMAC’s role as a medicine funder concerned with obtaining good value in terms of health gain for taxpayer dollars inevitably produces tensions with the pharmaceutical industry, particularly those companies marketing on-patent products. While the big companies such as Pfizer and GlaxoSmithKline undertake their own lobbying, other companies fund and are supported by an umbrella lobby group called the Researched Medicines Industry Association (RMI). This group makes submissions to government and generates media comment on the industry’s behalf. In recent years PHARMAC and the RMI met regularly at board and chief executive level, and these meetings were useful. The RMI has indicated that it does not want to continue with board to board meetings, although ad hoc meetings at Chief Executive level still occur.

REsEARCH AnD DEVElOPMEnT Within its legislated mandate, PHARMAC has the ability to “engage as it sees fit, but within its operational budget, in research to meet the objectives set out in section 47(a) [of the NZ Public Health and Disability Act 2000]”. In part to support this, DHBs and PHARMAC

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H E A lT H s E C T O R I s s u E s

established a fund in 2005 that will be dedicated to funding health sector research in New Zealand. This Fund is administered by the Health Research Council (HRC) to support New Zealand-specific research. PHARMAC notes it is the pharmaceutical industry’s role to develop new and innovative products, and companies need to sell their current products at a reasonable price to enable further reinvestment in research to take place. In recent years, PHARMAC has worked closely with the industry to reach agreements that enable companies to have their products funded, while patients obtain new medicine at an acceptable cost to those who ultimately pay the bill, the taxpayer. There is increasing academic debate about the cost of research and how this impacts on the price of medicines. Marcia Angell, a former editor of the New England Journal of Medicine, writes that research and development is a comparatively small part of pharmaceutical company costs, smaller than both marketing and profits. Angell cites evidence that rather than being a particularly innovative industry, most “new” drugs developed during the past decade are in fact “me-toos”, or variations on treatments for a particular condition such as raised cholesterol, or arthritic pain relief. Examples include simvastatin, atorvastatin and pravastatin (for raised cholesterol); and celecoxib, rofecoxib and valdecoxib (for pain relief).2 In a similar vein, French pharmaceutical magazine Prescrire rates all new drugs released in Europe. In 23 years of ratings (since 1981), it has assessed two-thirds of the drugs (66.63 percent) as “nothing new” – mostly “me-toos”. Fifteen percent were assessed as “possibly helpful”, while less than 3 percent offered “a real advance”. Only seven of the 2871 medicines assessed received the top rating, “Bravo”.3 New Zealand has a small number of medicines researchers undertaking work on new compounds in, for example, private research companies and universities. Some of this work is supported, and partially funded, by multinational pharmaceutical companies. The most recent information indicates that companies invest $20-40 million in NZ based pharmaceutical research, in addition to the $73 million Health Research Council funding. This is part of the more than half a billion dollars the Government invests in research and science each year. P H A R M AC E u T I CA l f u n D I n G A n D P H A R M AC E u T I CA l R E s E A R C H An often-cited argument of the industry is that if higher prices were paid for medicines, then more would be spent on research by the industry in that country. Where companies carry out their research is dependent on a number of factors, including the availability of well educated and trained personnel, the patient base, availability of resources, laboratories etc. The potential size of the New Zealand market for the product being studied is not relevant to these considerations. The product will ultimately be sold in a large number of countries, some with national subsidising policies (such as New Zealand, Australia and the UK), some without (such as the United States). The funding of research has been used as leverage by the industry to attempt to raise prices, and this was illustrated in New Zealand during 2004. Pfizer (the world’s largest drug company) announced it was withdrawing funding from an Auckland University group undertaking research into “prodrugs” used to treat cancer tumours. Pfizer made its announcement after PHARMAC confirmed a decision to reference price Pfizer’s product atorvastatin to a similar drug simvastatin, supplied by another US-based multinational Merck Sharp and Dohme. However, within weeks of the announcement, Swiss-based Roche and its subsidiary Genentech decided to pick up some of the funding.4 Pfizer’s decision meant high-quality research was jeopardised, but ultimately continues. There is no evidence to support the theory that increased taxpayer expenditure on subsidising medicines results in an equivalent increase in pharmaceutical related research. Given this, rather than raising medicine prices, the Government could encourage medical research in New Zealand by methods such as increasing the size of the contestable research fund. Overall, the evidence to date suggests that this would be a more cost effective means of supporting New Zealand based research.

The Truth About the Drug Companies: How they Deceive Us and What To Do About It, Angell M (Random House 2004) Prescrire International April 2004/Vol13 No. 70 Smart Drugs funding continues with funding from Roche, NZ Pharmacy August 2004

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H E A lT H s E C T O R I s s u E s

