Submission on the development of the Medicines Strategy (text extract)

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Medicines Strategy Consultation Sector Policy Directorate Ministry of Health PO Box 5013 Wellington

MEDICINES STRATEGY CONSULTATION DOCUMENT PHARMAC welcomes the opportunity to make a submission as part of the development of a medicines strategy for New Zealand. We strongly support the strategy initiative and are very pleased to be providing our views. New Zealand has a well functioning medicines system that has evolved in a structured manner over many decades. The system has been very successful in providing New Zealanders with access to a comprehensive range of safe, effective and affordable medicines. We are therefore building from a very strong base – we are not playing catch up, but taking this valuable opportunity to think about tomorrow’s challenges and system refinements needed to address them. The use of medicines is supported by multiple systems, structures and processes. While some stakeholders have seen – at least based on public statements so far – the strategy as a review of PHARMAC, the appropriate focus in our view is the whole medicines system. It must also be appreciated that medicines are only one means to an end (people’s health). It is that end, the achievement of desirable health outcomes for New Zealanders, which must inform and shape the strategy. While appreciative that the consultation document is a step toward a strategy, PHARMAC suggests that further work would be desirable on New Zealand’s health status and identifying tomorrow’s challenges – that is, understanding the operating context within which the strategy must succeed. Further, it will be important to focus (in terms of guiding further work) on what the end product of this process is. We envisage the end result will be a high level document (a small number of pages) clearly setting out the Government’s strategic vision for the medicines system and key strategies to achieve it. There are two key strategies that, in our view, stand out as priorities: • increased focus on optimal use of pharmaceuticals – PHARMAC believes that the single biggest challenge in improving health outcomes and value for money in pharmaceutical therapy is to find ways and means of optimising the use of medicines. Emphasis in this area will arguably become even more important as new high cost medicines emerge, and with increasing demands for quality information to promote “health literacy”. Irrespective of how much money is spent on medicines, we need to spend it wisely and the evidence is that significant health gains can be made. We endorse the Ministry’s emphasis on optimal medicines use in the consultation document, and recommend that the strategy be firmly focused on this area; and increased focus on information quality and research – available information is not primarily generated with funding prioritisation, the value of medicines in practice and optimisation of health outcomes in mind. In our view, funders of medicines must take a more active role in ensuring that the right incentives are in place for the best information to be available or, if necessary, initiate research to generate that information. While needing further development to

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refine details, a well-targeted investment in research would be likely to generate information that PHARMAC could use to improve the effectiveness of funding pharmaceuticals (and benefits well in excess of costs). Research could also usefully be focussed on the first priority above: optimal use. Further with respect to optimal use, a fundamental shift in paradigm is required: a change from a historic focus on the supply side of the system (registration and funding) to the demand side (optimal use). Each year there is significant interest in PHARMAC’s new investments but, in reality, these investments constitute a small fraction of pharmaceutical expenditure and confer only relatively small benefits over the substantive benefits of already-funded treatments. The lion’s share of expenditure/treatment benefits stem from historic funding decisions; the efficiency of which can only be influenced by prescribing and dispensing decisions and the use of those medicines by consumers. It is to this area that the medicines system must shift its focus and intensify efforts. We have also taken the opportunity presented by this process to self-evaluate our own performance. While focussed on business improvement over time, we can see no significant weaknesses in the structures or processes underpinning PHARMAC’s operations. It is always possible to improve, however, and our work has identified the following issues with respect to PHARMAC’s operations: • while many of our decisions will be unpopular (and not necessarily consistent with strong feelings, but rather evidence), we can do a better job of taking people with us, i.e. through further improving our communications and stakeholder engagement, ensuring PHARMAC’s role and processes are better understood by stakeholders; there are potential benefits (in terms of increased health outcomes) from a longer budget period; something PHARMAC will further explore with other parties involved in the budget setting process; and there are potential benefits from PHARMAC tendering some of its budget for new investments. This approach could dissipate, if not eliminate (depending on the extent of competition), the market power associated with new innovations through putting them up against one another in a defined competitive process (as opposed to one-on-one negotiations at present).

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There are central aspects of PHARMAC’s operations that others want to change (potentially significantly); changes we would be very concerned about and recommend against. In particular, we reconsidered key arguments raised by other stakeholders previously about PTAC’s role and “increased transparency” of PHARMAC’s decisions, but do not see changes as desirable. With respect to our procurement work generally, we took the opportunity to consider New Zealand’s cross-government guidance, and guidance internationally, and feel our systems and approaches measure up very well. Clearly not everybody will share our assessment: some interest groups are likely to call for radical change of some systems and structures to advance their own particular interests and priorities. However, from our perspective as an agent of government and the public at large, the public interest is already served very well, and is best served by continuing evolutionary development (as the Ministry proposes), rather than revolutionary wholesale change. Thank you for the opportunity to share these views. For questions on our submission, please contact Peter Alsop, Manager Corporate & External Relations, in the first instance (04 916 7529). Yours sincerely

Matthew Brougham Chief Executive (Acting)

TABLE OF CONTENTS

Executive Summary ............................................................................................. i 1 Introduction ................................................................................................ 1

1.1 1.2 General support for strategy work ......................................................................1 Outline of submission ........................................................................................1

Defining a Strategy .................................................................................... 3

2.1 2.2 2.3 2.4 2.5 2.6 2.7 Key messages...................................................................................................3 Importance of defining the strategic context........................................................3 Strategic focus: health outcomes........................................................................4 Criticality of quality information and data.............................................................4 Strategy development........................................................................................5 Evaluation .........................................................................................................5 Recommendations.............................................................................................5

Research and Development ...................................................................... 7

3.1 3.2 3.3 3.4 3.5 Key messages...................................................................................................7 A research strategy to support decision making..................................................7 Funding clinical research ...................................................................................8 Pharmaceutical research is not linked to pharmaceutical prices ..........................9 Recommendations.............................................................................................9

Medicines Registration ............................................................................ 10

4.1 4.2 4.3 Key messages.................................................................................................10 Registration policy must consider downstream effects ......................................10 Recommendations...........................................................................................11

Public Funding of Medicines................................................................... 12

5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 5.11 5.12 5.13 Key messages.................................................................................................12 General overview of PHARMAC’s performance ................................................12 Historical review of institutional arrangements ..................................................13 PHARMAC’s governance.................................................................................14 Pharmacology and Therapeutics Advisory Committee ......................................14 Procurement principles and standards..............................................................15 Transparency of PHARMAC’s overall operations ..............................................18 Funding of high cost medicines ........................................................................23 Setting the Community Pharmaceutical Budget ................................................23 PHARMAC’s performance ...............................................................................25 Other government purchasers of pharmaceuticals ............................................31 Conclusions ....................................................................................................31 Recommendations...........................................................................................33

Distribution............................................................................................... 34

6.1 6.2 6.3 6.4 Key messages.................................................................................................34 Background.....................................................................................................34 Issues and options...........................................................................................35 Recommendations...........................................................................................36

Optimal Use of Medicines........................................................................ 37

7.1 7.2 7.3 7.4 7.5 7.6 7.7 Key messages.................................................................................................37 Introduction .....................................................................................................37 The social cost of sub-optimal use of medicines ...............................................38 Interventions to improve optimal medicines use................................................41 ‘Optimal use’ elsewhere in government ............................................................41 Conclusion ......................................................................................................42 Recommendations...........................................................................................42

Recommendations ................................................................................... 43

EXECUTIVE SUMMARY

Introduction • New Zealand has a comprehensive, well functioning medicines system that has evolved in a structured manner over many decades. The system has been very successful in providing New Zealanders with access to a broad range of safe, effective and affordable medicines. Notwithstanding that success, there is, and always will be, scope to enhance the sector’s contribution to improved health outcomes for all New Zealanders. “Towards a New Zealand Medicines Strategy” presents an important opportunity to take a step back and consider the big picture, and to systematically review and assess objectives and strategies. PHARMAC strongly supports this strategic initiative. PHARMAC’s submission comments on a range of issues, covering the entire medicines supply chain: research & development, registration, funding, distribution and optimal use. Traditionally, the focus of medicines policy has been firmly on the supply side of the market (i.e. registration, funding and procurement of new medicines). However, even the most comprehensive, accessible, and generously funded range of medicines will fail to achieve the Government’s health outcome objectives if these medicines are not prescribed appropriately, dispensed correctly, and used by patients as intended. The strategy is a timely opportunity to shift the paradigm from optimising the content of the medicines toolbox to optimising the use of these valuable tools.

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Strategy development • Current systems and structures are the result of a long and successful process of evolution. The public interest is best served by continuing this evolutionary development to meet future challenges (as the Ministry proposes), rather than by radical structural change. The strategy work should be based on a long-run perspective. To be effective, the strategy must explicitly consider the future operating environment and the challenges presented by, for example, changing demographics and changing medical technology. Given the inherent uncertainty about future developments and the increasing complexity of modern society, system stability and flexible decision making based on sound principles (rather than detailed prescription) are critical attributes of a successful system. The strategy must be shaped by a clear focus on health outcomes. Pharmaceuticals are an important contributor to achieving health outcomes – but they are not and never can be more than inputs to the health system; medicines are means to ends, not ends in their own right. The output from the broader strategy work should be a high level document setting out the Government’s strategic vision for the sector and key strategies to achieve it.

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Research and development • Public funding of medicines is critically reliant on the availability of high quality research data about the use of medicines in practice, the relative cost effectiveness of different medicines, optimal dosage regimes and treatment length, and the optimal place in therapy relative to other medicines and/or healthcare interventions.

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Pharmaceutical industry research provides valuable information for registration, but frequently does not address questions of critical importance for funding decisions. Much research is carried out under narrow and tightly controlled clinical trial conditions that do not always reflect the use of medicines by prescribers and patients in the real world. Public funders of medicines already actively seek out existing information to improve the quality of inputs to their decisions, but have played a largely passive role in generating additional data through research. This passive role may no longer be appropriate or adequate to make the best possible decisions with scarce health dollars. Funders of medicines must take a more active role in ensuring that the right incentives are in place for optimal information to be available or, if necessary, initiate research to generate data that is more appropriate and suitable for answering questions of optimal resource allocation. Public funding should be made available to ensure that relevant, objective and independent information is available to support critical public choices in funding medicines. It is feasible to carry out a broad range of medicines research domestically; it would also be efficient to collaborate with other health funders/providers internationally when a larger investment or broader population or participation is required. Current barriers to research and development being carried out are not related to PHARMAC itself or its decisions (evidence indicates other factors are the critical location determinants for research).

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Medicines registration • • Medicines registration is a key step in the supply chain; it plays an important role in ensuring that only safe and effective medicines are permitted to enter the market. The registration process represents a significant hurdle for the pharmaceutical industry to overcome for market entry of new products; it is important this hurdle is no higher than required to ensure patient safety. Unnecessary cost and avoidable delays result in lost opportunities to achieve health gains, and in lost opportunities to use enhanced competition for making efficiency gains in purchasing medicines. In considering registration, therefore, it is critical that “downstream effects” are considered. Perhaps as a result of separate policy developments in relation to the Australia New Zealand Therapeutic Products Authority, registration has not featured prominently in the strategy work to date. Irrespective of the registration body (Medsafe or ANZTPA), there are critical registration issues with downstream impacts in the medicines system that will always be important to consider (e.g. time to market, barriers to entry). As the long-term effectiveness of the medicines system will depend on these issues, the strategy should be mindful of them.

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Public funding of medicines • Over time, there have been radical improvements in the policies, procedures and operations relating to medicines funding in New Zealand. This includes a high level of transparency and the use of open and competitive medicines procurement processes.

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An assessment of PHARMAC’s decision making processes shows that they meet or exceed relevant domestic and international standards and guidelines for good practice in public sector procurement. PHARMAC’s decisions have also been formally and rigorously tested in the Courts and have withstood these challenges successfully. Benchmarking of PHARMAC’s procurement system against Australia and the UK demonstrates the advantages of a rigorous and openly competitive approach to public funding of medicines. Over the past decade, New Zealand has been extremely successful in reducing the acquisition costs of medicines in competitive markets without compromising quality, safety or patient access. As a result, substantial public funding has been released for re-investment in other health care services, both pharmaceutical and non-pharmaceutical. PHARMAC’s processes are very transparent. However, there is a significant unevenness between transparency obligations on PHARMAC and those applying to pharmaceutical suppliers. Proposals for increasing PHARMAC’s transparency need to carefully consider the impact on PHARMAC’s negotiation ability with pharmaceutical suppliers, and the long-term impacts on the decision process. PHARMAC’s funding decisions take into account the formal advice of the Pharmacology and Therapeutics Advisory Committee (PTAC). PTAC has a distinguished history over many decades of providing Ministers as well as PHARMAC’s Board with free, frank and objective advice of the highest quality. PHARMAC strongly recommends against any changes to the objectives or procedures of this highly successful institution. The debate about access to pharmaceuticals is often focused around access to the very newest medicines; however, from a health outcomes perspective, it appears far more critical that the population at large has access to the entire pharmaceutical tool-box on affordable and equitable terms. In this respect, New Zealanders enjoy superior access than Australians. In order to continually improve, new procurement methods need to be investigated. For example, PHARMAC could issue tenders for a fixed amount of money for new investments, and invite pharmaceutical suppliers to submit bids for this money. This would highlight the opportunity costs of investing in alternative new technologies, and perhaps open up new and creative ways for suppliers to bring their products to the market. PHARMAC’s decision making is influenced and somewhat constrained by a one-year budget cycle, and a legal requirement to come within budget. This necessitates a degree of risk aversion, particularly in the early part of a financial year. Decision making may be able to be improved and better health outcomes achieved with a longer budget period, while still retaining a budget cap. From a health sector perspective, it is currently not possible to determine the optimal proportion of spending on medicines versus other health interventions. Determining the optimal level of the pharmaceutical budget depends on further progress in developing health sector wide cost effectiveness data such that budgeting decisions can be made on the basis of sector wide opportunity costs. The strategy should promote this work. The strategy should consider the role of other government agencies that fund medicines. There may be valid reasons for different approaches to assessment and deciding on funding; however, the strategy is a timely opportunity to evaluate whether any differences – given they can create access inequities – are justified.

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Distribution • Distribution of pharmaceuticals has long been tightly regulated because of the public interest in dispensing safety. Compared to other retail industries, the dispensing industry has undergone comparatively little structural change over many decades: the industry is still characterised by small owner/operator businesses.

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Although both health funders and the pharmacy industry emphasise and seek to enhance the increasingly important professional role of the pharmacist, current funding structures remain focused on the pharmacist’s role as a retail distributor. It is likely that efficiency gains in distribution could be made by complementing the predominantly “one-size-fits-all” contracting model with a range of alternative funding options. Potential opportunities exist in the area of ePharmacy and mail order pharmacy, competitive tendering in areas of high retail market concentration, fixed location payments to ensure continued pharmacy access in areas that are commercially unattractive or unsustainable for pharmacists, and integration of hospital with community pharmacy in selected locations.

