This is a report was commissioned by The Select Committee on Health in August 2003. It’s report Inquiry into the Proposal to Establish a Trans-Tasman Agency to Regulate Therapeutic Products was released in December 2003, which means the accompanying papers are also now in the public domain. This is published in part because of its intrinsic interest, but also because it is a small contribution to the literature on New Zealand cost-benefit studies.
Keywords: Health;
Executive Summary
Using a Cost Benefit Analysis Framework, this report reviews the NZIER Assessment of Regulatory Options for Therapeutic Products to answer the following two questions.
Should there be an Extension to the Coverage of the Regulated Therapeutic Products?(Para 4.10)
The unsatisfactory situation in regard of the regulation of therapeutic products needs to be addressed. The simplest option would be an enhancement of the current regime. That would involve the industry in about another $32m to $48m p.a. compliance costs adding perhaps 2 to 3 percent to prices on average.
These additional costs would be offset by following unquantifiable benefits.
– benefits of reduced self-regulatory costs and of reduced disruptions when there is a failure of one (group of) product(s);
– improvements in information and confidence of consumers;
– possibly some quality improvements of products and some reductions in adverse medical events.
The unquantifiable benefits may exceed the identified costs. However the incidence of the costs (and benefits) will not be proportional and some products may be withdrawn from the market because of higher compliance costs.
The main risks are that the gains would be nonexistent or insubstantial.
Should there be a Trans-Tasman Regulatory Agency? (Para 5.13)
If New Zealand is to enhance its current regulatory regime for therapeutic products it seems likely that the compliance costs could be substantially reduced by some an international arrangement.
One such arrangement is the Trans-Tasman Agency (TTA). It is thought to reduce compliance costs on average by $26m-$39m p.a. (1.6-2.0 percent). This would reduce compliance costs of extending to a comprehensive scheme to about .5 percent of prices, on average.
The unquantified benefits of the scheme (additional to the comprehensive regulatory arrangement) would be additional exports. An unquantified cost may be the loss of jobs to Australia. An additional risk arises from the difficulties of renegotiating an international agreement if the new regime does not work properly.
Any international intercourse involves some loss of sovereignty. The TTA proposal is no exception. It is a political decision as to whether the trade-off of the sovereignty loss is compensated by the reductions in compliance costs, which in the case of the TTA seem substantial.
The Select Committee should also consider the possibility of Mutual Recognition Arrangements, insofar as the TTA is not the only means of implementing an international regulatory arrangement. If it is practical, it may be useful to have a separate economic evaluation done on it.
An appendix which brought together the three tables in the body of the text is omitted.
1. Introduction
1.1. The Select Committee on Health enquiring into a proposal for a trans-Tasman agency to regulate therapeutic products has commissioned this report to provide an independent assessment and summary of the economic evidence presented to it, especially of the cost-benefit assessment provided by the NZIER to Medsafe and published as Appendix 3 to their Submission to the Select Committee.
1.2 This report is based upon the NZIER assessment, supplemented where necessary, by information from other reports also submitted to the Select Committee.
1.3 A major aim of this report has been to summarise the assessment. Some of the fine detail in the NZIER’s assessment has been omitted. It is not thought that any of the omissions materially affect the conclusions.
2. Cost-Benefit Analyses
2.1 Cost-Benefit Analysis (CBA) is a standard economic method for evaluating the economics of some proposal. It is not controversial, Other common criticism of the method is that it pays insufficient attention to the distributional impact of a proposal or to risks (variations around the central forecasts). In practice they can be quantified to some degree, although often albeit it clumsily. The accompanying narrative should draw attention to these issues, insofar as they may seriously affect the outcome.
2.2 At the heart of a CBA is a list of all the effects of the proposal compared to some base case (often the ‘status quo’), the quantification and valuation of each effect, and the addition of the values into a net benefit (if beneficial effects exceed costs) or vice versa. Usually the proposal is sufficiently complicated that not able to all its effects can be quantified, either because some effects are unmeasurable or because suitable data is not available. Any significant omissions are mentioned in the narrative which accompanies the calculations.
2.3 In my opinion, the NZIER report, meets the standards of a professional Cost-Benefit Analysis.
3. The Issues
3.1 The issue is complicated by there being two separate proposals:
Issue 1. Should the current regulatory regime be extension to cover complementary healthcare products and medical devices? (Section 4)
Issue 2. Should the current regulatory agency (Medsafe) be replaced by an alternative arrangement, most notably but not only, by a proposed Trans-Tasman Agency. (Section 5)
3.2 For presentational purposes, it is proposed to treat the two issue independently, although there is some interdependence between them. In one direction, an element for any justification for the extension of coverage has to include the cost of doing so, which in part depends upon the regulatory agency. In the other, the feasibility of different agencies – especially cross-national ones – may depend upon a commonality of coverage.