M A O R I A n D PA C I f I C I s l A n D H E A lT H Maori and Pacific Islanders have the highest rates of obesity, diabetes, cardiovascular disease, smoking & respiratory disease and premature death in New Zealand.5 It is a major health problem and PHARMAC recognises the need for a pro-active approach. Research undertaken by PHARMAC and others demonstrates that Maori and Pacific uptake of medicines in critical disease state areas is below the national average, and below the level supported by clinical evidence. To combat this, and ensure that all New Zealanders have equitable access to subsidised medicines, PHARMAC developed a Maori Responsiveness Strategy. Its aims are to promote the benefits of subsidised medicines, and in doing so improve the health and well being of Maori. PHARMAC consulted with Maori at a series of hui in late 2001 and developed its Maori Responsiveness Strategy which ensures Maori health priorities are identified and specifically addressed. In 2005 PHARMAC reported back to Maori at hui throughout the country to outline steps that had been taken in implementing the 2002 strategy. Successes include: • Improving Maori representation on bodies advising PHARMAC • Growing PHARMAC’s internal resources to improve responsiveness • Running information campaigns that address priority Maori health issues • Improving the collection and analysis of health data for different ethnicities Feedback from the 2005 hui is being used to inform further development of PHARMAC’s responsiveness to Maori health needs. In 2005-06, PHARMAC will also be examining the development of a strategy specifically aimed at improving its responsiveness to issues affecting Pacific peoples. R E b AT E s PHARMAC uses rebates as a way of sharing financial risk with pharmaceutical companies. Some contracts are negotiated with an expenditure cap so spending above the agreed level is then rebated to PHARMAC. They can be agreed because it may be difficult to estimate expenditure on an expensive new drug, so the supplier agrees to rebate back to PHARMAC spending above an agreed level (risk sharing). Another reason for rebates can be because the supplier has negotiated a price lower than in other countries, so the price published in the Schedule is higher than that actually agreed. This also has the effect of discouraging the reexporting of prescription medicines. Rebates ultimately are paid back to DHBs with five payments being made per year (four quarterly payments and an end-of-year “washup” payment). PHARMAC is increasing its treasury function to ensure that DHBs maximise the benefits of these funds. The volume of rebates received by PHARMAC has increased dramatically over recent years as companies increasing use this mechanism to offer New Zealand value. In 2003/04 PHARMAC received $86 million in rebates, in 2005/06, this amount is forecast to be over $120 million. It is not commonly understood that the total Community Pharmaceutical Budget is the net result of expenditure minus rebates. Therefore, the cash expenditure by DHBs on subsidising medicines for patients in their districts will be $703 million, PHARMAC will collect and redistribute $120 million in rebates, resulting in actual expenditure of $582.86 million in 2005/06.

The following statistics are taken from the Ministry of Health publication Our Health, Our Future - Hauora Pakari, Koiora Roa - The Health of New Zealanders 1999:

• Life expectancy reduced - Maori males = 69.4 yrs vs. non-Maori males = 76.9. 61 percent of Maori male deaths occur before age 65, compared with 57 percent of Pacific Island deaths, and 20 percent of Pakeha. • 88 percent of Pakeha rate their health as “good” vs 86 percent for Pacific Island and 81 percent for Maori • Maori have higher rates of smoking than Pakeha (44% vs 21%), are less likely to be physically active (38% vs 43%), have higher rates of obesity (27% vs 16%) and diabetes (8% vs 3%). These trends are also noted for youth suicide, self-injury, stroke and respiratory illnesses

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H E A lT H s E C T O R I s s u E s

J O I n T T H E R A P E u T I C G O O D s AG E n C Y The New Zealand and Australian Governments have agreed to combine their medicines assessment agencies into one, the Joint Therapeutics Agency (JTA). Implementation of the new agency is scheduled to take effect from 1 July 2006. PHARMAC is working with the Ministry of Health as the JTA and its rules are developed. PHARMAC is concerned to ensure that any change in costs of registration, or process for registration do not limit New Zealand’s ability to access new or generic medicines. If the cost of processing applications to the JTA is too high, this may become a barrier for New Zealand patients to gain access to some medicines. The Ministry does ensure that PHARMAC is consulted on important issues such as these.

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PHARMAC’s fRAMEWORK

PHARMAC’s ORIGIns In the 1980s the Government was concerned at the growth of State pharmaceutical expenditure, and questioned whether there were sound health reasons for the level and nature of prescribing.6 The Department of Health wrote a pharmaceuticals strategy for the Minister of Health in 1989 focusing on: A strong decision-making framework has been created to enable PHARMAC’s decisions to withstand scrutiny and legal challenge. Prior to PHARMAC’s inception (when the Drug Tariff unit reported directly to the Minister of Health) the pharmaceutical industry sued the Minister and won two cases. PHARMAC was formed as a separate entity in part to reduce the Crown’s direct involvement in litigation. PHARMAC’s operations are guided by a published set of Operating Policies and Procedures (Appendix 1), which were reviewed in 2000 and are again being reviewed in 2005. Specific functions and responsibilities are set out in the Funding Agreement negotiated annually with the Ministry of Health on behalf of the Minister of Health. • encouraging greater competition; • influencing prescriber behaviour; • greater choice to the consumer; and • admission of products to the Drug Tariff.

PHARMAC was established in 1993 with the specific purpose of improving the management of Government expenditure on pharmaceuticals. Many of the policies advocated in 1989 have been implemented by PHARMAC.

COMMERCE ACT EXEMPTIOn

the exemption

PHARMAC’s sTRuCTuRE PHARMAC is a Crown Entity, accountable directly to the Minister of Health, with its powers and functions set out in the NZ Public Health and Disability Act (2000), and the Crown Entities Act. It has the statutory role of managing the Pharmaceutical Schedule. Final decisions are made by an independent PHARMAC Board, comprising a chairman and five other members appointed by the Minister of Health.