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Optimal use of medicines • • The supply side of the medicines market can only provide inputs and treatment options; it cannot by itself guarantee treatment outcomes. Each year there is significant interest in PHARMAC’s new investments. In reality, however, these investments constitute a small fraction of pharmaceutical spend. The system needs to escalate its interest in the efficiency of use of the lion’s share of the budget (i.e. optimal use of medicines already funded). Sub-optimal use of medicines in prescribing, dispensing and patient use represents a major problem. Inefficient and ineffective use of medicines represents at best a waste of scarce public health dollars and lost opportunities for achieving health gains; at worst, it inflicts harm and may even cause death or permanent disability. PHARMAC strongly endorses the emphasis the Ministry has placed on optimal use of medicines in its consultation document; in our view, the health gains which can be achieved by improving the use of medicines potentially outstrip any gains that can be made on the supply side by orders of magnitude. Realising these health gains will require concerted efforts by all parties involved and associated with the medicines system. It will also require substantial research effort and associated financial investment, similar to other sectors of the economy where Government agencies invest heavily in their equivalent of “optimal use”, such as road safety, fire prevention, workplace safety and energy efficiency. The strategy work provides a timely opportunity for a major shift in paradigm, encouraging the sector to change focus from optimising the content of the medicines tool-box to the optimal use of medicines.

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High level summary The diagram that follows is a high level summary of PHARMAC’s views. It is emphasised that a summary of this nature significantly abstracts from important detail and rationale; nonetheless the diagram may be instructive as to the key issues PHARMAC is raising in this submission.

OVERVIEW OF PHARMAC’s MEDICINES STRATEGY VIEWS

Whole system coverage, including consideration of interdependencies and alignment between system parts Future-focussed – evolution not revolution – flexibility in decision making given increasing complexity in operating environment Health-outcome focussed with emphasis on optimal use of medicines (sector prioritisation also important) Strong focus on quality information and data

RESEARCH

Clarify policy objectives

REGISTRATION

Clarify policy objectives

FUNDING

Clarify policy objectives

DISTRIBUTION

Clarify policy objectives

OPTIMAL USE

Clarify policy objectives

Key issues

Increased focus on closing research gaps for funding decisions required Improve incentives for market based provision of appropriate data for funding/prioritisation More active government involvement in closing gaps may be desirable Location of research work not related to funding policy Potential benefits from: - new research initiatives - international collaboration

Key issues

Registration a key determinant of future system success, so strategy must address Critical to consider “downstream” system effects Registration hurdles should be no greater than needed to ensure safety Registration costs must not deter efficient market entry Like the ANZTPA synergy, wider recognition of registration elsewhere may offer benefits longer term

Key issues

PHARMAC performs well against procurement guidelines Benchmarking has limitations; simple metrics are misleading Stakeholder engagement improvement is required PTAC’s role should remain PHARMAC already transparent and more transparency has risks Tendering money for new investment worth exploring Longer budget period may have benefits Sector-wide prioritisation critical to budget setting Consider role of other government agencies that procure medicines

Key issues

Key role in strategy success, so strategy must address Options for innovation need to be further explored Location and number of pharmacies may not be optimal Pharmacy fees may not be optimally aligned to the medicines management role DHBs may have a more direct role in community pharmacy

Key issues

Incentives of system parts should be aligned to optimal use (strong focus for strategy) Significant health outcomes foregone from sub-optimal use Problem scale not reflected in the level of effort/expenditure Roles and responsibilities may need clarifying Likely benefits from increased research The Government appears to invest heavily in optimal use analogies in other sectors

Significant gains to be made

Be cognisant of “downstream” effects

Retain and refine

Assess options for improving efficiency

Significant gains to be made

1.1

INTRODUCTION

General support for strategy work

Safe and effective medicines play an important role in New Zealand’s public and private health care sector; they are widely used by hospitals and in the community as a part of treating a vast range of health conditions. The use of medicines is supported by multiple systems, structures and processes that have evolved over many decades. In broad terms, the sector has been very successful in providing New Zealanders with access to a comprehensive range of safe, effective and affordable medicines. However, from time to time, a positive opportunity presents itself to take a step back and consider the big picture, and to systematically review and assess objectives and strategies: this strategy work presents such an opportunity. PHARMAC is committed to assisting the strategy development as much as possible, and is pleased to make this submission.

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Outline of submission

We have structured our submission to follow the natural progression of medicines through the system, from their research and development through registration and funding to their use by medical practitioners and patients. Given the strong interdependencies between the system components, a meaningful and effective strategy can only emerge from a holistic approach.

Section

Subject

Summary description This section explains PHARMAC’s perspective on a strategy; what it might ultimately “look like” and key considerations associated with formulating a strategy, particularly the importance of system evaluation; the importance of quality information and data; and an understanding of the future environment within which the strategy must succeed. We discuss current limitations in the availability of research to support public funding decision making in the medicines sector, and present a case for increased activity in this area. Behind optimal use, this is the second most important area for attention in the strategy. We raise some registration issues that are important to the long-term effectiveness of the medicines system. In particular, registration (and a strategy for the system) needs to consider the “downstream effects” on the system, including with respect to time to market and barriers to market entry. This section covers medicines funding through PHARMAC. We discuss PHARMAC’s and PTAC’s respective roles and functions, provide an assessment of PHARMAC’s performance against national and international standards and benchmarks, explore the issue of transparency and address the question of setting an optimal medicines budget. This part of the system has not yet been fully considered in the strategy work. We comment on medicines distribution and raise issues and options to further explore that may improve the efficiency and effectiveness of this important area of the medicines system.

Defining a strategy

Research and development

Medicines registration

Public funding of medicines

Distribution

Section

Subject

Summary description We present evidence about the scale and social cost of present sub-optimal use, and make the case for a substantial shift in the focus of thinking from the supply to the demand side of the market. Our analysis suggests that this is the key priority for a medicines strategy given the extent of health gains that may be able to be realised through more dedicated efforts. We conclude with the full list of recommendations arising out of our submission, being important areas that we consider the strategy work should further examine or address.

Optimal use of medicines

Recommendations

DEFINING A STRATEGY

2.1

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Key messages

The medicines sector has been very successful in providing New Zealanders with access to a comprehensive range of safe, effective and affordable medicines. The public interest in meeting future challenges is best served by continuing evolutionary development of the medicines sector, rather than by revolutionary, wholesale change. Medicines are merely an input to the system: a means to an end. It is that end, the achievement of desirable health outcomes, which must inform and shape the strategy. The health gains that can be achieved by improving the use of medicines are likely to far outstrip any gains that can be made on the supply side (registration and funding) of new medicines. The strategy work should be based on a long-run perspective, and identify the future operating environment within which the strategy needs to succeed. In a challenging future environment, system stability and decision making flexibility are likely to be key. The strategy needs to be based, in terms of defining and assessing problems to identify key strategies, on quality information and data. The criticality of quality information and data equally applies to future evaluation of whether the strategy has been successful. The end result should be a high level document setting out the Government’s strategic vision for the sector (PHARMAC has shared its work-in-progress vision for the system).

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2.2

Importance of defining the strategic context

Opportunities to take stock of an entire sector are few and far between. Accordingly, it is important the strategy work is based on a long-run perspective, looking out 10 – 15 years (when we expect that the strategy will have taken full effect) and take into account expected social and technological developments over this timeframe. Some of the challenges the strategy will need to address are: • • • • • the aging of the population, with associated demand implications; population growth and increasing ethnic diversity, with implications for access issues; an increasing emergence of very high cost medicines; an increasing emergence of “a pill for every ill”, including lifestyle conditions; an increasing public knowledge of health issues, so called ‘health literacy’ (and associated need for quality information), together with increasing public expectations of the health system; and ongoing budget pressures and difficult trade-offs across the health sector.

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The above challenges are just examples: a full assessment of future challenges and the future operating environment should be undertaken – this assessment (and hopefully predicting the future well) will be critical to developing a successful strategy.

In particular, the increasing complexity of modern society means that, in our view, system stability and decision making flexibility are likely to be central to future success. Given a wide range of interdependencies in the medicines system, any radical changes are likely to be disruptive with high costs. As case specifics and complexities will be different and changing through time, overly prescriptive processes or decision making is likely to impede the system’s ability to make the best possible choices at any point in time. With respect to medicines innovation (an important strategic consideration), contrary to widespread perception the rate of innovation in the medicines sector is quite slow, particularly when compared to other industries such as IT, communications, transport, manufacturing and many consumer goods (e.g. electronics). The majority of current medicines have been around for many years, sometimes decades. This slow rate of innovation is to a significant extent attributable to the safety risks inherent in pharmaceuticals, necessitating tight regulatory control of market access to new medicines. Perhaps as a result of this, the small number of genuine innovations tend to attract a disproportionately high public profile, even where they may only benefit small numbers of patients. The sharp public focus on funding of new technology is understandable – but it obscures the fact that the biggest and most important contribution to health outcomes from public funding of pharmaceuticals comes from the efficient management of access to, and the use of, the thousands of existing medicines for the whole population. The strategy therefore presents a timely opportunity to shift the paradigm from optimising the content of the medicinal toolbox to optimising the use of these valuable tools.

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Strategic focus: health outcomes

As noted above, medicines are merely a means to an end. It is the end, the achievement of desirable health outcomes for New Zealanders, which must inform and shape the strategy work. The challenge here for the strategy work is to: • • assess the health status of the population and set objectives for long-term health outcomes (including to prioritise initiatives to close gaps); consider the role which the supply and use of safe, effective and affordable medicines can play in closing these gaps (thinking more broadly in the process about other health interventions and, importantly, initiatives to avoid interventions, such as nutrition and exercise, and the promotion of individual responsibility and ‘health literacy’ generally); and focus strategic work on the areas of greatest potential health gain so as to optimise the contribution of the medicines sector to the Government’s wider health sector targets.

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2.4

Criticality of quality information and data

Any strategy needs to be based, in terms of defining and assessing problems to identify key strategies, on quality information and data. The criticality of quality information and data equally applies to future evaluation of whether the strategy has been successful. In our view, there are some significant knowledge gaps in the sector which will pose challenges to the development of an effective strategy, as well as to the future evaluation of the strategy’s success. These gaps are particularly evident in the area of research to support funding/prioritisation and medicines use. For example, without a good understanding of the factors which influence patient compliance with a particular therapeutic regime, it will be difficult to develop effective strategies to influence patients towards better adherence and thus, to generate better health outcomes. We discuss some of the weaknesses of the current information base, together with possible approaches for addressing those weaknesses, in relevant parts of this submission.

While it is clear that the system’s information base cannot be substantially enhanced in the short term (information and data gaps generally take time to address), we envisage that the strategy work will identify critical information gaps and consider whether closing these should be strategic priorities for the system.

2.5

Strategy development

We envisage the end result of the current consultation process to be a high level document setting out the Government’s strategic vision for the sector, with a clear focus on health outcome objectives. With that as a solid foundation, further work programmes can then be initiated. As part of planning our own work for the strategy, PHARMAC prepared a one-page diagram of the key considerations and outcomes to underpin an effective strategy (see next page). While this is still a “work in progress” and would benefit from further assessment of others’ perspectives, it neatly encapsulates a vision for the sector.

2.6

Evaluation

An important part of the strategy work is consideration of the approach that will be taken to evaluate its effectiveness over time. The strategy will provide guidance to the sector for many years to come as its various elements are developed and implemented. In some areas, it may take considerable time until results become evident and it may not always be clear whether developments in the sector are attributable to the strategy’s influence or to independent factors. The strategy should, therefore, be clear about what it attempts to achieve in each area, and how those achievements will be assessed. This will allow periodic refinement of the strategy and, importantly, the opportunity to adapt to changing future circumstances and objectives. In the absence of considering how to evaluate the strategy now, there is a risk that the strategy may be overly ambitious or set unrealistic targets, and ultimately achieve no more than briefly raising the profile and significance of medicines as a key element of total health care – after which the sector will return to “business-as-usual”.

2.7

Recommendations

With respect to defining a strategy generally, PHARMAC recommends: • • • • • consideration of New Zealand’s health status and the future operating environment in which the strategy must succeed; continued evolutionary development of the medicines system to meet future challenges (as the Ministry proposes), rather than by radical structural change; a strong focus on system stability and flexible decision making based on sound principle rather than detailed prescription; a strong focus on continual improvement in the quality of information and data underpinning the medicines system’s activity and decisions; and a paradigm shift in medicines policy from optimising the content of the medicinal toolbox to optimising the use of these valuable tools.

RESEARCH AND DEVELOPMENT

3.1

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Key messages

Critical information for medicines prioritisation and funding is sometimes lacking as a result of clinical research being generally designed for registration purposes. Funders of medicines must take a more active role in ensuring that the right incentives are in place for optimal information for medicines funding to be available or, if necessary, initiate research (with public funding) to close information gaps. It may be feasible to carry out research domestically, or look to collaborate with other health funders/providers internationally. Current barriers to research and development being carried out are not, in PHARMAC’s view, related to domestic medicines policy or its implementation.

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3.2

A research strategy to support decision making

Most pharmaceutical research is undertaken by or on behalf of the pharmaceutical industry. The driving forces behind industry research are, understandably and legitimately, commercial imperatives and shareholder interests, rather than the public interest. The primary purpose of data generated by pharmaceutical industry research is to demonstrate safety and efficacy to satisfy regulatory requirements for market access. However, data generated in the type of controlled clinical trial setting designed to demonstrate safety and efficacy are often not optimal (and sometimes not very useful) for health care funding decisions; prioritising investment decisions and optimising health outcomes in the public interest sometimes requires answers to very different questions. The pharmaceutical industry does not have particularly strong incentives to provide such information; indeed, this type of research may frequently conflict with commercial interests. There are well-documented examples of this, such as: • research into new uses for old, off-patent products is frequently not pursued by pharmaceutical companies due to difficulties in extracting maximum commercial gain from off-patent products (e.g. research into potential cancer-destroying properties of dichloroacetate1); potential adverse health effects that will negatively affect sales and/or registration (e.g. rofecoxib2 and fenoterol3); and companies promoting particular treatment sequencing or length, even if not well supported by research (and in some cases proposing treatments of a longer or add-on nature, with associated higher costs, than may be optimal or necessary).

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Coghlan A, Cheap, Safe Drug Kills Most Cancers, New Scientist 23 January 2007. For the original research article see S Bonnet, Archer, S L, Allalunis-Turner, J, Haromy, A, Beaulieu, C, Thompson, R, Lee, C T, Lopaschuk, G D, Puttagunta, L, Bonnet S et al, "A Mitochondria-K+ Channel Axis Is Suppressed in Cancer and Its Normalization Promotes Apoptosis and Inhibits Cancer Growth," Cancer Cell 11, no. 1 (2007). Grocott R, Metcalfe S. Going against the flow: the impact of PHARMAC not funding COX-2 inhibitors for chronic arthritis. N Z Med J. 2005 Oct 7;118(1223):U1690. http://www.nzma.org.nz/journal/118-1223/1690/ Pearce N. Adverse reactions: The fenoterol story. Auckland University Press, 2007.

More generally, common knowledge gaps include: • • the relative effectiveness and cost-effectiveness of a new medicine compared to existing therapies, including optimal treatment length, sequencing and dosage; effectiveness and cost-effectiveness of medicines in real-world rather than controlled clinical trial populations, such as in Maori and Pacific populations, low income groups, and in older, co-morbid, populations; new uses for older, off-patent medicines; and effectiveness and cost-effectiveness of medicines where patient compliance is sub-optimal (whether as a result of patient misuse or other system imperfections).