3.3 While in principle the Select Committee’s concern is with the establishment of a Trans-Tasman agency to regulate therapeutic products, it is clear that many of the submissions are concerned with the question of the extension of the regulation, irrespective of the agency which does it.
4. Should there be an Extension to the Coverage of the Regulated Therapeutic Products?
4.1 The case for the extension of the coverage of regulated therapeutic products is set out in Medsafe’s Submission to the Health Committee. It reports a need for new legislation because the current legislation is ‘unworkable’ (p.17), and suggests that some of the therapeutic products are being distributed in contravention to the Medicines Act. (p.9) (An implication is that the situation – and therefore the status quo – would be very different, were the law enforced). It also identifies actual instances where there appears to have been a serious public health risk as a result of inadequate regulation. (p.22-62)
4.2 It would appear that new legislation is overdue. The NZIER report evaluates this option by comparing the additional costs and benefits of an enhanced regulatory regime. The status quo option is the current regime – that is with current levels of enforcement of the Medicine Acts. They report that the number of activities (applications, variations and annual renewals ) would increase from 8000 a year to 37,000 a year, and the total agency costs would rise from $8m to $43m a year, as staff numbers increased from 62 to 319. (Table 8) Additionally there is the direct cost to businesses of complying with the regulatory regime, which they estimate as a further $7.7m a year. (Table 9) (The data on which the assessment is based were provided by Medsafe to the NZIER or, in some cases , are the NZIER’s own assessments. They have not been independently verified.)
4.3 The NZIER estimates of the resulting increase in costs as a result of the enhanced regulatory framework are as follows. The first column is the type of therapy, the second is the total increase in costs, the third is the increase as a percentage of industry turnover, and the final column gives a range for the percentage increase based upon the NZIER assessment. (Table 10)
I: ADDITIONAL COMPLIANCE COSTS from the enhanced regulatory regime compared to the current one.
| Industry Type | Cost | To Turnover |
Range |
| Pharmaceuticals | $24.1m | 2.7% | 2.4-3.0% |
| Complementary Health Care Products |
$7.5m | 7.5% | 5.3-9.7% |
| Medical Devices | $9.3m | 1.4% | 1.0-1.8% |
| All | $40.9 | 2.5% | 2.0-3.0% |
4.4 In assessing this table it should be noted that
(i) It is assumed that Medsafe will fully cost charge. This adds an extra $3.6m p.a. to business costs. Strictly this is a separate policy issue, but it does not markedly affect any conclusions. These could be offset by a $3.5m p.a. reduction in trans-Tasman import duties.
(ii) The percentage of turnover figures are averages. In particular Medsafe says that as much as 95 percent of current complementary health care products will be subject to a regulation involving self-assessment. It seems likely that many products will hardly be affected by the new regime. On the other hand a few may have a sufficient increase in their compliance costs to be withdrawn from sale, following consumer resistance to the higher prices.
4.5 The figures reported in Paragraph 4.3 are true resource costs (after a minor adjustment mentioned in Paragraph 4.4 (i)). The NZIER was unable to quantify the following benefits from a comprehensive regulatory regime.
Those to the industry include that it would reduce the costs of industry-self regulation. Also, in the event of some disruption over one or a particular group of products (say of a class of complementary health care products), there would be less industry wide disruption from falling sales, because the public would have more confidence in the other products.
Consumers would have more information, and more confidence in the quality of the products they are purchasing. They would also benefit from any pressure the regulatory regime put on suppliers to improve the quality of their products. Perhaps most importantly, consumers would be less likely to suffer from adverse events.
4.6 The NZIER report mentions Transit New Zealand uses a statistical value of life (avoiding death) of $2.55m. (NZIER report page vi) It seems that it is unlikely that the enhanced regulatory regime will result in the avoidance of premature death and other severe adverse incidents to offset the additional itemised resource costs.
4.7 However it is arguable that the big aggregate gains would be from modest gains in quality life years from many individuals avoiding particular self-medication with unfortunate side effects, that is from sickness or poor health rather than from death. Suppose at any time 16,300 people are currently experiencing a reduction of their quality of life of 10 percent as the result of avoidable side effects, and that was valued at $2,500 a person.[Footnoted: $2,500 is about a tenth of the implicit value of a quality life year that Transit New Zealand uses] That would more than cover the extra compliance costs identified above even if there was no reduction in the self-regulation costs, costs from industry disruption and other consumer benefits identified in paragraph 4.5. I am unable to judge whether such a figure is realistic (Appendix 2 of the Medsafe submission gives some background material), but note that a figure of 16,300 would represent less than 1 percent of the half of the population thought to make some use of the complementry health therapies.
4.8 The main risks from enhancing the regulatory regime would be that the gains mentioned in paragraphs 4.5 and 4.6 would be nonexistent or insubstantial.