PHARMAC has an exemption under the NZ Public Health & Disability Act (2000) from Part 2 of the Commerce Act (1986), which prohibits certain restrictive trade practices. This exemption was formerly given under the Public Finance Act (1989). Through its decisions on which pharmaceuticals to subsidise, PHARMAC has significant influence over the supply of pharmaceuticals in New Zealand. The exemption means PHARMAC’s activities cannot be challenged on the grounds that, for example, PHARMAC is taking advantage of its market power or that its activities lessen competition in a market.

P H A R M AC b OA R D Richard Waddel (chair) Professor Gregor Coster Karen Guilliland Helmut Modlik David Moore Adrienne von Tunzelmann Auckland Auckland Christchurch Wellington Wellington Tauranga Former Chief Executive Ernst & Young; professional director Dean of Graduate Studies, University of Auckland; chair West Coast DHB Member Canterbury DHB; Chief Executive NZ College of Midwives Te Atiawa, Ngati Tama; management consultant Former General Manager of PHARMAC, consultant economist; CEO of LECG Public policy consultant; chair Tauranga Chamber of Commerce

“Pharmaceutical Costs and Regulation: From the Minister’s Desk”, Rt Hon Helen Clark MP in For Health or Profit?, edited by Peter Davis, Oxford University Press, 1992. The Rt Hon Helen Clark was Minister of Health from February 1989 - October 1990

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PHARMAC’s fRAMEWORK

R at i o n a l e f o R t h e e x e m p t i o n

The Commerce Act promotes competition in markets for the long term benefit of consumers within New Zealand. The promotion of competition is considered to benefit the public. However, Parliament has recognised that some activities may have other benefits that outweigh the promotion of competition. Therefore legislation provides for certain exceptions from the Commerce Act’s prohibitions.

The key reasons for PHARMAC’s Commerce Act exemption are: • Avoids vexatious litigation: Defending Court proceedings involves considerable cost to PHARMAC. A single Commerce Act case could take two years and cost PHARMAC $1 million or more in legal fees to defend, given the complexity of the legal and economic issues involved in such cases. Any challenge to PHARMAC’s activities made under the Commerce Act by litigious pharmaceutical companies would divert staff away from their core functions and delay subsidy decisions. Time and money spent on defending Court proceedings would be better spent on widening access to pharmaceuticals. The exemption ensures that this occurs. • Allows PHARMAC to perform centralised role: PHARMAC decides what pharmaceuticals should be subsidised on behalf of all District Health Boards. For a country of New Zealand’s small size, the only practical way of exercising sufficient market power to obtain lower pharmaceutical prices from multinational pharmaceutical companies, is to centralise subsidy decisions. However, since a centralised role could be argued to involve price fixing or collusive behaviour, there is a risk that without the exemption PHARMAC’s role could be challenged under the Commerce Act.

• Recognises that economic efficiency not the only goal: The Commerce Act is based on certain assumptions, such as the desirability of competition as a mechanism to promote economic efficiency. However, with the supply of pharmaceuticals, economic efficiency is only one objective. New Zealand’s health system recognises that equity of outcomes is also important and, one of these mechanisms is by providing pharmaceutical subsidies to patients. While subsidies distort usual market mechanisms, having PHARMAC determine pharmaceutical subsidies furthers other health objectives.

Risks foR phaRmac if exemption R e m ov e d

The exemption is valuable mainly because it prevents potentially vexatious litigation. Past legal action by pharmaceutical suppliers show they are willing to challenge PHARMAC’s actions under the Commerce Act. A decision of the Court of Appeal in 1998, which confirmed that the Public Finance Act exemption applied to PHARMAC’s activities, brought an end to a number of proceedings that were then in progress against PHARMAC. PHARMAC regularly seeks legal advice on the Commerce Act implications of a particular action or strategy to ensure it uses the exemption in a responsible manner. However, without the exemption, the prospect of litigation could deter PHARMAC from taking actions that would otherwise save millions of dollars on the health budget. More generally, it is not in PHARMAC’s interests to take advantage of its exemption to deter or lessen competition. The more competition there is between pharmaceutical suppliers, the lower the cost of pharmaceuticals. This benefits the New Zealand public.

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PHARMAC’s fRAMEWORK

DECIsIOn MAKInG The PHARMAC Board, or the Chief Executive under Delegated Authority, makes decisions after considering the following Decision Criteria; which are published in the Operating Policies and Procedures:

phaRmac’s decision cRiteRia:

(a) The health needs of all eligible people; (b) The particular health needs of Maori and Pacific peoples; (c) The availability and suitability of existing medicines, therapeutic medical devices and related products and related things; (d) The clinical benefits and risks of pharmaceuticals; (e) The cost-effectiveness of meeting health needs by funding pharmaceuticals rather than using other publicly funded health and disability support services; (f) The budgetary impact (in terms of the pharmaceutical budget and the Government’s overall health budget) of any changes to the Schedule; (g) The direct cost to health service users; (h) The Government’s priorities for health funding, as set out in any objectives notified by the Crown to PHARMAC, or in PHARMAC’s Funding Agreement, or elsewhere; and (i) Such other criteria as PHARMAC thinks fit. PHARMAC will carry out appropriate consultation when it intends to take any such “other criteria” into account.

The process PHARMAC uses to assess pharmaceutical funding applications is outlined in the following flow-chart.