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Even in terms of clinical matters (as distinct from data to inform decisions generally), PHARMAC’s expert advisory committee, PTAC, has had to defer many recommendations due to lack of information, including in the areas of dose, frequency, duration or sequencing of treatment. Other gaps include lack of information on health outcomes – many medicines are evaluated only in terms of their intermediate or physiological outcomes – and a general lack of head-to-head trials of medicines with relevant comparators. PHARMAC and DHBs have therefore deferred or delayed funding decisions because they have not had adequate information about the effectiveness of a pharmaceutical, or other clinical information needed to make a decision with sufficient certainty (including cost-effectiveness) at the time.4 In addition, while making an important contribution to research, the pharmaceutical industry cannot be relied on to provide answers in all of these areas, since some research findings may run counter to its (legitimate) commercial interests. The maxim of caveat emptor (buyer-beware) applies: health funders cannot just rely on suppliers’ representations but they have to make their own investigations. The issue at hand – the usefulness of clinical trials for funding decisions – is also not well protected by consumer protection legislation such as the Fair Trading Act. Traditionally, funding agencies around the world have played a largely passive role in research, relying in large part in their evaluations on supplier-provided data and published research that is primarily designed for registering medicines, but not necessarily optimal for funding them. This passive role may no longer be adequate to continue to make the best possible value-based decisions with scarce health dollars. Public funders of medicines must therefore take greater responsibility to carry out their own research, targeted at questions around the use and relative value of medicines in normal practice, and at optimal allocation of scarce resources. Such research could be described as a continuum, from simple information gathering (such as requests of suppliers for voluntary provision, literature searches and Internet browsing – all of which are common practice for funders), through to other possible approaches, such as information requests with the force of law (such as powers routinely used by regulators, including post-approval committees) or proactively commissioning work or clinical trials to generate new information. All of these approaches (and there may be others) have the same intent: ensuring the quality of information supporting decisions is as robust as possible.

3.3

Funding clinical research

While needing further development to refine details, we suggest that a well-targeted investment in research is likely to generate information that PHARMAC can use to improve the effectiveness of funding pharmaceuticals (with benefits well in excess of the cost).

Examples include: tiotropium for COPD (uncertain efficacy with less severe disease); Cerezyme for Type 1 Gaucher disease (effective dosage); risperidone microsphere long-acting injections for severe refractory schizophrenia (unknown efficacy beyond 12 weeks); gabapentin for neuropathic pain (no head-to-head data to compare with currently funded alternative(s)); combination inhaled corticosteroid/long acting beta agonist (ICS/LABA) inhaler devices for severe asthma (unknown effects on compliance, hence safety and outcomes, compared with using separate ICSA and LABA inhalers concurrently); venlafaxine for refractory depression (evidence was limited to one single-blind trial of 121 patients treated for one month).

A further area of possible benefit would be increased international collaboration. The research questions targeted at supporting funding decisions are not of interest to PHARMAC alone: other pharmaceutical funding agencies around the world face the same problems. We believe there is significant scope for collaborative international efforts with the advantage of spreading knowledge and, as useful and possible, research costs over many funders. Collaboration and improved information sharing would also assist funding decision making: the pharmaceutical industry is well organised internationally and generally keen to point to overseas decisions as rationale for funding domestically – better collaboration may reduce this pressure.

3.4

Pharmaceutical research is not linked to pharmaceutical prices

The Researched Medicines Industry (RMI) and Pfizer have previously explicitly linked decreases in pharmaceutical company funding of research in New Zealand to PHARMAC’s funding decisions. There is good evidence to suggest there is in fact very little linkage between these two areas, and that research funding and the commercial pillars of research are driven by entirely different factors. Even in a market as large as the United Kingdom, the Office of Fair Trading has noted that raising prices in the hope that research investment will follow is ineffective, if not contrary to principles of international trade.5 It found that there was no clear relationship between price level and success in attracting research investment. The study investigated the drivers of research location, and found them to be: • • • • • a highly skilled workforce with relevant scientific qualifications; the presence of opinion leaders in the medical field; access to high quality clinical trials infrastructure; existing R&D activity, including public sector R&D; and historical and cultural factors.

Overall, the report found that the threat of withdrawing research investments as a means of persuading governments to maintain high prices was understandable as a commercial tactic, but not credible in the face of the attractiveness of the research drivers set out above. Recent success in attracting research funds by New Zealand researchers support this view. A New Zealand group has recently secured overseas backing of $51.5 million to expand trials of an experimental cancer agent that fights a variety of advanced tumours. The decision was clearly because the original developers of the compound were Auckland Professors Bill Denning and Bill Wilson, rather than because of any purchasing decision made by DHBs or PHARMAC about pharmaceutical cancer treatments.

3.5

Recommendations

With respect to research and development, PHARMAC recommends: • • expansion of existing research programmes, or the establishment of a dedicated medicines research fund, to close information gaps related to the prioritisation and funding of medicines; & increased international collaboration between medicines funding bodies.

Office of Fair Trading. "The Pharmaceutical Price Regulation Scheme." UK Office of Fair Trading, 2007.

MEDICINES REGISTRATION

4.1

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Key messages

Like all parts of the system, it is important that medicines registration is performed as efficiently and effectively as possible. Registration has not featured largely in strategy work to date, but needs to for the strategy to be comprehensive, including to be clear on longer-term objectives of registration. Irrespective of the registration body (Medsafe or ANZTPA) there are critical registration issues that will always be important to consider (e.g. time to market, barriers to entry). Like the expected ANZTPA synergy, there may be benefits longer term from wider recognition of registration decisions in other jurisdictions. As registration is only a means to an end, it is critical that the “downstream effects” of medicines registration are considered.

4.2

Registration policy must consider downstream effects

The registration of medicines to ensure their safety and effectiveness is a critical step in the medicines system and, generally speaking, its importance cannot be overstated. Like all parts of the system, however, it is important that this function is performed as efficiently and effectively as possible. This includes considering trade-offs, for example between (a) greater confidence in safety versus delay and cost; and (b) the level of registration fees versus their potential to be a barrier to market entry. Legislation currently being considered in Parliament proposes the establishment of the Australia New Zealand Therapeutic Products Authority (ANZTPA), i.e. the merging of the Australian and New Zealand regulators into a single agency. Recognising the potential for the ANZTPA to make registration more efficient and effective (through, in effect, registration economies of scale), the consultation document understandably gives limited consideration to medicines registration. It is important though – for a meaningful strategy across the whole medicines system – that the strategy is clear on the role of the registration process in maximising the health outcomes available from medicines. Further, given the long term focus of a strategy, there are critical registration issues that will always be important to consider, irrespective of the particular registration mechanism in place. In particular, if the registration process takes too long, is too inflexible or costs too much, New Zealanders will be deprived of benefits that medicines could otherwise offer. In considering registration, the following issues are particularly important in thinking about downstream effects on the medicines system: • time to market – subject to quality considerations, registration should be as fast as possible such that, all other things being equal, patients benefit from medicines as soon as possible. Currently, Australian registration has a shorter period for an assessment where the product has been assessed in two other countries (175 working days) – this would be a useful feature of the ANZTPA if included. Just as the ANZTPA would synergise Australian and New Zealand efforts in a single body, there may be opportunities longer term for recognition of work by other reputable international agencies (e.g. the United States (FDA), Europe (EMEA), and Canada);

•

registration cost – if this is too high, it may prevent market entry for pharmaceutical suppliers with associated loss of competition generally, particularly in smaller generic markets. In New Zealand, there are a large number of funded pharmaceuticals (more than 30% of pharmaceutical markets – 224 medicines) with a market size below $50,000 – accordingly, market entry is likely to be very sensitive to the level of registration costs. While the Australian market would also be available to the supplier, it is not always practical for a company to launch in both markets; in many of the markets, the level of return across both markets may also not be sufficient to be attractive (relative to registration costs). Theoretically speaking, if the public good is compromised by registration being foregone because of registration costs, there may be a case for subsidisation; and prioritisation – registration processes are typically “first through the door”, but this does not necessarily maximise the health gains of registration. ‘Priority Assessment’ is proposed under the Medicines Rule, but not to date with respect to generic medicines that could potentially result in significant health resource savings. The benefit associated with savings from generic medicines in most cases is more tangible than the health gain associated with new medicines, where evidence is still emerging and long-term risks are not well known.

•

While a detailed policy assessment has underpinned the ANZTPA legislation currently in the Parliamentary process, the above issues will be important determinants of the future success of the medicines system. As the strategy is to span the whole medicines system and is long-term in nature, it is important that key objectives for registration are clearly articulated in the strategy and tested over time.

4.3

Recommendations

With respect to medicines registration, PHARMAC recommends: • • increased consideration in the strategy work of the implications of medicines registration on the medicines system as a whole; and particular consideration be given to examining any unnecessary barriers to market entry of pharmaceutical products, including to consider how any barriers are minimised over time.

PUBLIC FUNDING OF MEDICINES

5.1

•

Key messages

While the health sector as a whole has been subject to major change at several points in the past two decades, the medicines sector and its institutions have evolved through a process of steady improvement rather than disruptive change. Although institutionally stable, there have been radical improvements in the policies and procedures, and checks and balances, relating to medicines funding. This includes a high level of transparency and the use of open and competitive tendering processes. Benchmarking against Australia and the UK demonstrates the advantages of a rigorous and openly competitive approach to public funding of medicines. Over the past decade, New Zealand has been extremely successful in reducing the acquisition cost of medicines in competitive markets without compromising safety, quality or patient access. PHARMAC’s processes meet or exceed domestic and international guidelines for good practice in government procurement. PTAC has a distinguished history of providing free and frank advice of the highest quality to Ministers and to PHARMAC’s Board. PHARMAC recommends against making any changes to this valuable and highly successful institution. PHARMAC’s decision making is influenced and somewhat constrained by a short, one-year budget (notwithstanding the out-year indications). Decision making may be able to be improved and better health outcomes achieved with a longer budget timeframe while retaining a budget cap. To determine the optimal level of pharmaceutical expenditure, further progress in developing cost effectiveness data across the health sector is required to improve prioritisation decisions. The role of other government agencies that fund medicines should be assessed, including to consider whether any differences in approach to assessing and funding medicines are justified.

•

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•

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5.2

General overview of PHARMAC’s performance

Since its inception in 1993, PHARMAC has been highly successful in managing public funding of medicines for New Zealand. For example, PHARMAC has: • • made available to New Zealanders a broad range of new therapies; introduced competitive forces to many previously uncompetitive market segments, resulting in massive savings of health dollars that have been available for reinvestment in additional pharmaceutical and non-pharmaceutical health services; made very substantial improvements to the value for money that the New Zealand public gets from its purchase of medicines; introduced comprehensive consultation on all relevant matters with all interested parties; and improved the flow of information to prescribers and patients about the effects and relative merits of medicines.

• • •

5.3

Historical review of institutional arrangements

The secondary health care sector went through a series of major changes over the past two decades, including the amalgamation of Hospital Boards into Area Health Boards in the 1980’s; the funder-provider split into Regional Health Authorities (RHAs) and Crown Health Enterprises in the early 1990’s; the later consolidation of RHAs into the national Health Funding Authority; and finally the establishment of District Health Boards, centred around major regional hospitals. Each successive round of restructuring resulted in substantial changes in function, administrative structures and staffing, with system disruptions and associated costs. By contrast, the principal institutions in the medicines system – PHARMAC, PTAC, and Medsafe – are the result of a steady process of organisational evolution spanning several decades. Institutional change has been gradual, although still embodying adaptations resulting from changes in societal expectations, health policy and the secondary sector. In particular: • in 1993, the Drug Tariff Section of the (then) Department of Health, which had previously been responsible for administering medicine subsidies, became PHARMAC, a joint venture company of the four RHAs, and the responsibility for changes to the Pharmaceutical Schedule (previously called the “Drug Tariff”) was devolved from the Minister of Health to PHARMAC’s Board of Directors (then the four Chief Executives of the RHAs); correspondingly, PTAC, which had been advising Ministers of Health since 1941, became an advisory committee to PHARMAC. With the change to the DHB structure, PHARMAC became a Crown Entity accountable to the Minister of Health, with a Board of Directors appointed by the Minister; and on the registration side, the Therapeutics Section of the (then) Department of Health was turned into a stand-alone business unit of the Ministry of Health, Medsafe, in 1998.

•

Although the institutional arrangements and lines of accountability underwent significant changes over time, the core functions and structures of medicines regulation and funding have remained in place. The comparatively stable institutional arrangements have allowed the development and ongoing improvement and refinement of transparent methods and processes for making decisions about the public funding of pharmaceuticals. However, there has been a rapid transition from the original Drug Tariff: which was a comparatively obscure regulation, developed largely behind closed doors by officials with the advice of PTAC, and accessible only to a narrow audience of prescribers and pharmacists. To the current Pharmaceutical Schedule: which is accessible to the public at large, and where changes are made following consultation with stakeholders, including the pharmaceutical industry, pharmacies, the medical community and patient groups. While the changes to institutional arrangements and processes were gradual and evolutionary, there was one fundamental change to the system in 1993: the integration of primary care funding in capped total health care budgets of the RHAs and their successors. Prior to 1993, public expenditure on pharmaceutical subsidies (as well as subsidies for GP visits, laboratory tests etc) was purely demand driven, and funded separately from the capped funding of secondary care in Vote: Health. Pharmaceutical subsidies were the fastest-growing line item in the entire Government budget. The existence of independent funding streams presented significant incentives for inefficient cost-shifting between primary and secondary care, provided limited opportunities and incentives for efficiency enhancing cross-sectoral investments, and meant that prioritisation of pharmaceutical investments happened in isolation from the consideration of alternative health care investments (and vice versa).

A more subtle, but equally far-reaching policy change was a shift in the focus of setting medicine subsidies from pharmacology and pharmacological class (pre-1993) to therapeutic effect: essentially a focal shift from pharmaceutical inputs to health outcomes. This change, which was reflected in a series of major therapeutic group reviews, was instrumental in putting reference pricing on a coherent and rational basis and facilitated substantially enhanced price competition among pharmaceutical suppliers. We would argue that it is precisely the stability over time, and the absence of radical and disruptive institutional change, that has facilitated rapid progress in efficiency, effectiveness, and public accountability in medicines funding. In the following sections, we discuss specific aspects of PHARMAC’s functions and performance, together with issues, opportunities and risks arising out of the strategy work.

5.4

PHARMAC’s governance

PHARMAC is a Crown Entity accountable to the Minister of Health and has a Board of Directors appointed by the Minister. PHARMAC’s also operates in practice as an agent of the DHBs and its capped (notional) pharmaceutical budget is funded by the DHBs. PHARMAC has built a constructive relationship with DHBs which is not adversely affected by the fact that PHARMAC is formally accountable to the Minister. The current arrangements are characterised by a robust system of checks and balances: PHARMAC reports monthly and quarterly to the Ministry of Health (acting on behalf of the Minister). PHARMAC’s Board is directly accountable to the Minister of Health, who may at any time ask for a “please explain”, or, indeed, ultimately dismiss Board Members. PHARMAC staff members are accountable to its Board of Directors who scrutinise not just the substance of their actions, but also ensure a rigorous adherence to the Operating Policies and Procedures (OPPs)6 (and the quality of advice generally). The OPPs set out PHARMAC's decision-making criteria, the role of PTAC, and PHARMAC's role and objectives, and were published after public consultation. Overall, existing governance arrangements seem to be working well.

