Pricing strategies, executive committee power and negotiation leverage in New Zealand's containment of public spending on pharmaceuticals

Abstract

AbstractThis paper explores policy mechanisms behind New Zealand's remarkable track record of cost containment in public pharmaceutical spending, contrasting with most other advanced economies. We drew on a review of official policy documents and 28 semi-structured expert interviews. We found that decision making in pricing and reimbursement policy was dominated by a small group of managers at the Pharmaceutical Management Agency (PHARMAC), the country's drug reimbursement and Health Technology Assessment Agency, who negotiated pharmaceutical prices on behalf of the public payer. In formal negotiation over patented pharmaceutical prices these managers applied an array of pricing strategies, most notably, ‘bundling’ consisting of discounted package deals for multiple pharmaceuticals, and ‘play-off tenders’, whereby two or more pharmaceutical companies bid for exclusive contracts. The key pricing strategy for generic drugs, in contrast, was ‘blind-tenders’ taking the form of an annual bidding process for supply contracts. An additional contextual condition on bargaining over pharmaceutical prices was an indirect strategy that involved the cultivation of the PHARMAC's ‘negotiation leverage’. We derived two cost containment mechanisms consisting in the relationship between pricing strategy options and various reimbursement actors. Our findings shed light on aspects of the institutional design of drug reimbursement that may promote the effective use of competitive negotiations of pharmaceutical prices, including specific pricing strategies, by specialist public payer institutions. On this basis, we formulate recommendations for countries seeking to develop or reform policy frameworks to better meet the budgetary challenge posed by pharmaceutical expenditure.