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PHARMAC’s fRAMEWORK

DECIsIOn PROCEss CLINICAL SUBMISSIONS ASSIGNED TO A TGM

supplier

Communication/Information

Therapeutic Group Manager (TGM)

Seek, review, collate additional literature and information Refer back for more information

PTAC and/or sub-committee

Negotiation & further development of proposal

recommendation and prioritisation

supplier

Consultation on proposal

TGM

Yes

sector

Responses to consultation

NOTIFICATION OF DECLINE OR FURTHER DEVELOPMENT OF PROPOSAL

TGM

Analysis and recommendation Decline/Refer back

board

TGM

Notification

sector

schedule Analyst (updates schedule)

The process set out in the diagram above is intended to be indicative of the process that may follow where a supplier wishes to list a new pharmaceutical on the Pharmaceutical Schedule. PHARMAC may, at its discretion, adopt a different process or variations of this process. -17-

PHARMAC’s fRAMEWORK

T H E b OA R D The Board fulfils a number of functions, including: The analysis and assessment team examines data and provides economic analyses of proposed transactions, and assessments of new drugs. PHARMAC’s role in managing hospital pharmaceutical expenditure involves four staff, who are responsible for analysis of hospital drugs, negotiating commercial contracts with suppliers and communicating with District Health Boards. PHARMAC also manages the Exceptional Circumstances scheme, both community and hospital, as well as administering high costs medicines such as imatinib (Glivec). • setting PHARMAC’s strategic direction; • monitoring pharmaceutical expenditure; • taking decisions relating to the Pharmaceutical Schedule; • ensuring PHARMAC’s operations focus on health outcomes; and • reviewing PHARMAC’s Demand Side operations.

It is useful for the Board to have a balance of skills, with at least one member having clinical training. Board members must be committed to their role (which requires considerable preparation and deliberation) and be prepared to express their own views. The Board has a clear mandate to make decisions within agreed parameters.

P H A R M AC ’ s A DV I s O RY C O M M I T T E E s PHARMAC has developed a considerable resource and expert knowledge to support funding decisions. A range of committees and advisory panels provide advice on issues ranging from complex new medicine funding decisions, to information issues affecting health consumers. The two main committees provide a valuable resource to inform PHARMAC decisions and also serve to connect PHARMAC to the wider community.

M A nAG E M E n T PHARMAC has a staff of 45 full and part-time employees making it a relatively small and focused organisation. Decision-making requires a clinical focus, supplemented by analytical and economic skills. PHARMAC has three Therapeutic Group Managers (TGMs), and two Therapeutic Group Interns, plus two staff responsible for managing the annual tender. TGMs are responsible for specific medical areas: for example, Diabetes, Oncology, Antidepressants, Cardiovascular and Musculo-skeletal. The Demand Side team has four staff, developing projects around PHARMAC’s legislated function to promote the responsible use of pharmaceuticals. The Demand Side team develops information campaigns for health professionals and patients, and works with such outside agencies as the Heart Foundation, Sport and Recreation NZ and clinical groups. It also manages PHARMAC’s contract to provide services promoting the responsible use of pharmaceuticals and best clinical practice.

phaRmacology & theRapeutics a d v i s o R y c o m m i t t e e ( p ta c )

PTAC is the primary expert medical committee providing advice to PHARMAC. Its role is to provide clinical advice on funding issues being considered by PHARMAC. PTAC is a group of practicing physicians who share a strong background in independent thinking and critical appraisal. Appointments to PTAC are made by the DirectorGeneral of Health, in consultation with the PHARMAC Board. The process is governed by the Protocol for the Appointment of Members of the Pharmacology and Therapeutics Advisory Committee. Positions are advertised and nominations are received from relevant medical colleges and professional bodies.

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PHARMAC’s fRAMEWORK

C u R R E n T P TA C M E M b E R s H I P Chair Deputy Chair Committee Members Prof. Carl Burgess MBchB, MD, MRCP (UK), FRACP Physician/clinical pharmacologist , FRCP , Dr Paul Tomlinson BSc, MBChB, MD, MRCP , FRACP Paediatrician , Dr Ian Hosford MBChB, FRANZCP Psychiatrist Dr Sisira Jayathissa MBBS, MD, MRCP (UK), FRCP Physician (Edin), FRACP , FAFPHM, Dip Clin Epi, Dip OHP , Dip HSM, MBS, Dr Peter Jones BMedSci, MB, ChB, PhD, MRCP (UK), FRACP , Dr Jim Lello BHB, MBChB, DCH, FRNZCGP , Dr Peter Pillans MBBCh, MD, FCP , FRACP , Physician General practitioner Physician/clinical pharmacologist

Dr Anthony Ruakere MBChB, Dip Obst, Dip General General practitioner Practice, FRNZCGP , Dr Tom Thompson MBChB, FRACP , Dr Howard Wilson BSc, PhD, MB, BS, Dip Obst, FRMZCGP , FRACGP , Physician General practitioner

PTAC is supplemented by 15 sub-committees, each having at least one PTAC member plus specialists in the relevant area.