5.5

Pharmacology and Therapeutics Advisory Committee

PTAC has been an integral part of the health system since 1941. Originally set up as a Ministerial Advisory Committee, it has been an advisory committee to PHARMAC since 1993. PTAC’s statutory purpose is to provide PHARMAC with objective advice on pharmaceuticals and their benefits. In particular, PTAC considers applications for the funding of medicines and makes recommendations on applications to PHARMAC’s Board. PHARMAC considers PTAC’s advice to be indispensable; it would be impossible to replicate this level of depth and breadth of clinical knowledge and experience with in-house employees. Moreover, since PTAC’s members have extensive clinical experience, including current medical practice (both in hospital as well as community settings), they provide a vital perspective on both current population health needs and priorities as well as on the use of pharmaceuticals in medical practice. PTAC has a distinguished history of providing free and frank advice of the highest quality to Ministers and to PHARMAC’s Board. PHARMAC recommends against making any changes to structure, operation, objectives or scope of consideration of this valuable and successful institution.

PHARMAC. Operating policies and procedures of the Pharmaceutical Management Agency (“PHARMAC”), 3rd edition. January 2006. http://www.pharmac.govt.nz/pdf/231205.pdf

5.5.1

PTAC’s independence

From time to time, some stakeholders (the pharmaceutical industry in particular) have suggested that PTAC and its advice should be somehow “more independent” from PHARMAC. In our view, “more independence” is an expression that is widely aired but poorly defined and understood. PTAC is already independent from PHARMAC, and provides PHARMAC with the free, frank and objective advice required to inform decision-making. It is precisely this objective and independent advice which is valued by PHARMAC and which provides the Board with the assurance that applications by suppliers as well as PHARMAC staff work are subject to rigorous scrutiny. PTAC’s input regularly results in modifications to initial PHARMAC proposals (e.g. in prescribing restrictions or the composition of therapeutic sub-groups). Further supporting PTAC’s independence, PTAC members are appointed by the Director-General of Health. PHARMAC staff and directors are entitled to attend PTAC meetings and participate in the discussion, but have no right to vote. None of these aspects create any form of material or substantive dependence on, or undue influence by, PHARMAC. 5.5.2 Scope of PTAC’s advice

PTAC makes its recommendations to the PHARMAC Board on the basis of the same nine decision criteria used by PHARMAC, although the particular judgements made about the relative significance of these criteria in any specific case may differ between PTAC and the Board (as well as amongst the individual Committee and Board members). This results from the different perspectives that each member of the Committee and the Board brings to very complex issues and is an important part of ensuring thorough consideration of all of the merits and alternatives to a proposed action. It has occasionally been suggested that PTAC should limit its considerations to clinical matters and, in particular, cost and opportunity cost should not be part of its deliberations. In PHARMAC’s view, this would reduce the value of PTAC’s advice to the Board substantially, for the following reasons: • as a matter of institutional principle, it is desirable that the objectives, criteria and considerations of an advisory body reflect, and are aligned with, the objectives and criteria of the decision maker. Advice that excludes consideration of core concerns of a decision maker, or may even be based on conflicting objectives and criteria, is of limited use at best; there is no shortage of narrow, purely clinical information in the pharmaceutical area. What distinguishes PTAC’s advice is the comprehensive (balanced) outlook across a range of information and the consideration and weighing up of the broad range of relevant and sometimes conflicting factors from the perspective of the practicing clinician; and as practicing experts in the field, PTAC members are aware of the costs and opportunity costs of funding medicines. In practice, it would be difficult, if not impossible, for members to suppress that awareness and avoid being influenced by it when making recommendations to the Board. Under these circumstances, it is preferable to have explicit consideration of all criteria, including cost, than to have some unspoken, hidden considerations operating in the back of PTAC members’ minds.

•

5.6

Procurement principles and standards

We now turn to consideration of PHARMAC’s procurement practices from the perspective of general principle, relying on national and international standards and guidelines. 5.6.1 National guidelines

Government agencies operate as major purchasers of goods and services in virtually all sectors of the economy, from office and IT equipment to roading, defence, infrastructure, hospital supplies and pharmaceuticals. Government purchasing activities are generally referred to as “procurement”. Due to the scale and economic significance of government procurement, as well as public

accountability concerns, rigorous national and international procurement standards and guidelines have been developed and are suitable for assessing PHARMAC’s performance. In PHARMAC’s case, “procurement” involves determining subsidy levels for a national formulary of pharmaceuticals, and the terms on which patients can access them, rather than the actual purchase of stocks of medicines. In New Zealand, the Ministry of Economic Development (MED) advises the Minister of Commerce on the Government procurement policy framework (domestic and international) and leads a programme to raise the standards of procurement practice across the public sector. Since 1991, the MED has published a policy guide for government procurement.7 The Government expects its departments8 (e.g. The Treasury, the Ministry of Social Development, the Ministry of Health) and others (e.g. the New Zealand Defence Force and Police), and encourages other public sector agencies (such as PHARMAC), to be guided in their procurement of goods and services by the following principles: • • • • • best value for money over whole of life; open and effective competition; full and fair opportunity for domestic suppliers; improving business capabilities, including e-commerce capabilities; and recognition of our bilateral obligations and our trade policy interests in open and transparent government procurement markets.

More recently (2006), the MED has published a set of mandatory rules for procurement.9 The Rules are mandatory for Public Service Departments, New Zealand Defence Force and New Zealand Police. Other public sector agencies are encouraged to comply, as appropriate. The Rules introduced the publication of Annual Procurement Plans on the Government Electronic Tenders Service (GETS) (rules 51 and 52). They also require central government purchasers to go to open tender when making a purchase (or potential purchase) over the value of $100,000 (or $10 million for construction) and to advertise the request for proposals on GETS (rules 7, 23 and 24). There are, however, certain exceptions to open tendering, which include the protection of exclusive rights, such as patents or copyrights, or where there is an absence of competition for technical reasons, the goods or services can be supplied only by a particular supplier and no reasonable alternative or substitute exists (Appendix 2 exception 1 (b)). 5.6.2 International guidelines

The Asia Pacific Economic Cooperation (APEC) Government Procurement Experts Group (GPEG) has developed non-binding principles for procurement.10 These are: • • • value for money; open and effective competition; fair dealing;

Ministry of Economic Development (2002), Government Procurement in New Zealand: A Policy Guide for Purchasers. Note; this document is under revision at present to reflect some of the changes introduced by the mandatory rule. The general principles will remain the same. The Ministry of Commerce published the original document before it became a part of MED. In relation to government procurement policy, “departments” means the 35 public service departments listed in the First Schedule to the State Sector Act 1988 plus New Zealand Police and the New Zealand Defence Force. Ministry of Economic Development (2006), Mandatory Rules for Procurement by Departments. http://www.apec.org/apec/apec_groups/committees/committee_on_trade/government_procurement.html

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accountability and due process; and non-discrimination.

New Zealand has adopted the APEC non-binding principles into its government procurement policy verbatim (and already meets a new GPEG policy document on transparency that it is yet to officially recognise). No other APEC government has, to PHARMAC’s knowledge, a policy as reflective of the APEC principles as New Zealand’s. The Interagency Pharmaceutical Coordination Group of the World Health Organisation (WHO) has also published guidance on procurement in the pharmaceutical sector, 11 noting in particular that efficient procedures should be in place to select the most cost-effective essential medicines to treat commonly encountered diseases. Four strategic objectives for pharmaceutical procurement are identified: • • • • procure the most cost-effective medicines in the right quantities from an essential medicines list; select reliable suppliers of high-quality products; ensure timely delivery; and achieve the lowest possible total cost.

The group argues that procurement should be limited to an essential medicines list or national formulary because: No public or private health care system in the world can afford to purchase all drugs circulating in the market within its given budget. Resources are limited and choices have to be made. … This allows the health system to concentrate resources on the most cost-effective and affordable drugs to treat prevailing health problems. The selection of drugs based on a national formulary or national list allows for concentrating on a limited number of products. Larger quantities may encourage competition and lead to more competitive drug prices. Reducing the number of items also simplifies other supply management activities and reduces inventory-carrying costs.12 5.6.3 Assessment of PHARMAC’s performance against procurement standards

There are three main threads running through international and New Zealand policy guidance and rules for public sector procurement: open competition; value for money; and transparency. From an international perspective, transparency is important with respect to reducing corruption and increasing the level of open competition in procurement markets. This is not, however, an issue in New Zealand.13 The transparency of PHARMAC’s operations generally is discussed further below. Open competition Since its inception, PHARMAC has made major efforts to increase and enhance open competition among suppliers of pharmaceuticals. PHARMAC operates a rigorous system of reference pricing based on therapeutic sub-groups (medicines which have the same or similar effect in treating the same or similar condition), which does not favour any supplier, whether on the basis of type (generic versus originator) or country of origin. Since 1998, PHARMAC has moved successively to open competitive tendering for readily substitutable pharmaceuticals, with the result that in 2005,

World Health Organisation (1999), Operational principles for good pharmaceutical procurement, Interagency Pharmaceutical Coordination Group, document WHO/EDM/PAR/99.5. Principle 4. Ibid. These are not issues for particular concern in the present context, particularly given that the NZ environment is rated internationally as being one of the least corrupt in the world. In the Medicines Strategy Discussion Document on the other hand, “transparency” is discussed much more in the context of public accountability and enhanced public understanding of decisions – this is addressed later in this part of the submission.

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493 individual medicines were procured via open tenders, representing approximately 70% of the Pharmaceutical Schedule by prescription volume and 22% by value. There are of course many pharmaceuticals, particularly new medicines, for which there are no ready substitutes from competing suppliers and which cannot, therefore, easily be procured via tendering (although a possible approach is discussed below), notwithstanding the fact that they generate annual expenditure far in excess of the $100,000 threshold. However, to the extent possible given the features of the supply market, PHARMAC’s procurement processes and outcomes are clearly in line with domestic recommendations for good practice and comply equally with international guidance and standards in relation to open competition. PHARMAC’s standard procurement procedures are very open, transparent and well known: • • the Operating Policies and Procedures are published and have been developed and amended following extensive public consultation processes involving all stakeholders; PHARMAC provides details on the type of information that should be provided by suppliers and others seeking a drug to be funded through the Pharmaceutical Schedule and how (and why) it will be used by PTAC;14 and PHARMAC has taken the additional step of publishing and consulting widely on its methodological and public policy rationale for using CUA.15

•

We are not aware of any other national medicines procurement programme which uses open competition, and in particular open tendering, as rigorously and extensively as PHARMAC. Value for money PHARMAC’s operations in managing the Pharmaceutical Schedule are focused on maximising value for money. Reference pricing and open tendering mean that the Government (subject to product quality) pays no more than the lowest price on offer for any given product. Where no price competition is available (in particular in relation to new medicines), PHARMAC assesses spending opportunities against its 9 decision criteria, including to take account of costutility analysis (CUA). PHARMAC has been extremely successful in the “value-for-money” domain, achieving substantial price reductions (and thus, better value for money) over time.

5.7

Transparency of PHARMAC’s overall operations

An increased public focus on visible accountability for individual decisions has been a major theme affecting the operations of all government departments and agencies over the past decade. PHARMAC’s decisions attract considerable scrutiny from the general public, patient advocacy groups, the medical profession and the pharmaceutical industry. Understanding how decisions are made is important for public trust and confidence in the decision-making process. Ultimately, public agencies must be accountable to the public, and the availability of information to the public is generally regarded as an important element of accountability. In a world where people expect more and more transparency, it can be difficult, or at least counterintuitive, to argue against more transparency. “Increased transparency” sounds and feels right, good, democratic and accountable. The reality, however, is that too much transparency, or transparency at the wrong time, can be very prejudicial to good health outcomes. To illustrate this point, we discuss a range of relevant considerations and issues below.

PHARMAC (2005): “Recommended methods to derive clinical inputs for proposals to PHARMAC” (Version 1B, 20 July 2005). Available from http://www.pharmac.govt.nz/funding_applications.asp PHARMAC (2004): A Prescription for Pharmacoeconomic Analysis (version 1.1, currently under revision). Available from http://www.pharmac.govt.nz/pharmo_economic.asp

5.7.1

Transparency versus cost

As noted earlier, the establishment of PHARMAC in 1993 started a radical shift in the degree of openness and transparency in the public funding of medicines in New Zealand. Funding procedures and decisions prior to 1993 were largely hidden from the public eye. By contrast, vast amounts of information about PHARMAC, including both its operational structure and processes and the individual decisions it makes through them, are now readily accessible to interested parties. Decisions on individual drug funding applications as well as changes to policies and procedures are made following extensive public consultation, and outcomes are disseminated to directly affected parties as well as to the public. This high level of openness in a previously somewhat obscure area of public expenditure has been driven proactively by PHARMAC, with the intention of improving public understanding and acceptance of the difficult and sometimes uncomfortable choices that need to be made. From time to time, PHARMAC’s decisions have been subjected to judicial scrutiny, with a particular focus on procedural fairness and robustness. The unsuccessful nature of these challenges reinforces the integrity and robustness of PHARMAC’s processes. It must also be acknowledged that this increase in transparency and public accountability comes at a substantial cost, both directly in terms of high transaction costs as well as indirectly through delays in some decisions. Furthermore, making some information public, particularly at the wrong time, can prejudice outcomes – in this case, resulting in lower health gains from medicines expenditure. There is an inevitable tension and trade-off therefore between increased transparency and best outcomes. This trade-off was clearly a concern in the MED’s recent review of New Zealand government procurement policy: purely in terms of transaction costs, carrying out procurement in the public sector in New Zealand has been estimated by practitioners as already costing roughly twice that expended in the private sector, due to requirements for fairness and transparency. Putting further requirements in place in order to ensure other mandatory policy objectives are considered will exacerbate this disparity.16 5.7.2 PHARMAC’s prioritisation list

It is widely known that PHARMAC maintains a prioritisation list to provide priority guidance on alternative investment opportunities. While the existence of that list is well known, its content is not (although PTAC’s priority recommendations are public knowledge). PHARMAC keeps its prioritisation list confidential for commercial reasons, since the weakest negotiating position is created when a supplier knows exactly what a customer wants and how limited the customer’s choices are. Suppliers are, like other members of the public, entitled under the Official Information Act (OIA) to access information held and used by PHARMAC. However, there are no reciprocal obligations on PHARMAC’s suppliers (further discussed below). Suppliers do not reveal their strategies, priorities and negotiating bottom lines to PHARMAC, and neither should PHARMAC reveal its specific strategies, priorities and bottom lines. Too much transparency in this area might benefit one part of the public (pharmaceutical suppliers), at the expense of the wider public whose interests of maximising value for money from purchasing pharmaceuticals would be seriously compromised. 5.7.3 The application of PHARMAC’s Decision Criteria

