Are prescription medicines particularly expensive in New Zealand?

The short answer is that they are not! Unlike many other countries, hospital patients receive their medicines for free and most prescriptions from the family doctor are filled at the pharmacy for a small ($5) charge. So, for most people, prescription medicines cost little or nothing.

However, for people who do not want or need a medicine approved for funding by New Zealand’s taxpayer-funded health system, this has to be paid for at a (generally unsubsidized) price set by the manufacturer. These prices can be very high and in some instances they can be drugs that are potentially life-saving, so they gain media attention. It is hard to say how many people fall into this category, but it is probably well under one per cent of all medicines users.

Before returning to these issues, the following sections will give some historical and policy background.

A Short History  

Ever since the earliest times health providers have used pills and potions as important elements in their practice. The earliest pharmacopoeia – guides to drugs and how to prepare them – were recorded at different times by Greek, Egyptian, Arab, Persian and Chinese apothecaries or pharmacists, mostly outlining herbal remedies.

To get something closer to the modern era of medicines one has to advance to the last nineteenth and early twentieth centuries. In 1897 aspirin was developed by the Bayer company from existing formulations (originally based on willow extract) and it is now one of the most widely used drugs across a range of applications. Another important development in modern medication was the discovery by Alexander Fleming of penicillin in 1928 from the natural product of a mould, paving the way for the widespread introduction of antibiotics.

Fast forward to 2021, and we see an effective vaccine developed within a year and mass-produced for dosing populations of millions within months. This is a staggering achievement and demonstrates the power and trajectory of the modern pharmaceutical industry with an impressive combination of world-beating basic science – much of it funded by public agencies – rapid field-testing to determine efficacy, and then manufacture and distribution around the world to many millions.

The New Zealand Scene

Where does New Zealand fit in the world picture? Like most other developed countries prescription medicines are available to New Zealanders within a publicly-funded health system. However, we are unusual – if not unique – in having a public agency with a fixed budget that negotiates with pharmaceutical companies over the pricing of their products.

This agency is called PHARMAC and was founded in 1993 by the four regional health authorities at the time. From the late 1980s, with the arrival of some particularly high-price medicines on the New Zealand market, the government established a more commercial approach to pricing, rather than just accepting the price that companies nominated. In effect, PHARMAC runs what is known technically as a National Formulary (more colloquially, a drug list); that is, certain medicines – the great majority – will be available under the taxpayer-funded health system, while others will not. This is a point of some controversy since drugs that are not funded by PHARMAC are likely to be expensive (see case studies below).

In some cases, patients may meet so-called part-charges for drugs that are not fully subsidized. Where a grouping of equivalent medicines (technically, a therapeutic group) has been accepted onto the formulary – say, antibiotics – PHARMAC sets the price it is prepared to pay at the cheapest equivalent version of these medicines. In the case of this “best buy”, the patient pays just the standard charge of NZ$5. However, for all other versions of equivalent drugs the patient may need to pay the (usually quite small) difference between the price PHARMAC will reimburse and the price the company charges.

Dollars and Cents

PHARMAC’s budget for medicines is just over NZ$1 billion a year, approximately five per cent of the taxpayer-funded annual health budget. At the same time, it has made substantial savings over the years in its negotiations with drug companies such that it is estimated that, if PHARMAC had not been doing its job of negotiating to get “the best price” with pharmaceutical companies, the cost to the New Zealand taxpayer of the current formulary would be about three times what it is now (i.e. $3 billion, not $1 billion).

Across the OECD, countries spend about 9% of GDP on health, ranging from 17% in the United States to under 5% in Turkey. New Zealand stands just above that average figure at about 9.5%. Of this expenditure, about 80% is publicly funded (70% across the OECD). Expenditure on pharmaceuticals is about 10-15% of the health budget across the OECD (versus about 5% in New Zealand), with about 25% of that in hospitals, 65% in the community, and 10% over-the-counter (not PHARMAC funded) at the pharmacy.

This gets to the nub of the question – at just five per cent of health expenditure (versus an OECD average of over 10%), how can New Zealand fund all the medicines that its population needs? Yes, when you take into account the savings made, in effect PHARMAC is being criticized for negotiating good prices because, were it not for those negotiations, its budget would be trebled in size and above the OECD average. Nevertheless, it is apparent from media stories that there are a good number of dissatisfied customers who feel they are not able to get the drugs they need, except by paying exorbitant prices, or moving to Australia where they might be able to get those drugs on the tariff.

Some Case Studies*

There are three areas where cost might be a consideration for patients. Desperate patients are still willing to sell up and move to Australia or fund-raise, and these gain media interest.

Firstly, there is a considerable flow of very expensive cancer drugs, many of which have been given abbreviated review by drug regulators because they are seen as particularly innovative and important. Some of these are funded in Australia, but not in New Zealand. A recent review of such drugs found that they may have added a few months to life expectancy, but at very great expense. One example of this would be Pembrolizumab (branded as Keytruda) for urothelial cancer. The experts on PHARMAC’s Cancer Treatments Subcommittee recommended that PHARMAC decline the application for funding.

Secondly, there are drugs for rare disorders that might make a big difference to sufferers’ lives, but that are so expensive that they would take a disproportionate share of PHARMAC’s budget. A triple modulator therapy treatment for cystic fibrosis, which is estimated would cost around a quarter of the current PHARMAC budget, has been in the media on multiple occasions over the past few months, with criticism aimed at PHARMAC for not funding the medicine.  PHARMAC has not yet received an application for this medicine. 

Finally, there are drugs that clinicians may champion because they are judged to be an advance on current, acceptable treatment. Again, these may be very expensive if fully implemented. A recent example in the media was an inflammatory bowel disease (IBD) treatment,  Ustekinumab, where many clinicians who treat IBD saw the need for an additional treatment, and held a protest outside PHARMAC and at Parliament to raise awareness of the need for this additional medicine. Ustekinumab remains an option for funding with PHARMAC.

Conclusion

Access to medicines is in many ways a litmus test of a decent society, particularly if a medication can make a difference between life and death. With the modern welfare state citizens can expect to access medicines at minimal cost. It is a modern “gift relationship” between the citizen and the state. At the same time, medicines can be very expensive and come with conflicting therapeutic claims. New Zealand has developed a system that tries to bring the cost of medicines down to a manageable level, while at the same time assessing therapeutic efficacy in a stringent manner. In making these trade-offs there may be some element of personal distress and even tragedy, but overall the system serves us well.

*These case study details were supplied by PHARMAC on request. For further information, see

Peter Davis

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Peter Davis NZ

Peter Davis recently retired from Auckland University where he established and headed the COMPASS research group in the Faculty of Arts for ten years and before that taught and researched in health policy and health services in the Faculty of Medical and Health Sciences (and for a time at the Christchurch Medical School) for 30 years. Peter remains an Honorary Professor in Statistics and an Emeritus Professor in Population Health and Social Science at the University of Auckland. He was recently elected to the Auckland District Health Board where his main areas of interest are: the reporting and using of information to improve the performance of health systems, the effective management of public sector organisations to achieve policy goals, and the development of evidence-informed public policy. Peter is also Chair of the Board of Trustees at The Helen Clark Foundation, a New Zealand-focussed public policy think tank.

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