P TA C s u b - C O M M I T T E E s Analgesia Cancer Treatments (CATSoP) Mental Health Osteoporosis Tender Medical Anti-infective Diabetes Neurological Respiratory Transplant Immunosuppressant Cardiovascular Hormone and Contraceptive Ophthalmology Special Foods

c o n s u m e R a dv i s o Ry c o m m i t t e e ( cac )

The Consumer Advisory Committee is mandated in the NZ Public Health and Disability Act 2000. The CAC provides input to PHARMAC from a patient or health consumer perspective. It is governed by its Terms of Reference which define its role and scope of activity. The CAC contains a mix of members from different ethnicities and locations, rural and urban, and a mix of ages and genders. Under its Terms of Reference, CAC is required to contain at least two Maori and one Pacific peoples representative.

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PHARMAC’s fRAMEWORK

c u R R e n t cac m e m b e R s h i p

MEMbER Sandra Coney (chair) Matiu Dickson (deputy chair) Vicki Burnett Sharron Cole Dennis Paget Paul Stanley Kuresa TiumaluFaleseuga Te Aniwa Tutara Heather Thomson

l O C AT I O n Auckland Hamilton Auckland Wellington Blenheim Tauranga Levin Auckland Te Aroha, eastern Bay of Plenty

P R I M A RY I n T E R E s T A R E A s Women’s health; general consumer health issues Maori health Mental health, epilepsy Young families; medical ethics Health of older people Maori men’s health; gambling and addiction Pacific people’s health Maori women’s health; mental health Maori health, isolated rural issues

P H A R M AC E u T I CA l b u D G E T PHARMAC is accountable through the Statement of Intent and Crown Funding Agreement to the Minister for managing the pharmaceutical budget, which is negotiated on an annual basis. The Minister of Health has approved a recommendation from PHARMAC and DHBs for a three-year funding path from 2005/06 to 2007/08. This enables better long-term planning and more certainty in making decisions on funding new pharmaceuticals. The funding path includes a review procedure so expenditure targets can be revised.

Table 1: Pharmaceutical expenditure targets Y E A R TO J u n E 2002 - 03 2003 - 04 2004 - 05 2005 - 6 2006 - 07 2007 - 08 P H A R M AC E u T I CA l b u D G E T $513 million (actual expenditure) $533 million (actual expenditure) $565 million $582.86 million $597 million $612 million

Once drugs come off patent there are opportunities to reduce their price and subsidy. This allows PHARMAC to make savings, but it is difficult for these savings to compensate for both growth in expenditure due to increased use of drugs, and the funding of new drugs. Generally, pharmaceutical expenditure has to rise in order to fund new drugs to expand the range of treatments available.

The pharmaceutical budget-setting process is outlined in the following flow-chart. -20-

PHARMAC’s fRAMEWORK

P R O C E s s f O R s E T T I n G T H E C O M M u n I T Y P H A R M AC E u T I CA l b u D G E T

1 July: financial year begins first Quarter sept October: begin forecast development for november PHARMAC board meeting. forecast includes volume changes, impact of new investments, and changes in contracts. based on the two quarters prior data November: forecast goes to PHARMAC board November: forecast, once approved is sent to DHb CEO Representatives November: DHbnZ consult all 21 DHbs on proposed forecast.

December: feedback presented to PHARMAC January: PHARMAC begins to prepare a new forecast with more recent data February: forecast goes to PHARMAC board February: Revised forecast given to DHb CEOs.

negotiations of the joint DHb and PHARMAC recommendation for the Community Pharmaceutical budget April: Joint Recommendation signed off and sent to Minister (Ministry prepares separate advice). number also included in DHb District Annual Plans Minister approves Community Pharmaceutical budget for following financial year, and indicative budgets for two outyears Minister approves DHb District Annual Plans, PHARMAC statement of Intent with Community Pharmaceutical budget included June 1 July: financial Year begins 1 July.

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PHARMAC’s fRAMEWORK

P R I O R I T I s AT I O n O f f u n D I n G PHARMAC’s Decision Criteria, taken from the Operating Policies and Procedures, direct it to assess and review: I s s u E s M A nAG E M E n T PHARMAC has a robust issues management programme, identifying potential events and developing appropriate strategies. These include: • Cost effectiveness – are the health gains commensurate with added costs? • Comparative effectiveness – does it do the job better than treatments that are already funded? • Clinical information and research– does the scientific evidence support the health benefits claimed? • Government health priorities, as outlined in government health strategies; and • Cost – what is the impact on the wider health sector and the pharmaceutical budget? • balancing the competing demands of PHARMAC’s budget constraints, patient needs, clinical requirements and the need for pharmaceutical companies to operate a successful business; • patient disappointment if PHARMAC decides not to list a new therapy; and • subsidy changes that may affect large numbers of patients.

PHARMAC is at the international forefront in applying techniques for assessing the cost-effectiveness of pharmaceuticals. This involves expressing the benefit from a drug in terms of its contribution both to life expectancy and quality of life. Quality of life encompasses dimensions such as reduction of pain, improvements in mobility and ability to lead a normal life. These benefits are expressed as a single measure – the QALY (Quality Adjusted Life Year), an internationally-recognised measurement tool enabling PHARMAC to compare different types of drugs that can produce quite different benefits for patients. When assessing costs, PHARMAC considers both the pharmaceutical and health sector dimensions. For instance, some drugs could mean patients avoid surgery, lowering costs for hospitals. This is taken into account when the funding decision is made. While cost-effectiveness ratios are a useful input into prioritisation, PHARMAC also gives weight to other decision criteria such as patients’ medical needs, accessibility of suitable alternatives and the impact on the pharmaceutical budget.