Stakeholders, and pharmaceutical suppliers in particular, frequently call for more transparency about the reasoning behind PHARMAC’s decisions and the judgements involved. PHARMAC’s

Page 19. Ministry of Economic Development (2005), New Zealand Government Procurement Policy Review, Part Two: Realising the Potential for Innovation.

decision criteria, which set out the broad tensions in health care funding decisions, are also occasionally criticised for being too vague and non-transparent, and it has been suggested that the weighting or importance attached to the criteria should be made explicit and measurable, thus increasing transparency and leading to more predictability over time. In our view, such calls reflect a fundamental misconception of the complexities and circumstances under which PHARMAC makes its decisions. As the specific circumstances of each decision are complex, unique and time-dependent, the only certainty in providing a detailed explanation of how PHARMAC would apply multiple decision criteria to a specific application is that it would create an unjustified and misleading perception of inconsistent decision-making over time. Decision making is not, and never can or should be, a purely mechanistic exercise in measuring and analysing data, ticking off boxes and assessing performance against specific criteria. Decisions about the management of the Pharmaceutical Schedule ultimately require the exercise of professional judgement on a wide range of complex issues, and the balancing of competing interests and values in an ever-changing environment. The need to exercise professional judgement is why the Minister of Health appoints PHARMAC’s Board – so that they can exercise their high level of professional judgement in making these difficult decisions on behalf of New Zealand. These professional judgements are always based on facts, and some aspects of decisions can be quantified, measured and described. But there is no substitute for the professional judgement involved. There is a limit to ever increasing transparency because the complexity of the statutory exercise of professional judgement cannot be captured and broken down into perfectly transparent and measurable elements. The complexity involved in exercising professional judgement has long been recognised by the Courts (both in New Zealand and in other Westminster systems). Other than critically appraising procedural matters, the Courts are generally quite reluctant to substitute their own view on the substance of decisions made by expert bodies given the technical complexity of the issues concerned. 5.7.4 Consultation on changes to the Pharmaceutical Schedule

As part of its efforts to increase the transparency and public accountability of its operations, PHARMAC introduced extensive consultation to the process of making changes to the Pharmaceutical Schedule, and in particular to changes that resulted in subsidy reductions. But, transparency and accountability through consultation processes can carry a significant cost or opportunity cost. The direct monetary cost of time spent consulting on a proposal is easily quantified. For example, PHARMAC recently ran a tender for the antidepressant paroxetine. A delay in implementing the tender result (were consultation extended for example) would have cost $1 million per month. 17 Costs of similar magnitude can be demonstrated with numerous reference pricing decisions over the past 15 years. Likewise, health gains may be forgone through delays. If every price change on the Pharmaceutical Schedule from 1996 to 2006 had been delayed by just one month, total expenditure over that ten year period would have increased by approximately $45 million (precluding that level of investment in other pharmaceuticals or health services). These figures highlight that, in managing the Pharmaceutical Schedule, speed is of the essence: time equals money equals health services for the population. This is of course true not only in relation to delays associated with extended consultation: the same applies to delays in medicines availability more generally, although quality (not just the speed of decisions) is ultimately important. 5.7.5 Other transparency considerations

Apart from these direct costs and opportunity costs discussed above, there are also indirect effects associated with increased transparency. For example, as the MED notes, it may lead to increased

Based upon savings realised subsequent to the completion of the process.

risk aversion and a reduced receptiveness by public agencies to innovative proposals from industry (with a high level of prescription in procurement, innovative proposals may not be able to be accepted).18 While difficult to quantify, the cost of foregone innovation (like adverse impacts on dynamic efficiency generally) is likely to be significant. The cost of defending decisions in court is also hugely expensive and time consuming; the likelihood of unwarranted challenge is likely to increase proportionally with the level of prescription required of a decision-maker. 5.7.6 Procurement is not regulation

In considering the performance of PHARMAC (and particularly with respect to considering transparency), our view is that some stakeholders may mistakenly see PHARMAC as a regulator, as opposed to a procurement agency. The Government’s role in funding medicines is not a regulatory one, and PHARMAC is not a regulatory agency. PHARMAC determines the subsidies it is willing to pay on behalf of taxpayers to facilitate public access to medicines; but it does not regulate or control market prices as is sometimes alleged. In the literature on best practice regulation, considerable emphasis is placed on consistent and predictable decisions to, in practical effect over time, promote market behaviour that is consistent with the public good knowing what the regulator would do if required to intervene. Regulated and potentially regulated entities, therefore, have a legitimate interest in understanding a regulator’s approach to particular issues and the details underpinning decisions on these issues (such as how the rate of return on particular assets is calculated). At the same time, it is also in the regulator’s interest that market participants act in the public interest to reduce the need for regulatory intervention or correction. Pharmaceutical suppliers also have a legitimate interest in understanding PHARMAC’s approaches. To this end, PHARMAC has made considerable effort to ensure its processes are well defined and understood, including a high level of transparency about, for example, PTAC recommendations and PHARMAC’s assessment method for cost-utility analysis. It does not follow, however, that each and every detail of a procurement decision, in contrast to regulatory decisions, needs to be explained: to do so (as explained above, this risks significant additional costs and may shift the balance of market power towards the supplier. Further, the relationship between PHARMAC and its suppliers is very different to that of regulation. Negotiating with suppliers for new investments on a willing-buyer willing-seller basis, or running an open competitive tender, is very different to a regulator imposing a particular standard, price or level of service. There is nothing out of the ordinary here with respect to government procurement: in a similar way, central and local government procures roading design and construction services using open and competitive processes, but do not regulate prices in the market for roading services. More generally, PHARMAC was set up as a procurement agency, not a regulator, as procurement is a much more efficient way – given the characteristics and complexities of pharmaceutical markets and decision making – to get value for money for consumers. On the other hand, the United Kingdom has attempted a regulatory approach (including to regulate pharmaceutical supplier profits) but, as discussed further below, found significant shortcomings in this approach. 5.7.7 Transparency of pharmaceutical suppliers

There is a significant asymmetry between transparency obligations on PHARMAC and those applying to pharmaceutical suppliers – asymmetry that potentially places PHARMAC at a

Ministry of Economic Development (2006) Discussion document for industry as part of the 2006/2007 New Zealand Government Review of the 1994 World Trade Organisation Agreement on Government Procurement.

commercial disadvantage to the ultimate cost of taxpayers (financially or in terms of foregone health benefits). Given the promotion of “increased transparency” by the pharmaceutical industry, PHARMAC has naturally considered how transparent the pharmaceutical industry itself is, and whether any further requirements related to disclosures by companies would be in the public interest. A number of opportunities exist within current medicines processes for the pharmaceutical industry to be more transparent itself, particularly with respect to patented medicines where market power may be a concern. For example: • • applications for funding could be made publicly available in full (or with a very strict assessment about what contents are commercially sensitive); a declaration could be sought from applicants confirming that they have provided PHARMAC with all relevant information related to their application (not simply a subset that some applicants presently choose, including in some cases with respect to clinical trials, despite current guidelines requesting that all information be included);19 economic justification for pricing proposals and rates of return; disclosure of involvement or linkages with any individuals or bodies that may seek to influence the funding process; and a forward plan with respect to patent protection that PHARMAC should be aware of in weighing up longer term expenditure impacts from the likelihood, or otherwise, of generic provision.

• • •

These ideas would not be out of step with how market power is addressed in regulatory contexts (albeit procurement, as explained, is not the same as regulation). For example, most network companies with natural monopoly characteristic are required by information disclosure requirements to publicly disclose some contracts, some supply standards, pricing methodologies, forward-looking investment plans and asset valuations. Some regulatory agencies also have statutory powers to request information from companies and, in some contexts, request companies to prepare or collate new information. Overall, the important point is that any consideration of transparency for PHARMAC needs to carefully consider the impact on the negotiating context. If a more prescriptive or mechanistic approach to funding is required, then the likely outcome is a need for more transparency of pharmaceutical suppliers, including prescription around the funding proposals themselves. 5.7.8 Medicines compared with other procurement

The above assessment is generic in the sense that the analysis treats the procurement of medicines the same as procurement of any other good or service. This was not to understate the importance of medicines, but rather to get clarity on key policy considerations relevant to any public purchasing and funding process: from a procurement perspective, there is nothing special or different about medicines. PHARMAC understands the high importance that people generally attach to their health and the associated desire to understand “the system”, particularly when one is wanting something from the system (and a further heightened interest when wanting but not getting). This is human nature. It does not logically follow, however, that each and every aspect of the system needs to be widely understood or explained and, as noted above, there are good reasons not to in some cases.

PHARMAC (2005): “Recommended methods to derive clinical inputs for proposals to PHARMAC” (Version 1B, 20 July 2005). Available from http://www.pharmac.govt.nz/funding_applications.asp

5.8

Funding of high cost medicines

PHARMAC has recently run its own process related to the funding of high cost medicines. As some parties have seen the funding of high cost medicines as relevant to the medicines strategy work, PHARMAC will be providing all submissions to the Ministry for its consideration. PHARMAC will evaluate the submissions itself as part of its own work in this area.

5.9

Setting the Community Pharmaceutical Budget

PHARMAC manages the pharmaceutical budget on behalf of DHBs. There are two distinct but related issues: the process of setting the budget and the size of the budget. 5.9.1 The budget setting process

At present, the Government allocates an annual budget to the Ministry of Health, with which it is expected to fund health services. In turn, the Ministry allocates money to the District Health Boards, using a Population-Based Funding Formula. The DHBs then negotiate a budget for community pharmaceuticals with PHARMAC. PHARMAC’s budget is set for one year, with an indicative range for the following two years. PHARMAC develops its budget bid based on: • • • extrapolation of past trends; the expected effect of PHARMAC’s ‘business as usual’ on purchases and of demand-side management; and expected opportunities for new, cost-effective medicines.

DHBs and PHARMAC negotiate this budget, and then make a recommendation to the Minister of Health. A joint recommendation can be provided or, if DHBs and PHARMAC cannot agree, different recommendations can be made. The budget can be revisited during the year if necessary. In the short term, PHARMAC has very limited control over pharmaceutical expenditure: the bulk of spending is not discretionary or actively managed, but results from millions of prescribing and dispensing decisions, largely relating to historical drug listing decisions. There is no mechanism by which PHARMAC could, for example, quickly reduce or increase expenditure on cardiovascular and asthma medicines if it turned out part-way through the year that expenditures in these areas were (respectively) running significantly above or below the forecast. Overall, therefore, there is significant expenditure inertia. There is a comparatively small part of the budget that (in addition to savings in the existing stock of listed drugs medicines as agreements come up for renewal) can be used on a discretionary basis to fund the acquisition of new medicines, or the widening of access criteria where appropriate. For new investments however, much like expenditure generally, it usually takes several months to have material effects on expenditure in the relevant category (due to lags in pharmaceutical uptake). An important consequence of PHARMAC’s limited short-term ability to control expenditure, combined with the legal requirement that PHARMAC cannot overspend its budget, is that decisionmaking about new investments in the presence of a fixed, one-year budget is necessarily riskaverse. This is particularly so in the early part of the financial year when uncertainty about actual spending and the corresponding availability of discretionary funds is greatest. A second limitation of the single-year fixed budget is the lack of inter-temporal flexibility where: • next year’s budget is set before the out-turn of the current year is known. In this scenario, it is possible that efficient current year expenditure is, for practical reasons, not incurred – in such scenarios, that money should transfer to next year’s budget. This does not mean that all budget underspends should be “banked” into next year’s budget – the efficient level of

expenditure for next year is, other than the scenario described, not (theoretically speaking) related to historical expenditure; and • particular uncontrollable circumstances (e.g. an influenza epidemic) “crowd out” alternative funding priorities. Over multiple years, the probability of such events can be estimated quite accurately and built into long-term budget projections. However, for any one year, the probability of a rapidly-evolving epidemic occurring is much less predictable. Consequently, any short term budget will, at some point in time, come unstuck in terms of its ability to cover both the normal and abnormal.

To a large extent, these issues arise from having a short, fixed budget cycle. It is worth further exploring the budget process to consider whether there would be sustained benefits from a budget set for a longer period and with additional flexibility between individual years. 5.9.2 Setting the optimal budget level

PHARMAC uses cost-utility analysis to inform prioritisation of its work on funding proposals (noting however that cost effectiveness is only one of PHARMAC’s nice decision criteria). In this way, we improve the effectiveness of the pharmaceutical budget by moving funds to the highest-priority uses. However, this prioritisation process only allows us to judge how best to employ PHARMAC’s time and funds within a given budget – it does not give us an indication of what the optimal size of the pharmaceutical budget should be in the context of an overall budget constraint for the total health sector. This requires consideration of the merit of spending on medicines relative to non-pharmaceutical health services. This consideration requires that – theoretically speaking – the foregone benefits of alternative spending opportunities across the sector need to be identified and ranked, in much the same way as PHARMAC optimises within the pharmaceutical budget. While the theory is clear, the difficulty in practice is that the required cost effectiveness data are not currently available for large areas of health expenditure. It is likely that a considerable part of DHB expenditure is reflective of historical resource allocation decisions with significant inertia associated with those allocations (including capital investment decisions which are not amenable to quick and easy re-allocation). This is a practical reality (and not inherently bad), in much the same way as PHARMAC’s expenditure is driven by historical listing decisions and established prescribing patterns in the market. What is important though is that, over time, resources flow from those areas with least value to those with most. There is no simple and easy way to optimise allocations in the short term, but there will always be specific opportunities in the short term – decisions “at the margin” – for allocating new money to improve allocation. The strategy must emphasise the necessity of taking such opportunities across the medicines system (and broader sector), including to better assess historical allocations. In simple terms, the strategy must seek to ensure that the “right” amount of money is spent on medicines relative to other health services. A pragmatic but effective approach to this exercise is “Programme Budgeting Marginal Analysis” (PBMA) – the key questions are, in essence, “what we would cut if our budget was reduced” and “what we would do next if our budget was increased”. The approach described above is reflected in the new framework for collaborative decision-making currently being implemented by the Ministry of Health and the DHBs, which should generate costutility analyses for a range of health services. This is a positive initiative which should continue to be a high priority given its potential to improve resource allocation across the sector. Alongside that work, it may be productive to review other recent evidence-based decisions at the margin of health sector funding. Evaluations could be made of, for example, funding for elective surgery procedures, and funding in high-growth areas such as aged care. We also recommend that comprehensive cost-effectiveness analyses be carried out when Government allocates new funding to particular initiatives or programmes.

The international medical and health-economic literature contains a growing resource base of costeffectiveness type analyses of a broad range of medical interventions. While these data would have limitations in New Zealand’s situation, they do provide general indications of relatively cost-effective and cost-ineffective interventions. When compared to the cost/QALY of recent investment decisions as well as identified opportunities for expenditure increases by PHARMAC, it is conceivable that such a consistent, cross-sectoral approach would lead to an increase in the overall pharmaceutical budget. However, we would emphasise that PHARMAC is not at this stage advocating an increased budget per se; but rather, advocating for additional analysis to better determine what the optimal budget level should be.

