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Final Shape of Pharmac and NZ Blood Service

MEDIA RELEASE, June 7, 2000

Final Shape of Pharmac and New Zealand Blood Service

Health Minister Annette King today released a Cabinet paper outlining the final shape of Pharmac, the Government's drug negotiating agency, and the New Zealand Blood Service.

Both agencies would be structured as Crown entities, and, within the Crown entity model, as statutory corporations, she said. "Their functions will remain unchanged, and they will continue to be exempt from the Commerce Act."

Mrs King said Pharmac's role in negotiating prices with pharmaceutical companies, to ensure the Government got good value for money, was crucial.
"Most medicines are too expensive for the average New Zealander to afford without Government subsidies and it is the level of these subsidies that Pharmac negotiates."

The Blood Service had an equally important role, she said. "It decides how blood and blood services are supplied nationally to best manage the safe supply of blood and blood products, and protects the gift status of blood."

Mrs King says the Commerce Act exemptions would allow both Pharmac and the NZBS to collaborate with health agencies such as district health boards. "While collaboration in commerce can be at the expense of the public, the reverse can be true in the health sector. This is certainly the case for nationally co-ordinated drug buying and blood provision and safety. Sector co-operation to produce the best outcome for patients is a key Government objective."

Mrs King said the exemptions could be likened to the exemption covering companies in their internal dealings with their own subsidiaries.

"The Pharmac exemption should help prevent a repeat of the litigation the agency has faced. Three of the eight legal cases PHARMAC has faced in the past five years have been related to the exemption. Maintaining the status quo should limit any further testing of legal waters, avoiding costly litigation."

Mrs King also announced today that the health ownership monitoring responsibilities of the Crown Company Monitoring Advisory Unit (CCMAU) would transfer to the Ministry of Health as soon as practicable, and no later than September 1 this year.

"The main advantage will be having integrated performance advice coming from one agency. The health ownership monitoring function will be established as a separate directorate, with the head of the directorate being a member of the ministry's executive team, and able to report to the Minister of Health on behalf of the Director-General on any issues relating to hospital ownership interests."

Mrs King said the Cabinet paper on the transfer of the health ownership monitoring function would not be released until officials had completed a review of CCMAU's responsibilities in respect of other Crown companies.


Background:

Pharmac:

 Manages the growth rates of Government expenditure and patient access to pharmaceuticals
 Manages the fiscal risks associated with pharmaceutical expenditure via innovative supply contracting. Maintains robust internal processes to minimise legal risk in a contentious and litigious environment.
 Develops techniques for prioritising pharmaceutical expenditure to ensure there is a correct balance of expenditure within pharmaceuticals and between pharmaceuticals and other forms of healthcare.
 Develops demand-side and supply-side programmes that encourage cost-effective use of pharmaceuticals.

Pharmac has a board of up to six members appointed by the Minister of Health. Board meetings will be held in private as Pharmac's activities are frequently commercially sensitive. The Minister of Health will have the power to direct PHARMAC that a particular drug be subsidised or purchased but not to require PHARMAC to purchase a pharmaceutical from a particular source or at a particular price, or to provide a subsidy for an identified person.

Commerce Act exemption

The Commerce Act 1986 was enacted to promote competition in New Zealand markets to benefit the public. The Commerce Act recognises, however, that some practices that may be anti-competitive may have other benefits that outweigh promotion of competition, and therefore provides for certain exceptions.

The Commerce Act exemption for pharmaceutical purchasing arises under s2 of the Finance Act 1994, which exempts Pharmac's pharmaceutical purchasing arrangements from Part II of the Commerce Act. When the Health Funding Authority is dis-established, Pharmac's Commerce Act exemption in the Finance Act 1994 will need to be adjusted for it to continue. To give full effect to the exemption, it will continue to be important to protect not just Pharmac but the Crown (including Ministers) where it is acting in trade, the
DHBs, and other organisations (including pharmaceutical companies and
pharmacies) that will enter into contracts or other arrangements in relation to
pharmaceuticals with Pharmac. Accordingly the protection afforded by the current exemption contained in the Finance Act 1994 will need to be carried over, with appropriate drafting modifications, to reflect Pharmac's and the health sector's new structure. It is proposed that the exemptions, with the necessary modifications, be transferred to the New Zealand Public Health and Disability Bill.

The Cabinet has previously decided that the Commerce Act 1986 will not apply to dealings between DHBs. Private sector groups of companies currently enjoy this exemption and the Crown should treat itself no differently.

Key reasons for Pharmac having a Commerce Act exemption include:
 Allowing Pharmac to perform centralised purchasing role. Under the 1993 health restructuring, the four RHAs established Pharmac as their agent to operate a common, national Pharmaceutical Schedule. This was seen as the only practical way for a country of New Zealand's small size to exercise sufficient market power to obtain lower pharmaceutical prices from multinational pharmaceutical companies, which at the time were charging New Zealand well above world prices. However, since this centralised purchasing role might be seen as involving price fixing or collusive behaviour on the part of the RHAs, it was considered desirable to provide Pharmac with a partial exemption to avoid challenges under the Commerce Act. Pharmac's centralised purchasing role will continue under the restructured health sector.
 Economic efficiency not the only goal. The Commerce Act is based on a series of assumptions, such as the desirability of competition as a mechanism to promote economic efficiency. With pharmaceuticals and health this is only one objective. The Government has decided that equity of outcomes is also important.
 Avoiding vexatious litigation. Defending Court proceedings involves considerable cost to Pharmac. To date, pharmaceutical suppliers have brought 8 court cases against Pharmac, all of which have been successfully defended, at a cost approaching $5 million in legal fees. Time and money spent defending court proceedings would be better spent on widening access to pharmaceuticals.

From time to time various parties, in particular pharmaceutical companies, have argued against the exemption. It is important to note:
 Pharmac does not control access to the market. Any supplier can market their products in the New Zealand market provided they meet the regulatory standards for them. Pharmac only influences access to Government subsidies. Some companies choose to launch and market their products without recourse to subsidies.

 Pharmac is not interested in eliminating or diminishing competition. Its goal of getting value for money from pharmaceuticals is facilitated where there is vigorous competition amongst suppliers.

New Zealand Blood Service

1. Sets operational policy for the provision of blood and blood services.
2. Responds to emergencies, potential infection risks that threaten the safety of blood, and fluctuations in the supply of blood and blood products.


3. Minimises and manages the risks to recipients of blood and blood products and to the Crown.
4. Sets safety standards for provision and collection of blood, and sends appropriate cost signals to hospitals and their decision-makers.
5. Manufactures a range of blood components and plasma products, and manages the fractionation of plasma by contract.
6. Addresses a variety of issue-based risks including widely varying standards, poor national inventory management, inefficiencies, difficult communication, limited customer focus, scarcity of key skills, and lack of sector-wide planning.
7. Protects the gift status of blood through a stewardship role.
8. Meets its statutory responsibilities under the Health Act as an appointed entity relating to (1) to (7) above.

The NZBS board will consist of up to seven members appointed by the Minister of Health. Board meetings will be held in private. NZBS has a national focus. It is not in charge of large amounts of money or public facilities. It will meet region by region and all members will be appointed. Open meetings would create inflexibility and add to the costs of the NZBS.
The Minister of Health will have the power to direct the NZBS over its Statement of Intent; its annual plans; to protect the supply of blood, and to withdraw contaminated blood.

ENDS

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