The issues management programme involves assessing both the likelihood of an event occurring and estimating the damage that would arise from the issue eventuating. Damage is considered in different dimensions, including financial and political. Issues, and programmes for their management, are reviewed monthly. PHARMAC keeps the Minister informed about significant issues. In addition, PHARMAC has a business continuity plan that ensures the stability of PHARMAC’s operations in the event of a natural disaster.

T H E P H A R M AC E u T I CA l s C H E D u l E The Pharmaceutical Schedule is a list, updated monthly and reprinted three times annually, of the more than 2000 prescription drugs (and related products) subsidised in NZ. The Schedule records the price of each drug, the subsidy it receives from public funds and the guidelines, or conditions, under which it may be funded. As part of the Hospital Strategy, PHARMAC also publishes Section H, which lists all the hospital medicines subject to a national contract. The Schedule is available in paper form (a book) or electronically. The electronic format is a key factor in pharmacy electronic claiming in which PHARMAC works with other parties - HealthPAC, the Pharmacy Guild and pharmacy software vendors. Copies are sent free of charge to 11,000 health professionals.

PHARMAC’s METHODs

PHARMAC has been successful because it has been able to generate competition between companies to secure government subsidisation of their products. The processes that PHARMAC uses are common in most other areas of governmental purchasing, and follow a similar model to large Health Maintenance Organisations in the United States. However, what makes New Zealand unusual is the government applying these common business tools in the health sector. P R O M OT I n G T H E R E s P O n s I b l E u s E O f MEDICInEs The NZ Public Health and Disability Act charges PHARMAC with promoting the responsible use of medicines. The task is carried out by PHARMAC’s Demand Side team. This involves promoting best practice prescribing (currently partially contracted to BPAC NZ), supplying information to support pharmaceutical subsidy initiatives, and running information campaigns. While some of these campaigns are aimed at reducing the inappropriate over-prescribing of some pharmaceuticals (such as the Wise Use of Antibiotics campaign), others, such as One Heart Many Lives, promote an increase in the use of prescription drugs, where appropriate. Demand Side also jointly funds the SPARC-run Green Prescription programme which has been shown to be a cost-effective way of encouraging people to be more physically active to improve their health. Demand-driven expenditure carries the greatest fiscal risk for current and future health funding. Demand Side management includes identifying key cost drivers and specific risk areas, encouraging appropriate prescribing, participating in continuing medical education and educating to balance pharmaceutical marketing. Areas of high expenditure are being targeted to increase doctors’ awareness and patients’ knowledge. PHARMAC Demand Side activities incorporate the objectives of key health sector documents, including the NZ Health Strategy, NZ Disability Strategy, NZ Primary Health Care Strategy and other related strategies. The Demand Side team also works closely with the Consumer Advisory Committee to identify areas of need raised by consumers and the community. Information campaigns include: PRICE COMPETITIOn Generating competition on price amongst pharmaceutical suppliers is a significant objective for PHARMAC as a means of managing pharmaceutical subsidies. Price competition has historically not been a feature of the pharmaceutical market because Government subsidies meant doctors and patients – who jointly make the purchase decisions – do not face the true cost of prescriptions. PHARMAC has introduced a measure of cost sensitivity and price competition that is taken for granted in other markets in NZ but which, until recently, was absent from pharmaceuticals. A range of techniques is used to establish efficient subsidies. These include:

1. Reference pricing – establishing a common subsidy for drugs that have the same or similar therapeutic effect. PTAC makes recommendations on the therapeutic sub-grouping of drugs. The subsidy is set at the level of the lowest-priced drug within the same sub-group. Reference pricing is effective in encouraging price competition. If a company lowers the price of its drug and other companies do not follow, the manufacturer’s surcharge is a disincentive for doctors to prescribe those products, so the lower priced product gains market share. 2. Tendering – selecting one brand of an off-patent drug to be the listed brand on the Schedule (see Page 8). 3. Risk sharing and rebates – As described on P13, rebates are negotiated as part of risk-sharing arrangements with pharmaceutical suppliers, and are paid back to DHBs by PHARMAC.

W i s e u s e o f a n t i b i ot i c s

This campaign has been co-ordinated and funded by PHARMAC since 1999, is run during the winter colds and flu season and has been effective in raising awareness that antibiotics are not effective as a treatment for winter colds and flu. Qualitative research carried out during the campaign indicates that the public’s awareness of the correct role of antibiotics

PHARMAC’s METHODs

in treating colds and flu has increased since the campaign’s inception, and expectations of receiving an antibiotic for a cold have fallen. This is reflected in prescribing figures for antibiotics, which have reduced by about 21 percent. The campaign involves PHARMAC working with groups including the College of General Practitioners, the Pharmaceutical Society, and Plunket.

a d u lt a s t h m a m a n a g e m e n t

PHARMAC has been running a campaign to promote the responsible use of the most common asthma preventer medicine, inhaled corticosteroids. The campaign, which involves working with the Asthma and Respiratory Foundation, aims to reduce average daily doses of these medicines to be more in line with New Zealand and international guidance. Part of the campaign has seen PHARMAC support continuing education programmes for pharmacists in the correct techniques for asthma inhaler usage. PHARMAC also worked with the asthma educators and the Maori asthma society, Tu Kotahi, to develop and publish a flip chart resource and a support kit for asthma educators. Latest data indicate that since the campaign’s inception the average doses of inhaled corticosteroids, drugs such as fluticasone and beclomethasone, have reduced by nearly 9 percent.