5.10 PHARMAC’s performance

PHARMAC manages the expenditure of about $600 million of taxpayer funds each year, in an area of high public interest. PHARMAC’s decisions affect the health and wellbeing of a great number of people, and may have significant commercial ramifications for the pharmaceutical industry. It is therefore neither surprising nor in any way inappropriate that PHARMAC’s decision making is subject to continuous scrutiny and comment. PHARMAC’s principal objective is “to secure for eligible people in need of pharmaceuticals the best health outcomes that are reasonably achievable from pharmaceutical treatment and from within the amount of funding provided”.20 However, while the objective is clear, health outcomes associated with pharmaceutical treatments result from a complex chain of decisions and actions (or inaction) by PHARMAC, prescribers, pharmacists and, not least, by patients. No one person or agency in this chain can unilaterally “secure” health outcomes; each health outcome depends critically on successful co-operation amongst all of the parties involved, all of whom have some degree of control over a particular aspect of treatment, and limited or no control over others, as well as on a large range of outside factors and circumstances beyond the control of anyone. PHARMAC’s primary area of control is in subsidising medicines, i.e. in facilitating comprehensive access to prescription medicines at very low or no cost to patients. Once medicines are funded, prescriber choices amongst pharmaceutical and other treatment options are outside PHARMAC’s control, as is patient compliance. PHARMAC can, however, influence prescribers and patients to some extent, for example, through access criteria, medicines-targeting education and information programmes and other demand side activities. 5.10.1 Simple metrics have significant limitations In the following sections, we briefly review PHARMAC’s performance, including international comparisons. Before getting into those assessments, it is acknowledged that reliable insights from international comparisons are very difficult to obtain due to a wide range of relevant factors that are different in each country. Simple measures such as “number of medicines funded”, “expenditure as a percentage of health budget or GDP”, or “time to fund a medicine” are not particularly meaningful. Such measures fail to take account of a wide range of important considerations, for example (noting many of those factors are not interdependent and actually compound): • number of medicines funded – it is not the absolute number of medicines that is clinically important, it is the number of conditions that can be effectively treated and the consequent health gains, i.e. outcomes are important not inputs; decision speed – while quick funding intuitively sounds better, a quick decision is not always a quality decision. It is important that all relevant evidence is thoroughly considered. Further, funders should be very sure about funding a medicine given the life-cycle taxpayer cost of doing so, and the difficulty associated with de-listing medicines, even if further evidence undermines earlier decisions. In other words, and quite different to other procurement, medicines funders generally only get one shot to get things right – at the initial funding decision;

•

Section 47(a), New Zealand Public Health and Disability Act (2000).

•

expenditure proportion of health budget or GDP – different countries have different purchasing powers and different priorities. This makes any cross-country comparison about proportional expenditure meaningless. In any event, it is a sovereign choice of every country about how much it wishes to spend on medicines or any other good or service; and generally speaking, the use of simple indicators of funding performance are inadequate because they do not: – – – address whether value for money has been robustly determined (the mere focus on an input or output does not guarantee a quality health outcome); take into account other important health policy settings (e.g. patient co-payments); and consider how well medicines are actually used – there is no merit in quick and plentiful supply if medicines are poorly used.

•

5.10.2 Population health gains from new investments PHARMAC reports the likely magnitude of health gains from its investment decisions each year in its Annual Report to Parliament.21 Over the last eight years, PHARMAC invested in 134 new medicines. 58 of these (totalling around 84 percent of the value of new pharmaceutical investments) had cost effectiveness information. In theory, these new investments were, in aggregate and for the first year of their implementation only, expected to save around 6,120 quality-adjusted life-years (QALYs) or the equivalent of about 630 statistical lives.22 Clearly, the life-savings over the future of those investments will be much more significant. Further, for every $1 investment in those new investments, 59 cents was ‘saved’ elsewhere in the sector, through the benefits of those pharmaceuticals generating less need for other health services. These savings – that can be reinvested elsewhere in the sector – increase the true health outcome gains from these investments. PHARMAC is not aware of any such data for the extent of health gains from investment decisions in other countries. 5.10.3 Benchmarking prices In 1987, prices for medicines were 37% higher in New Zealand than in Australia. By 2001, the Australian Productivity Commission found that New Zealand and Australian list prices were much the same for new medicines. But the Commission also found that prices in New Zealand for generic (off-patent) medicines were around 20% lower than in Australia, and lower than in any other country the Commission had investigated. By 2006, with PHARMAC’s tenders and rebates promoting intense competition in medicines supply, the cost of the twenty most commonly prescribed drugs in New Zealand had fallen to 20% of the Australian level. Australia, concerned about rapid increases in its pharmaceutical costs, is now imposing price cuts of up to 25% on medicines in competitive markets, including statins, antibiotics, and ulcermanagement agents. Germany, on the other hand, is imposing a 16% price reduction on all noncompetitive markets. In contrast to both these approaches, PHARMAC’s approach to funding new medicines is to negotiate solutions on a willing buyer-willing seller basis.

21 22

Available on the PHARMAC website at http://www.pharmac.govt.nz/annual_report.asp For this analysis, a statistical life is equal to 9.7 QALYs. Saving a life so a person lives out their full potential means saving, on average, 36 years of life. To establish the current/present value of these future years, a discount rate of 10 percent has been used, yielding a net present value of 9.7 QALYs.

5.10.4 Tenders: Open and fair competition reveals better prices When there is scope for competition in supply, PHARMAC utilises open tenders to establish a fair market price, and at the same time offers supply certainty to suppliers. Suppliers also frequently offer rebates to ensure that higher international head-line price levels are protected (posting the same price here, but with a rebate) and that District Health Board costs are cushioned (i.e. risk sharing) against unexpected increases in prescribing. The tender process has been particularly successful. Open, competitive tenders reveal the best price that suppliers are willing to offer. Tenders have enabled DHBs to spend up to $84 million a year more on other health services. Over 500 products are currently purchased through the annual tender process. Since PHARMAC initiated the tender programme, ten drugs have fallen in price by more than 80%. In the earlier years of the programme, average price reductions during the annual tender round were as high as 62% compared to the preceding year. The average reduction in prices during the 2005 tender round was 25% compared to the previous price level. What this demonstrates is that through successive rounds of tendering, prices keep falling consistently, gradually approaching a competitive, efficient market price level. It also puts industry comments about “unsustainable” and “predatory” price reductions made over a decade ago into some perspective. 5.10.5 Consideration of Australia’s funding regime Australia’s Pharmaceutical Benefits Scheme has much in common with New Zealand: • • • both countries assess pharmaceuticals in terms of their value for money; both negotiate over funding of each pharmaceutical, and list subsidies on a national schedule featuring therapeutic grouping and reference pricing; the rules governing how prescribers may use medicines are almost identical, right down to the name of the Special Authority scheme. The regulation and funding of pharmacies is very similar; and medicines reach the market at similar times – and will become available simultaneously should a single trans-Tasman medicines regulator eventuate.

•

While the systems have many features in common, there are some important differences. A key difference between Australia and New Zealand is patient access and equity: standard prescription fees are much higher in Australia (up to A$30.70) compared to a maximum of NZ$15 here. Like New Zealand, Australia also differentiates prescription fees on a socio-economic basis; but while over half of New Zealanders can now access a prescription for a maximum fee of NZ$3, only a comparatively small section of the Australian population is entitled to the lower (although still comparatively higher) Australian rate of A$4.60. As a result of these differences, the average prescription in Australia costs the patient just under A$6, while the corresponding average in New Zealand is below NZ$2 (29% of the Australian cost at current exchange rates23). In simple terms, funded medicines overall are more accessible in New Zealand, and access is less dependent on patients’ ability to pay. The debate about access to pharmaceuticals is often focused around access to the very newest medicines; however, from a health outcomes perspective, it appears far more critical that the population at large has access to the entire pharmaceutical tool-box on affordable and equitable terms. In this respect, New Zealanders enjoy superior access than our neighbours.

A$6 = NZ$6.81 as at 29 March 2007. www.xe.com

Australia has been at the forefront of assessing medicines in terms of their value for money. However, in its own assessment, it has found it is falling behind. The Australian Government recognises that “by getting better value for existing medicines, the capacity to list new medicines is strengthened” and that “in recent years, the [Australian] Government has been paying too much for many medicines where there is a competitive market operating”. New measures include: • • moving to ‘price disclosure’; promoting the use of more generic medicines, with a campaign “to ensure that patients and health professionals are aware of the safety, health and economic benefits of generic medicines”; and from 1 August 2008, the PBS will apply mandatory price reductions: annual decreases of 2% for three years “where price competition between brands is low” and a one-off price drop of 25% where “price competition is high”.

•

Australia will move drugs such as simvastatin, omeprazole, ranitidine, amoxicillin, and felodipine into the high-competition category, and apply a 25% price cut from August 2008. This regulatory approach is in stark contrast to PHARMAC’s commercial open-tender process. Tenders enable suppliers to price their products at a competitive level that reflects the cost of supply. In six of the eight years of the tender process, the savings to the New Zealand taxpayer have been much greater than the 25% price cut to be imposed on Australian suppliers. Patterns of access to medicines and costs differ between New Zealand and Australia, rendering comparisons by cost alone to be unhelpful. PHARMAC is currently examining inter-Tasman population coverage and costs of key medicines; these data are currently being worked on, but the published example of statins (a high profile24 , high health gain high need area) is useful. New Zealand’s per capita population coverage of statins now equals that of Australia, but we spend 1/3rd the amount per person (using a simple nominal dollar conversion).25 26 Further work is required to extend such analysis to inter-Tasman comparisons of health gains.

New Zealand and Australian use of statins since 2002

80.0 dispensing-based person-month equivalents per 1000 population 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 Jul-02 Jul-03 Jul-04 Mar-02 Mar-03 Mar-04 Mar-05 Jul-05 Sep-02 Sep-03 Sep-04 Sep-05 Nov-02 Nov-03 Nov-04 May-02 May-03 May-04 May-05 Nov-05 Mar-06 May-06 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06

New Zealand and Australia now have equal usage of statins

NZ, total statins Australia, total statins

month

Ellis C, White H. PHARMAC and the http://www.nzma.org.nz/journal/119-1236/2033/

statin

debacle.

Med

2006

Jun

23;119(1236):U2033.

Moodie P, Dougherty S, Metcalfe S. PHARMAC and statins—getting the best population health gains. N Z Med J. 2006 Jul 21;119(1238):U2092 http://www.nzma.org.nz/journal/119-1238/2092/ Metcalfe S, Moodie P. PHARMAC and statins—correction is needed. N Z Med J. 2007 Mar 2;120(1250):U2453. http://www.nzma.org.nz/journal/120-1250/2453/

New Zealand and Australian costs of statins since 2002

$4,500 $4,000

NZ, statin cost ($NZ) Australia, statin cost ($AUS)

nominal costs per capita of statin use in Australia are now 2.7 times that of NZ

nominal cost per 1000 population

$3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 Mar-02 Mar-03 Mar-04 Mar-05 May-02 May-03 May-04 May-05 Mar-06 May-06 Jul-02 Jul-03 Jul-04 Jan-02 Jan-03 Jan-04 Jan-05 Jul-05 Sep-02 Sep-03 Sep-04 Sep-05 Nov-02 Nov-03 Nov-04 Nov-05 Jan-06

month

5.10.6 Consideration of United Kingdom funding regime The United Kingdom has historically adopted a different approach to New Zealand and Australia: It does not negotiate pharmaceutical prices, but instead regulates pharmaceutical company profits. The United Kingdom competition watchdog, the Office of Fair Trading has just reviewed this scheme, and found significant shortcomings. It found that: • • • the Pharmaceutical Price Regulation Scheme fails to make good use of funding to improve population health; profit caps are routinely avoided by multi-national suppliers; and a significant shift towards ‘value-based pricing’ was needed, in part modeled on the Australian system. It calls for a linkage of cost-effectiveness evaluations to price negotiations, and proposes different ways of achieving this, all aimed at increasing competition in the sector.

Whichever option is chosen, it would be a major shift towards PHARMAC’s active promotion of market competition and negotiated outcomes (or other quasi-negotiation approaches such as the Australian percentage price cut approach) founded on a clear and transparent evaluation of the relative benefits of different medicines. The Office of Fair Trading concludes: If implemented, our recommendations will have significant implications, involving a major reallocation of drug spend in the long run. These changes will create winners and losers and will clearly not be popular with some companies. But companies that are successful in producing drugs that make major improvements to patients’ lives will prosper. In our view, that is the essence of effective competition. 5.10.7 What improvements can be made to PHARMAC’s purchasing methods? This brief benchmarking above of PHARMAC’s performance demonstrates the clear benefits from a rigorous, openly competitive and transparent medicines procurement system. Health care resources are scare, and it is therefore critical for maximising health outcomes that the procurement of medicines is carried out as efficiently as possible, to the benefit of all New Zealanders. PHARMAC has identified two ways in which the general approach to funding medicines could be improved: actively seeking out new therapies; and making better use of existing therapies.

Actively seeking new therapies PHARMAC could invite the industry to provide regular updates on which products they intend to bring to the market in each of the next five years. PHARMAC could use this information to: • be able to prepare for assessments of applications by ensuring that there is a good prior understanding of the potential need for each product, including both the current burden of the disease and current treatment and prevention options; improve budget forecasts; and undertake annual gap analyses and notify the industry of any areas where therapeutic innovations would be most likely to improve the health of New Zealand’s population.

• •

An innovative way to seek out the best new therapies would be to tender an amount of money for new investments (those PHARMAC typically invests heavily in exploring through a negotiation process), perhaps twice a year. Through that tender, suppliers could advocate (including with reference to competing products) why their new treatment should be funded and at what price. This approach could dissipate, if not eliminate (depending on the extent of competition), market power often associated with new innovations through putting them up against one another in a defined competitive process. Making better use of existing therapies: reducing inequalities, improving population health PHARMAC’s demand-side role promotes the optimal use of funded medicines. There is considerable evidence that many if not most medicines are being used at sub-optimal rates. This is further discussed later in this submission. For example, when funding for statins was restricted by clinical guidelines, prescribing was at about 60% of the levels predicted by the known distribution of cardiovascular risk factors in the population.27 Thus, a substantial proportion of the at-risk population within these guidelines were not being prescribed statins. Conversely, considerable numbers of people at lesser risk are prescribed statins, beyond guidelines. 28 Both the under-prescribing and the over-prescribing is inefficient: the one wastes opportunities to improve health outcomes directly, while the other wastes scarce health dollars which could be put to better use elsewhere. The best response to this problem is not clear, as it reflects wide-ranging issues and interdependencies in the education of prescribers, access to primary care, and changes in attitudes towards medical prevention (e.g. nutrition and exercise) and treatment (e.g. the role of medicines versus traditional healing) in some populations. However, what is clear is that a number of activities would positively promote improvement in this area: • • • increasing demand-side activities; funding research to develop an understanding of what benefits medicines can have (especially older medicines that have been identified as having a potential for a new use); funding research on why and where medicines are or aren’t being used; and

S. Metcalfe and P. Moodie, "More About Cardiovascular Disease and Lipid Management in New Zealand," NZ Med J 115, no. 1163 (2002). Gribben B, Jackson R, Arroll B, Metcalfe S, Goodyear-Smith F. The impact of a cardiovascular risk awareness campaign on statin prescribing - good news / bad news. Undergoing review for publication in the NZMJ.

