A pressing need
1993 - 1997
PHARMAC’s quarter century of activity has saved New Zealanders more than $6 billion on the cost of medicines and medical devices and the agency’s model has won plaudits from around the world.
But in late 1992, when a handful of staff moved into a small office on Lambton Quay tasked with creating the Pharmaceutical Management Agency, success was anything but guaranteed.
It was a time of fiscal austerity and the National Government had embarked on sweeping reforms that were designed to create a competitive market for the provision of health services. Major structural changes saw the Department of Health morph into the Ministry of Health and the Area Health Boards became 23 Crown health enterprises, with government-appointed boards and expectations that they would operate on a commercial model.
A key change was the separation of the purchaser and provider roles in public health care. Four Regional Health Authorities (RHAs) were tasked with buying health services in a competitive market. Major productivity gains were anticipated through taking a more business-like approach to delivering public health services.
But one area was identified as posing a real challenge to the health budget – the rapidly rising price of pharmaceuticals. Through the late 1980s, spending on pharmaceuticals had risen at around 15 percent per year, much higher than other areas of health expenditure.
“One of the key problems confronting PHARMAC in July 1993 was the strong and unsustainable level of growth in pharmaceutical expenditure,” wrote David Moore, PHARMAC’s first general manager, in the agency’s first annual report.
That escalating drug spend was largely down to a lack of bargaining power in dealing with pharmaceutical companies and an approach to drug buying that didn’t always properly consider the value proposition from a patient’s perspective.
“One of the things that surprised me was how little we actually knew,” remembers Carolyn Gullery, one of PHARMAC’s original Board members, representing the Southern Regional Health Authority – PHARMAC was initially a joint venture company of the RHAs, with executives making up PHARMAC’s Board of Directors.
Having come from the pharmaceutical industry herself, Gullery knew the advantage the drug companies had with their sophisticated industry forecasting, therapeutic evaluation techniques and understanding of market dynamics.
“Where PHARMAC really made a difference is they started to think like an industry player. They brought in negotiation, they started to do trade-offs. But most importantly, they looked at value for money,” says Gullery.
“It was breaking down all the marketing hype that the pharmaceutical industry has and saying, is it really worth paying more for this?” – Carolyn Gullery
While clarity was forming around the mission – to introduce price competition to a market where it hadn’t previously existed – the practicalities of starting an agency from scratch were starting to dawn on Moore and his founding chair, Denis Tait.
The blueprint for PHARMAC, developed by Moore while he was still at the Department of Health, came to be known as the ‘Purple Elephant’. It was a master document that covered all the ins and outs of the pharmaceutical supply system, from dispensing contracts to the all-important Pharmaceutical Schedule and the processes around it.
Then there was furniture to buy and IT systems inherited from the Department of Health to merge.
“In the first six months we all clocked up 80–90 hour weeks,” says Reinhard Pauls, who joined PHARMAC in April 1993.
“It was the most fun I’ve ever had at work.”
By June 1994 PHARMAC had published the Pharmaceutical Schedule, and formulated the Decision Criteria that would guide its decision making, as well as developing the initial Operating Policies and Procedures laying out its role and functions. The agency also saved $3.1 million on pharmaceutical purchases in its first year and estimated the following year’s savings would jump to $24 million. It was a modest start, but hinted at the great potential ahead.
“We have had a good beginning, but it is only a beginning,” Moore wrote in PHARMAC’s first annual review.
“Twenty months is a short time to rebalance such large issues. The achievements to date are significant, but big challenges lie ahead.”
1993 - 1997
Last updated: 13 September 2018