one heaRt many lives

Pilots of this campaign, to promote awareness of cardiovascular disease, ran in 2003 in Porirua and Gisborne and the campaign was rolled out more widely during 2004 and 2005. An assessment of the pilots showed increased awareness of the risks of cardiovascular disease (poor diet, smoking, physical inactivity, obesity), an increase in referrals for Green Prescriptions, and a greater than average increase in prescriptions for cholesterol-lowering statins. The campaign’s simple message and artwork was adopted by the National Heart Foundation for its annual Heart Week in November 2004, a significant endorsement of the PHARMAC campaign. During 2005 the campaign has rolled out into a third phase, which has seen PHARMAC providing funding to support community-initiated projects aimed specifically at improving cardiovascular health. This is new territory for PHARMAC, and consistent with the wider role of influencing pharmaceutical demand while promoting positive health messages.

PHARMAC’s METHODs

sPECIAl AuTHORITIEs AnD E X C E P T I O n A l C I R C u M s TA n C E s In certain situations, patients’ requirements need more flexibility. PHARMAC pays particular attention to the implementation of subsidy changes to minimise adverse impact on patients. In addition, PHARMAC has tools to provide a more flexible approach to setting subsidies: R E V I E W O f O P E R AT I n G P O l I C I E s A n D PROCEDuREs (OPPs) PHARMAC’s Operating Policies and Procedures govern the way PHARMAC manages the Pharmaceutical Schedule. They were written in 1993 and revised in 2001, a process which included three rounds of public consultation. The Health Funding Authority also commissioned a report by independent consultants David Caygill and Joel Lexchin on PHARMAC’s review of the OPPs. Many of the recommendations from the report were implemented. PHARMAC began a further review of the OPPs in 2005. Following an initial round of consultation, PHARMAC has initiated a second round of public consultation and has sought face to face meetings with key interested parties. PHARMAC has not yet finished this review process and is still considering the responses received. 1. Special Authority. This is PHARMAC’s most frequently used targeting tool, enabling funds to be targeted to the patients most likely to benefit from specific (often expensive) drugs by providing funding only for those patients in whom the treatment would be cost-effective. Patients may be required to try a less expensive drug initially. GPs have been concerned at the compliance costs involved in using Special Authority, so a new electronic application process is being developed, providing ‘real time’ approvals and reducing costs for both GPs and HealthPAC.8 2. Community Exceptional Circumstances. This tool is for patients whose needs are not met under the Pharmaceutical Schedule or other purchasing arrangements. It is primarily used to fund treatments for rare medical conditions, or for patients who do not fit the general pattern. Criteria include health needs, suitability, cost benefit and effectiveness, and the Health Services budget. 3. Hospital Exceptional Circumstances. This provides a mechanism for patients to continue to take medicines prescribed in hospital that are not subsidised in the Pharmaceutical Schedule, if taking such a medicine is cost effective for the DHB.

Formerly Health Benefits

PHARMAC’s METHODs

G R OW T H O f P H A R M AC E u T I CA l EXPEnDITuRE Since PHARMAC’s inception in 1993, the rate of growth in pharmaceutical subsidy expenditure slowed. Prior to PHARMAC expenditure growth was running at 1020% per year, however, since 1993 expenditure had been basically flat for the decade to 2003. Since 2003 the Minister approved an investment programme with notable increases in the pharmaceutical budget, and this is set to continue with the future pattern outlined by the three-year funding path agreed with DHBs. PHARMAC considers this increase in the pharmaceutical budget to be essential to enable New Zealand patients to continue to access new and innovative medicines. However, even with these increases New Zealand’s growth in pharmaceutical expenditure will be considerably less than other countries. Average growth in the OECD is around 810% per year. Australia has experienced on average 10% per annum growth, however, the Howard Government recently increased patient co-payments and legislated for price reductions on generics which have slowed the rate of growth. By contrast, New Zealand has not considered legislating for price reductions and is systematically lowering co-payments as Primary Healthcare Organisations have been introduced. PHARMAC has achieved cumulative savings valued today at more than $3 billion since 1993. PHARMAC estimates that, without its intervention, by the end of the current year pharmaceutical subsidies would have been $1,520 million (compared to the budgeted figure of $582 million). This expenditure growth reduction has been achieved by price reductions. Prices for drugs in NZ, especially generic products, are now lower than in most OECD countries, whereas formerly they were higher. At the same time as expenditure growth has slowed, levels of pharmaceutical treatment have expanded. The volume of pharmaceutical items dispensed is growing at around 3-4% per year. Also, there is a steady shift to using newer, more expensive items (pharmaceutical mix). This is shown by the growth in the mix and volume indices in the following chart.