•

developing and promoting information and reporting systems to monitor and publish data on rates of use of medicines compared to expected levels.

This type of activity could be driven (with consumer input) in collaboration with a number of players in the medicines system, including PHARMAC, DHBs, prescribers, pharmacists and suppliers.

5.11 Other government purchasers of pharmaceuticals

PHARMAC is not the only government purchaser of medicines: in our understanding the ACC, the Ministry of Social Development and the Department of Corrections also procure medicines. For completeness, a strategy should acknowledge the role of these agencies. There may be good reasons why each of these agencies may take a different approach to what pharmaceuticals are funded, depending on how they assess medicines and their decision criteria. For example, the ACC is particularly concerned with the costs associated with people being out of paid employment, so funding a medicine to promote early return to work may be highly desirable, even if not listed on the Pharmaceutical Schedule (with PHARMAC’s population-wide best health outcomes perspective). Even though different criteria or different objectives may be legitimate in principle, there is the potential for such differences to create perceived access inequities. For example, one person in a household may be prescribed a funded medicine in return to work sooner, but another in the household cannot access the same medicine due to their need not being a workplace related injury. An example was with a medicine called Pemetrexed for mesothelioma (usually caused by asbestos exposure). PHARMAC declined to fund this medicine given a relatively high cost per patient and limited benefits (less than three months survival improvement). The medicine was reviewed by PTAC and its cancer treatments Subcommittee, CaTSoP, and recommended as a low priority. The ACC on the other hand started funding this medicine for patients with workplace exposure. This created an issue of patients without New Zealand workplace exposure, such as immigrants and the wives of workers who had workplace exposure (and brought the dust home). In this and other similar situations, the equity issues from the perspective of the general public are easily appreciated. There is nothing new about access differences between people whose medical condition is the result of an accident rather than the result of consequence of disease/illness. However, while different objectives are appropriate for different agencies in principle (depending on their mandate), the medicines strategy is an opportunity to consider whether the policy fundamentals across government purchasers of medicines are optimally specified. It is important to consider underlying issues such as consistency in assessment (or being clear on reasons for differences in assessment approach) and access equity (or being clear on reasons for perceived inequity). In considering these issues, it is important to recognise that differences in approach – even if theoretically justified by different objective functions – can place significant pressure on other agencies to do similar.

5.12 Conclusions

5.12.1 Institutions The institutions in the medicines sector are stable and well functioning as a result of their steady evolution over the past few decades. The stability in the institutions has allowed them to develop the flexibility/capacity to effectively implement substantial policy and procedural changes without the disruption seen elsewhere in the health sector. This evolutionary approach should continue.

5.12.2 Procurement It is our view that PHARMAC’s procurement processes meet or exceed relevant national and international standards and principles of good practice. The fact that DHBs are also using PHARMAC to procure an increasing range of hospital pharmaceuticals (outside the pharmaceutical budget) further indicates confidence in the integrity, efficiency and effectiveness of PHARMAC’s procurement. 5.12.3 Transparency The MED has expressed the view that rather than introducing explicit and rigid procedures, better value for money outcomes would come from increasing exercise of professional judgment and avoiding situations where procurement follows a “tick-box” methodology. 29 PHARMAC strongly endorses that wider-government view in relation to its decision-making processes. Although transparency has very substantial benefits, there is always a price to be paid. As a result, suggestions to increase transparency must be carefully considered, weighing up both benefits and costs. The symmetry (or otherwise) of transparency expectations of PHARMAC versus the pharmaceutical industry (given a negotiating context) is also a critical consideration. 5.12.4 Optimal budget PHARMAC’s decision making is influenced and somewhat constrained by a short, one-year budget cycle. This introduces a degree of risk aversion, particularly in the early part of a financial year. In our view, decision making may be able to be improved and better health outcomes achieved with a longer budget time frame, whilst retaining a budget cap. Determining the optimal level of the pharmaceutical budget will require cost effectiveness analysis across a wide range of health interventions, to allow efficient prioritisation on the margin between pharmaceutical and non-pharmaceutical interventions. This work is underway, but the strategy should further emphasise it given the importance of being sure that the “right” amount of money is spent on medicines relative to other health interventions. 5.12.5 PHARMAC’s performance Through its decisions, PHARMAC has generated significant population health gains through open and competitive processes where appropriate, or negotiations with suppliers on a willing-buyer willing-seller basis. Evaluating PHARMAC’s performance using simple metrics can be misleading; however, consideration of the Australian and United Kingdom regimes suggests that PHARMAC’s approaches measure up very well. There may be further benefits from greater attention by PHARMAC (and others in the system) to optimal use, and from improving procurement further by tendering some money for new investments (instead of individual price negotiations with suppliers for those investments). 5.12.6 Other government funders of medicines The strategy should consider the role of other government agencies that fund medicines. There may be valid reasons for different approaches to assessment and deciding on funding; however, the strategy is a timely opportunity to evaluate whether any differences – given they can create access inequities – are justified.

Ministry of Economic Development (2005), New Zealand Government Procurement Policy Review, Part One: The Implementation of Current Policy and Removing Barriers to SME Participation. Ministry of Economic Development (2005), New Zealand Government Procurement Policy Review, Part Two: Realising the Potential for Innovation.

5.13 Recommendations

With respect to public funding of medicines, PHARMAC recommends: • • • • existing structures and systems with their proven track record in the medicines funding sector be retained, with further evolutionary improvements; PTAC, as one of the most distinguished institutions in the sector, continues its work on the basis of its present structure, operations and scope of considerations; consideration be given to extending the length of PHARMAC’s fixed budget cycle to improve the long-run efficiency of expenditure; any proposals to “increase transparency” be scrutinised rigorously and comprehensively on the basis of a cost-benefit analysis (including to consider impacts on PHARMAC’s negotiating context and whether reciprocal transparency requirements on pharmaceutical suppliers should apply); intensifying existing efforts elsewhere in the sector to prioritise resource allocation decisions across the sector, including determining the optimal level of the pharmaceutical budget; and the role of other government agencies that fund medicines be considered, including to assess whether any differences between agencies in medicines assessment and funding are supported by policy principles.

• •

DISTRIBUTION

6.1

•

Key messages

Distribution of pharmaceuticals has long been tightly regulated because of the public interest in dispensing safety. Compared to other retail industries, the dispensing industry has undergone comparatively little structural change over many decades: the industry is still characterised by small owner/operator businesses. Although both health funders as well as the pharmacy industry emphasise and seek to enhance the increasingly important professional role of the pharmacist, current funding structures remain focused on the pharmacist’s role as a retail distributor. It is likely that efficiency gains in distribution could be made by complementing the still largely uniform, “one-size-fits-all” contracting model with a range of alternative funding options. Potential opportunities exist in the area of ePharmacy and mail order pharmacy, competitive tendering in areas of high retail market concentration, fixed location payments to ensure continued pharmacy access in areas that are commercially unattractive or unsustainable for pharmacists, and integration of hospital with community pharmacy in selected locations.

•

6.2

Background

Distribution of pharmaceuticals has long been tightly regulated because of the public interest in dispensing safety. Pharmacy regulation through the Medicines Act still includes controls on business ownership and of physical attributes of dispensaries (so-called “bricks and mortar” clauses). As a result, the dispensing industry has undergone comparatively little structural change over many decades: the industry is still characterised by small owner/operator businesses. This slow rate of structural change is in contrast to the development of many other retail distribution sectors. Further, the opportunities presented by completely new communication technologies and distribution channels over the past decade (e.g. ePharmacy, retail ordering via internet with distribution from highly efficient automated, centralised facilities) have to date not been reflected (or at least not featured largely) in New Zealand’s medicines distribution sector. Whereas decades ago the pharmacist was the source and supply of many medicines (often compounded onsite), the pharmacist is now a retail distributor for a broad range of industrial products, many of which are pre-packed (original pack dispensing) or provided in bulk for dispensing into smaller packs. In addition to the distribution service of retail goods, pharmacists provide professional medical services in the form of consumer advice and health education (broadly speaking, medicines management). However, while the medicines management role becomes more important (contributing to optimal use of medicines), current arrangements for funding dispensing services remain focused on the pharmacist’s role as a retail distributor of medicines. The annual cost of dispensing services to DHBs is, in our understanding, in the order of $250 million, the bulk of which represents payments of a fixed fee per item dispensed. Under this approach, even if fixed fee levels do not increase, there is significant revenue growth for pharmacists associated with volume growth. Pharmacists have, and will continue to have, an important role in managing the interface between prescribers, medicines and the consumer. The development of the medicines strategy provides an opportunity to enhance and optimise the contribution of pharmacy to the medicines system. Below, we set out a few issues and options, with particular regard to opportunities for efficiency gains in purchasing distribution services. To date, the strategy work seems to have paid little attention to

this part of the medicines system: while not having all the answers, we consider there are a number of important issues that deserve consideration.

6.3

Issues and options

The continuous demand for increased accuracy, safety and competency in the pharmacy environment by regulatory authorities, manufacturers, healthcare professionals, and consumers has increased the overhead costs of dispensing operations. The current industry structure, dominated by small owner/operator businesses, makes it difficult to absorb such cost increases (without economies of scale and scope) as it still relies substantially on manual and semi-manual methods. These rising costs place pressure on public funding as well as on individual pharmacists, which seem to be reflected in increasingly difficult negotiations between DHBs and service providers. Further, contracting and payment for dispensing services still follows, by and large, the traditional “one-size-fits-all” model established some decades ago through a regulatory scheme that set dispensing margins and fees on a national level. This regulatory system was replaced in the early nineties with a contractual approach; however, the uniformity of payment structure and level on a regional or national level regardless of particular local circumstances, and the traditional focus on distribution rather than professional services remained. In our view, such a contracting model cannot be expected to fully align the interests of pharmacy businesses with the interests of health funders. In particular, the model incentivises pharmacies to maximise dispensing volumes, and it presents strong incentives to locate pharmacies where they can expect high sales volumes (not necessarily coinciding with the population’s need for access to pharmacy services). It is these sorts of coordination and interdependency issues that the strategy must carefully consider. At the same time, the “one-size-fits-all” model is not well suited to take advantage of the particular competitive opportunities which arise out of the location incentives noted above, or to adequately remunerate pharmacies which happen to be in commercially less attractive locations (such as rural areas), but that from a health access perspective might be absolutely vital. A more diverse and flexible approach to purchasing dispensing services, tailored to specific circumstances, could provide opportunities for substantial efficiency gains arising out of efficient location, innovation in service and, in some cases, economies of scale. For example (and noting the need for further analysis on the pros and cons of these options): • ePharmacy and mail order pharmacy could provide significant economies of scale in distribution as well as high accuracy and safety through the use of automated dispensing facilities. This would also provide consumers with another convenient choice and might improve access to dispensing services in certain areas; where there is a sufficient degree of competition between pharmacies (e.g. in urban centres with high population and foot traffic densities), dispensing contracts could be awarded on the basis of open, competitive tenders, specifying locations and service levels, resulting in an efficient concentration of sales volumes to a smaller number of high-volume dispensaries;30 in locations where access to pharmacy services is critical but dispensing volumes insufficient from a commercial perspective, contracting could be based on fixed annual facility and service contracts. Thus, a pharmacist could be paid for providing access and professional services to the public without having to depend on volume-related dispensing fee income; and with the abolition of the funder/provider split in the secondary health sector, DHBs could also contemplate entering the community dispensing market with facilities of their own. Essentially, as far as purchasing community dispensing services is concerned, DHBs are in a “make or buy” situation. DHBs already own and operate hospital pharmacies and thus, for example,

•

A precedent for competitive tendering of pharmacy services was set in the late 1990s by the Southern Regional Health Authority’s tender for methadone services.

have access to all the relevant professional skills, well established commercial relationships with suppliers, and safe and effective stock management systems. Community dispensing by DHBs could be used to enhance competitive market forces, as well as for increasing access in strategic locations. This approach would be analogous to the integration of community and hospital laboratory services. Generating efficiency gains in retail distribution would provide an opportunity to free up funds which could then be re-invested in purchasing enhanced professional pharmacy services or in other health services generally. In the context of improving optimal use of medicines, such a re-allocation might play an increasingly important role in improving health outcomes.

6.4

Recommendations

With respect to distribution, PHARMAC recommends: • • current pharmacy regulations be reviewed to ensure that they pose no undue constraints to introduction of modern, efficient methods of retail distribution in the industry; and the currently dominant “one-size-fits-all” pharmacy contracting model be complemented by alternative arrangements to enhance the professional role of pharmacy to ensure good access of all populations to convenient pharmacy services; enhance medicines management / optimal use; and to make best use of efficiency gains from retail competition where possible.

OPTIMAL USE OF MEDICINES

7.1

• • • • •

Key messages

The supply side of the medicines market can only provide inputs and treatment options; it cannot by itself guarantee treatment outcomes. Sub-optimal use of medicines in prescribing, dispensing and patient use represents a major problem in terms of health-outcomes and expenditure efficiency. It is time for a major shift in paradigm, to change focus from optimising the content of the medicines tool-box to the optimal use of medicines. This will require concerted effort by all parties involved and associated with the medicines system. It will also require substantial research effort and associated financial investment. Evidence suggests that the Government invests heavily in analogies of optimal use (or close variants of it) in other segments of the economy, such as roading, fire prevention, occupational safety and health, and energy efficiency.

7.2

Introduction

Historically, the focus of medicines policy has been firmly on the supply side, both in New Zealand and overseas. Over the decades, systems and structures have been developed to ensure that only safe and effective medicines enter the market, and that the public has access to the required broad range of pharmaceutical therapies on affordable terms. In recognition of the potential health risks associated with pharmaceuticals and their use, an extremely tight regulatory regime covering the entire supply chain has been put in place: • product safety control through Medsafe requires regulatory approval for any change in a registered medicine, from changes in suppliers of raw materials through to minor changes in packaging and labelling; prescribing rights are tightly controlled to ensure that only trained and qualified health professionals can prescribe medicines; continuing medical education; and the pharmacy sector which distributes medicines to the public is equally subject to stringent regulatory control, ranging from the ownership of pharmacies through physical attributes of dispensaries to restrictions on what personnel may dispense medicines.

• • •

While the particular national systems and structures may differ to some extent, they all follow very similar principles and objectives. Differences in affluent countries tend to be at the level of detail and implementation, reflecting differences in institutional history, attitudes toward government intervention, other local circumstances and health needs and resources. For example, not all countries register exactly the same range of medicines for the same indications; some countries emphasise (more than others) market-based funding structures to ensure access and control expenditure, while others such as the United Kingdom rely on price and profit regulation. However, the overall result in terms of the total basket of pharmaceuticals available tends to be broadly similar (particularly if adjustments are made, appropriately in PHARMAC’s view, for “me too” pharmaceuticals with similar effect).