PHARMAC’s METHODs

I n T E R n AT I O n A l R E l AT I O n s H I P s A n D C O M PA R I s O n New Zealand’s level of subsidisation is high compared with other OECD countries. Medicines subsidised through PHARMAC account for just under 80% of all medicines sold in New Zealand. This includes medicines sold over the counter in pharmacies, and medicines used in hospitals. The proportion of prescription drugs that are subsidised is even higher. New Zealand’s proportion compares with 74% Government funding in Germany, 54% in Australia, 37% in Canada, and only 19% in the United States. This indicates that New Zealanders are reluctant to pay out of pocket for medicines, however the pharmaceutical industry has claimed that private sales are increasing. None of the tools that New Zealand uses to control expenditure are unique, they are also used by large United States based Health Maintenance Organisations, such as Kaiser Permanente, and the US Federal Government’s Veterans Administration. Tools such as sole supply tendering and reference pricing are commonly used to generate competition between pharmaceutical companies for subsidisation of their products. However, New Zealand is unique because it has used these tools to maintain a national list of subsidised medicines for all citizens, not just subgroups or HMO members. Given this, international interest in PHARMAC’s operations has been growing. In 2005 health authorities in Belgium and Canada have sought a deeper understanding of the way New Zealand manages its pharmaceutical expenditure. PHARMAC has also had contact with health officials in Australia, Britain and Europe and with health providers in the United States. PHARMAC has a high international profile that reflects: • the importance of pharmaceuticals within all countries’ health management; • interest from other Governments in PHARMAC’s processes to obtain value for money, especially the commercial transactions undertaken; • PHARMAC’s achievements in limiting growth in pharmaceutical expenditure; and • opposition from the pharmaceutical industry. A number of countries now take steps to promote the use of generic medicines. Australia, and some European countries, use reference pricing. Most recently the Australian Pharmaceutical Benefit Scheme has introduced a risk sharing arrangement similar to the rebates agreements PHARMAC has with suppliers in New Zealand. In Britain, the National Institute for Clinical Excellence makes binding recommendations on pharmaceutical usage to National Health Service Trusts, based on clinical evidence and pharmacoeconomic analysis. In the past, PHARMAC has received significant coverage in international pharmaceutical magazines and medical journals.

This international contact has benefited PHARMAC in a number of ways: • providing better understanding of strategies used internationally; • helping PHARMAC to avoid the mistakes of other countries; • providing access to international experts to assist PHARMAC; • providing contact with experts when needed for litigation; and • establishing contacts with international experts, some of whom have visited NZ.

C O M M u n I CAT I O n s

MInIsTERIAl bRIEfInGs PHARMAC provides regular briefings (both written and verbal) to Health Ministers to keep them informed of any potentially contentious issues and to ensure no surprises. These regular updates have helped both sides keep up-to-date with political developments and ensured a regular, two-way communication flow. They have also helped Ministers on some of the high profile and emotive issues in which PHARMAC is involved. PHARMAC believes the regular Ministerial meetings are valuable and welcomes the opportunity to discuss how the current practices can be adapted to meet specific requirements. WEbsITE PHARMAC’s website (www.pharmac.govt.nz) has become an important communication tool for reaching key audiences. The website contains nearly all of PHARMAC’s publications which can be viewed online or downloaded. This is one of the ways in which PHARMAC is enhancing its transparency. Interest in the website has grown and it now typically has 500 to 600 visitors per day, making over 20,000 hits. This is an increase from the 7000 hits per day recorded in 2002. Most website visitors come from New Zealand, though a substantial number come from the United States. The most frequently-used facility is the Interactive Schedule, while Special Authority forms are also commonly accessed online. The media releases facility is also a popular destination for website visitors. A free subscription facility, which can alert people to new information posted to the PHARMAC website, has improved the flow of information between PHARMAC and the public.

P O l I T I CA l b R I E f I n G s Similarly, PHARMAC realised in 1997 that many constituency Members of Parliament had little understanding of its role in managing the availability of pharmaceuticals to their voters. A more proactive stance has been adopted. PHARMAC now writes to MPs over any major drug changes (in particular for pharmaceuticals used by large numbers of people, such as the ones for heart disease and asthma). Briefing sessions are held for the respective health spokespeople and, less often, for Caucus groups. PHARMAC encourages direct contact from MPs and electorate secretaries and endeavours to answer all questions promptly and clearly.

THE AnnuAl REVIEW This is PHARMAC’s second major public document (Appendix 3), which is widely distributed (and sent to all Members of Parliament). Contentious issues are highlighted including, in previous years, ‘medicalisation’ (common human conditions being defined as illnesses, requiring drug treatment, such as baldness and sexual dysfunction), the subliminal effects of drug company marketing and the public funding of research & development in the USA.

MEDIA PHARMAC’s media policy is to be open and straightforward with all its audiences: the public, doctors, pharmacists, health groups and politicians. It aims to be seen as making expert decisions fairly and objectively, working for patients and the taxpayer in making balanced decisions for the wider population, on cost effectiveness grounds - rather than purely balancing the budget.

APPEnDICEs

1. PHARMAC’s Operating Policies & Procedures 2. Pharmaceutical Schedule and most recent update 3. PHARMAC’s Annual Review

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w w w. p h a r m a c . g o v t. n z

Metadata

Title

Briefing to the Incoming Minister

Abstract

New Zealanders have had subsidised access to pharmaceuticals since the 1930s. Since 1993, the Pharmaceutical Management Agency (PHARMAC) has managed the list of medicines that are subsidised by the Government. Successive governments have been concerned to make a comprehensive range of medicines as affordable as possible for patients. PHARMAC achieves this by managing the New Zealand Pharmaceutical Schedule that lists all subsidised medicines, along with any restrictions on eligibility for subsidy.

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