On the whole, regulation and management of the medicines supply side functions very well, both in New Zealand and overseas. While there is always scope for natural business improvements and further developments, major systems failures are thankfully very rare (due in no small part to the robustness of the systems currently in place). However, it must be emphasised that the supply side of the market can do no more than provide access to treatment options (a comprehensive pharmaceutical tool-box for the medical community), but it cannot secure health outcomes. Health outcomes depend entirely on how this pharmaceutical tool-box is used (prescribed appropriately, dispensed correctly, and used by patients as directed) – that is, on the demand side of the market. Inefficient and ineffective use of medicines represents at best a waste of scarce public health dollars and of opportunities for achieving health gains; at worst, it inflicts harm and may even cause permanent disability for the people it is intended to help or death. From this background, PHARMAC strongly endorses the emphasis that the Ministry has placed on optimal use of medicines in its document; in our view, the health gains which can be achieved by improving the use of medicines potentially significantly outstrip any gains which can be made on the supply side.

7.3

The social cost of sub-optimal use of medicines

The inherent nature of demand side considerations means that it is difficult to accurately determine the scale of the problem of sub-optimal medicines use, but estimates are possible. Although the importance of optimal use has been acknowledged for many years, the issue has not been studied in a systematic and comprehensive fashion, either in New Zealand or overseas. While there are some studies of individual aspects of the problem, robust and comprehensive data on health and economic implications are hard to come by. There is a vast amount of research about the therapeutic effects of medicines in a controlled clinical trial setting – but much less about the actual use of medicines in a real-world setting. This is likely to be a reflection of the historical focus on the supply side of the market. Nevertheless, available information suggests that sub-optimal medicines use is a very major issue and, correspondingly, there is substantial potential for health gains from improvements on the demand side. For example, data from the 2005 Commonwealth Fund International Health Policy Survey31 cited in the Government’s consultation document makes grim reading: Issue Respondents given the wrong medication or wrong dose by a doctor, nurse, hospital or pharmacist when filling/collecting a prescription at a pharmacy or while hospitalised in the past 2 years. Respondents who did not take medication as prescribed. Respondents that had their doctors (or pharmacist AU) always/often explain side effects of any medication that was prescribed. Respondents that had their doctors (or pharmacist AU) always/often review and discuss all the different medications used by the respondents, including medicines prescribed by other doctors. Incidence 9% 49% 65%

50%

Commonwealth Fund (2005): The Commonwealth Fund 2005 International Health Policy Survey of Sicker Adults. New York.

Our brief review of the medical literature supports the contention that sub-optimal use of medicines is a major problem. For example: • a study published by United States Institute of Medicine in 2000 put adverse events on the political and public map: it estimated that between 44,000 and 98,000 Americans died each year due to clinical error and that a substantial proportion was due to errors in drug administration;32 a 1995 study estimated the direct annual costs of drug-related morbidity and mortality in the United States at US$76.6 billion in the ambulatory setting; sensitivity analysis indicated a range from a conservative $30.1 to $136.8 billion in a worst-case scenario. To put the results of this analysis into perspective, obesity was estimated to generate direct costs of $45.8 billion, all diabetes care $45.2 billion, while the treatment of cardiovascular diseases was estimated to cost $117 to $154 billion. The authors concluded that drug-related morbidity and mortality should be considered one of the leading diseases in terms of resources consumed;33 and a 2003 World Health Organisation study of patient adherence to long-term therapies found that poor treatment adherence was a global problem of large magnitude: adherence to long-term therapies for chronic illness in developed countries was estimated at no better than 50%. The consequences are poor health outcomes and increased health costs.34

•

At our own doorstep, a recent consultation document by the Ministry of Health estimated the number of preventable adverse drug events resulting in death or permanent disability at a staggering 1,912 per annum.35 Various analyses undertaken by PHARMAC have also highlighted disparities and inconsistencies in the use of funded medicines. For example: • in patients who use diabetes medicines and testing, one fifth of users of oral hypoglycaemics use neither an ACE inhibitor nor a statin (both highly necessary for good diabetes management), and there was marked under-use of blood glucose testing by patients using insulins compared with ideal, and over-use by patients using metformin alone or diet alone. These data confirm the likely under use of ACE inhibitors and statins for cardiovascular risk and suggest wide variations from “ideal” for blood glucose testing; comparing dispensings data for asthma medicines with hospitalisations, that the use of inhaled corticosteroids (ICSs) and long-acting β2-agonists (LABAs) for asthma is lower than expected in Maori and Pacific people across all ages. This contrasts with Maori and Pacific people’s high use of short acting beta agonists (SABAs), an indicator of poorer asthma control. Maori and Pacific people also have higher hospitalisation rates for asthma. These features are most apparent in young children and late adolescents/early adults36 (see following figure);

•

Kohn, L. T., J. M. Corrigan, et al., Eds. (2000). To err is human: building a safer health system. Washington, D.C., National Academy Press. Johnson, J. A. and L. J. Bootman (1995). Drug-related morbidity and mortality: a cost-of-illness model. Archives of Internal Medicine 155(18): 1949-1956 World Health Organization (2003). Adherence to long-term therapies: evidence for action. E. Sabate. Geneva, World Health Organization Ministry of Health (2006) Barcoding medicines: a patient safety and DHB cost-effectiveness proposal. Health report re. HC07-01-4 Metcalfe S, Moodie P, Davies A, McNee W, Dougherty S. PHARMAC responds on salbutamol. N Z Med J. 2005 Aug 26;118(1221):U1644. http://www.nzma.org.nz/journal/118-1221/1644/

3.0

Maori NZ European

medicine or hospital when asthma is out of control

age-standardised rate:1000 aged 0-34, relative to NZ Europeans

2.5

2.0

medicines that control asthma

1.5

1.0

0.5

0.0

long-acting relievers

preventers

relievers

hospitalisations = need

•

analysis of statin uptake before 2002 – at a time when there were considerable calls for access to be extended to a much wider range of patients than were already funded – indicated that the loss of life potential (quality-adjusted life years) from New Zealanders not accessing the statins that they were already eligible for was greater than losses from motor vehicle crashes. These types of calculations, along with known disparities in the uptake of statins by different ethnic groups,37 38 in part lead to PHARMAC developing its ‘One Heart Many Lives’ programme.

From PHARMAC’s perspective as a public funder of medicines, the evidence suggests that: • • • • • a substantial proportion of the public’s investment in medicines does not achieve its intended objective of improving New Zealand’s health status; scarce health resources which could be deployed to better effect elsewhere are wasted; irrespective of what level of money is spent on medicines, it needs to be spent wisely; the procurement decision is only one aspect of ‘wise spending’ and an aspect that cannot in itself guarantee wise spending; and the actions of a number of parties in the medicines chain are important – further consideration of these interdependencies, including to assess whether objectives are optimally aligned, is important.

These insights also reinforce PHARMAC’s earlier comments about possible benefits of further work in the area of research. PHARMAC’s funding decisions are made on the premise that medicines are prescribed, dispensed and used as intended. But as the above evidence suggests, underlying data is derived from clinical research, i.e. an environment without sub-optimal prescribing, without dispensing errors, and with far superior control of patient compliance; in other words, the real-world setting differs significantly from clinical research. It may be possible, therefore, that even better decisions could be made with better information about medicines usage; an area that could usefully be part of additional research attention.

Metcalfe S, Moodie P. More about cardiovascular disease and lipid management in New Zealand. N Z Med J. 2002 Oct 11;115(1163):U203. http://www.nzma.org.nz/journal/115-1163/203/ Moodie P, Metcalfe S, McNee W. Response from PHARMAC: difficult choices. N Z Med J. 2003 Mar 14;116(1170):U361. http://www.nzma.org.nz/journal/116-1170/361

7.4

Interventions to improve optimal medicines use

Interventions to improve optimal medicines use are not new in New Zealand; for example, prescriber education initiatives through organisations like PREMEC, bpacnz and practitioner groups have received public funding for well over a decade. The consultation document contains a comprehensive list of current initiatives and programmes, all directed at improving the efficiency and effectiveness of medicines use, including PHARMAC’s own demand side management programmes. While a number of programmes and initiatives exist, our view is that such interventions have until now had the character of a “second cousin” to medicines funding; no more than an element of tinkering outside the public core concern of making safe, effective and affordable medicines available for supply. Given the scale of the problem around medicines usage, it is time for a major paradigm shift: to change focus from the optimal content of the pharmaceutical tool-box to the optimal use of the tools. As noted above, there are extensive interdependencies in this area, so increased emphasis will require a concerted effort by all parties involved and associated with the medicines system: health care consumers and patient organisations, pharmaceutical suppliers, the Ministry of Health, the DHBs, prescribers and their organisations, community, pharmacists, the academic research community and PHARMAC. Substantial research efforts are required. It is critical to improve our understanding of scale and scope of the problem based on further analysis. This includes better understanding the underlying causes of sub-optimal medicines use, together with the evaluation of potential interventions to address the problem. It would then be possible to target investment in optimal use programmes to those initiatives which generate the best (health) value for money. It will also require significant financial investment. But at stake is the efficiency of annual public expenditure on pharmaceuticals of over $600 million and, in more important terms, hundreds or perhaps thousands of lives and the health and wellbeing of hundreds of thousands of medicine consumers.

7.5

‘Optimal use’ elsewhere in government

By way of comparison, we examined what other sectors of the economy invest in public health and safety. The evidence suggests that significant amounts of money are invested in analogies of optimal use. Ideally, these amounts would be put in context as a percentage of total expenditure in each area to get a better feel (but still as broad guidance only) for what proportion of the pharmaceutical budget might reasonably be spent on optimal use. Determining the total expenditure amounts in these areas is not straightforward; however the Ministry, working with other government officials, could likely access meaningful information to improve this analysis. Many of the initiatives below, while analogous to optimal use initiatives, are actually narrower in scope (and therefore underestimate the level of activity). In particular, optimal use is not just about safety (e.g. avoiding undesirable side effects and deaths from mis-use), but improving the efficiency of investment in medicines generally. 7.5.1 • • Road safety

The road toll for the year ended 8 February 2006 was 412, compared to the road toll for the year ended 8 February 2007 of 387, a reduction of 35 deaths. Vote Transport’s budget for the “promotion of land transport safety including publications and educational resource materials, and the promotion of land transport safety by the use of advertising and publicity” was approximately $34 million in 2006/07 and $32 million in 2005/06. Expenditure by other agencies, such as ALAC, is also arguably relevant to this purpose.

7.5.2 • •

Workplace fatalities

For the year ended 30 June 2006, the Department of Labour investigated 65 fatal workplace accidents. Approximately $29 million was appropriated in the 2007 budget to Vote Labour to “Services to promote and support safe and healthy people and workplaces”. 7.5.3 Fire safety

• •

In 2005, the Fire Service Commission identified 19 avoidable residential fire fatalities. According to its 2005 Annual Report, around $28m was spent on fire prevention and advice to the general public. This has the aim to “change people’s knowledge, attitude and behaviour towards fire safety”, for example, by increasing the installation of smoke detectors. 7.5.4 Injury prevention

•

Three areas were focused on with the aim of decreasing the number of new claims in these areas: public safety, safer workplace and workplace systems. There was a reduction of 792 new claims for public safety and 311 for workplace systems. ACC’s spending on injury prevention has increased from $18m in 2001/02 to $41m in 2005/06 (from 2006 Annual Report). 7.5.5 Other areas

•

There are numerous other examples of government intervention aimed at reducing inefficiency in decisions made by the general public (whether directly or as a result of activities before those end decisions are made). For example, the Government invests heavily in promoting energy efficiency on the basis of wanting to ensure efficient use of existing electricity resources (generators and networks) before expensive new infrastructure is built. This is conceptually analogous to the case in hand: making the best use of investment.

7.6

Conclusion

PHARMAC believes that the single biggest challenge in improving health outcomes and value for money in pharmaceutical therapy is to find ways and means of optimising the use of medicines. This will arguably become even more important as new high cost medicines emerge. Irrespective of how much money is spent we need to spend it wisely, and the evidence is that significant gains are potentially available. We endorse the Ministry’s emphasis on optimal medicines use in the consultation document, and recommend that the strategy be firmly focused on this area.

7.7

Recommendations

With respect to optimal use, PHARMAC recommends: • • • continued strong focus in the strategy work on the optimal use of medicines and strengthening work across the system to promote optimal use; a concerted effort be made to improve the sector’s understanding and appreciation of the significance and extent of sub-optimal medicines use; and a substantial investment be made in further analysis of potential benefits of optimal use initiatives (including to prioritise such initiatives).

RECOMMENDATIONS

Strategy development PHARMAC recommends: • • • • • consideration of New Zealand’s health status and the future operating environment in which the strategy must succeed; continued evolutionary development of the medicines system to meet future challenges (as the Ministry proposes), rather than radical structural change; a strong focus on system stability and flexible decision making based on sound principle rather than detailed prescription; a strong focus on continual improvement in the quality of information and data underpinning the medicines system’s activity and decisions; and a paradigm shift in medicines policy from optimising the content of the medicinal toolbox to optimising the use of these valuable tools.

Research PHARMAC recommends: • • expansion of existing research programmes, or the establishment of a dedicated medicines research fund, to close information gaps related to the prioritisation and funding of medicines; & increased international collaboration between medicines funding bodies.

Medicines registration PHARMAC recommends: • • increased consideration in the strategy work of the implications of medicines registration on the medicines system as a whole; and particular consideration be given to examining any unnecessary barriers to market entry of pharmaceutical products, including to consider how any barriers are minimised over time.

Public funding of medicines PHARMAC recommends: • • • existing structures and systems with their proven track record in the medicines funding sector be retained, with further evolutionary improvements; PTAC, as one of the most distinguished institutions in the sector, continues its work on the basis of its present structure, operations and scope of considerations; consideration be given to extending the length of PHARMAC’s fixed budget cycle to improve the long-run efficiency of expenditure;

•

any proposals to “increase transparency” be scrutinised rigorously and comprehensively on the basis of a cost-benefit analysis (including to consider impacts on PHARMAC’s negotiating context and whether reciprocal transparency requirements on pharmaceutical suppliers should apply); intensifying existing efforts elsewhere in the sector to prioritise resource allocation decisions across the sector, including determining the optimal level of the pharmaceutical budget; and the role of other government agencies that fund medicines be considered, including to assess whether any differences between agencies in medicines assessment and funding are supported by policy principles.

• •

Distribution PHARMAC recommends: • • current pharmacy regulations be reviewed to ensure that they pose no undue constraints to introduction of modern, efficient methods of retail distribution in the industry; and the currently dominant “one-size-fits-all” pharmacy contracting model be complemented by alternative arrangements to enhance the professional role of pharmacy to ensure good access of all populations to convenient pharmacy services; enhance medicines management / optimal use; and to make best use of efficiency gains from retail competition where possible.

Optimal use PHARMAC recommends: • • • continued strong focus in the strategy work on the optimal use of medicines and strengthening work across the system to promote optimal use; a concerted effort be made to improve the sector’s understanding and appreciation of the significance and extent of sub-optimal medicines use; and a substantial investment be made (similar to optimal use investments elsewhere in government) in further analysis of potential benefits of optimal use initiatives and programmes to elicit those benefits.

Metadata

Title

Submission on the development of the Medicines Strategy

Abstract

Medicines Strategy Consultation Sector Policy Directorate Ministry of Health PO Box 5013 Wellington MEDICINES STRATEGY CONSULTATION DOCUMENT PHARMAC welcomes the opportunity to make a submission as part of the development of a medicines strategy for New Zealand. We strongly support…

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