4.9 In some ways the exercise presented here is based on a misleading status quo. If the existing situation (which is taken as the status quo in the CBA) is unsatisfactory and unstable, the enhanced regulatory regime is the true status quo of a CBA. (Alternatives might be
– a sharply reduced scope for the Medicine Act – perhaps with consumers having stronger statutory remedies for failure, or
– a vigorous enforcement of the existing law.)
4.10 Conclusion to Should there be an Extension to the Coverage of the Regulated Therapeutic Products?
The unsatisfactory situation in regard of the regulation of therapeutic products needs to be addressed. The simplest option would be an enhancement of the current regime. That would involve the industry in about another $32m to $48m p.a. compliance costs adding perhaps 2 to 3 percent to prices on average.
These additional costs would be offset by following unquantifiable benefits.
– benefits of reduced self-regulatory costs and of reduced disruptions when there is a failure of one (group of) product(s);
– improvements in information and confidence of consumers;
– possibly some quality improvements of products and some reductions in adverse medical events.
The unquantifiable benefits may exceed the identified costs. However the incidence of the costs (and benefits) will not be proportional and some products may be withdrawn from the market because of higher compliance costs.
The main risks are that the gains would be nonexistent or insubstantial.
5. Should there be a Trans-Tasman Regulatory Agency?
5.1 The essence of the proposal that the Select Committee is examining, is that the costs of regulating therapeutic products can be reduced by an international regime in which the costs are shared with other national agencies, in particular Australia.
5.2 The NZIER CBA report looks at two options. One involves a Trans-Tasman Agency (TTA) as proposed in the discussion paper A Proposal for a Trans Tasman Agency to Regulate Therapeutic Products. In the other, New Zealand unilaterally recognizes the decisions from overseas regulators which imposed similar or higher standards than those of New Zealand. This report omits consideration of the unilateral option, as the NZIER finds it less attractive than the TTA option (although in some ways – including lower compliance costs – it is superior to the enhanced domestic regulatory option).
5.3 The TTA option evolved out of the provisions under CER for a Mutual Recognition Arrangement, (MRA) in which the regulatory decisions of one of the Tasman partners would be recognised by the other. Thus any supplier of a therapeutic product would only have to register in Australia or New Zealand and be automatically recognised in the other jurisdiction. That would mean suppliers in country would only have to register once, reducing compliance costs.
It is to be regretted that the submissions made available to me do not provide any detail as to why a MRA has not proceeded. (One factor has been the different regulatory regimes of the two countries, but that would be overcome by New Zealand updating and enhancing its regime.)
It is likely to involve less loss of national autonomy, and also leaves open the possibility of a similar mutual recognition arrangement with other countries (say Canada). (Another minor gain is there could be ‘competition’ from the two regulatory authorities would put downward pressure on compliance costs.) This would further reduce compliance costs, and in New Zealand’s case may encourage exporting to these other countries. This is an expository rather than advisory paper. Its one piece of advice would be
The Select Committee should also consider the possibility of Mutual Recognition Arrangements, insofar as the TTA is not the only means of implementing an international regulatory arrangement. If it is practical, it may be useful to have a separate economic evaluation done on it.
5.4 For expository purposes this report takes a slightly different approach from the NZIER assessment. As presaged, it uses a different status quo, assuming that parliament has decided there is a need for an enhanced regulatory regime because the current one is unsatisfactory and unstable. The choice is whether to impose the enhanced regulatory regime (the new status quo) or the TTA.
5.5 The NZIER estimates of the resulting reductions in costs as a result of the using TTA instead of the enhanced regulatory framework are as follows. The first column is the type of therapy, the second is the total increase in costs, the third is the increase as a percentage of industry turnover, and the final column gives a range for the percentage increase based upon the NZIER assessment. (Table 10)
II: REDUCTION IN COMPLIANCE COSTS for a Trans Tasman Agency Regime Instead of the Enhanced Domestic Regulatory Regime
| Industry Type | Cost | To Turnover |
Range |
| Pharmaceuticals | $25.5m | 2.9% | 2.6-3.2% |
| Complementary Health Care Products |
$4.9m | 4.9% | 3.4-6.4% |
| Medical Devices | $2.3m | 0.3% | 0.2-0.4% |
| All | $32.6m | 2.0% | 1.6-2.4% |
5.6 Because costs between the two nations are shared, there is a substantial reduction in the compliance costs to the therapeutic drugs industry. Given that the unquantifiable benefits will remain largely the same those considered in paragraphs 4.5 and 4.6 , the TTA option appears advantageous over the enhanced domestic regulatory regime.
5.7 At this stage it useful to compare the increases in compliance costs from the TTA regime over the current regime in a table analogous to that of Paragraph 5.5.
III: INCREMENTAL COMPLIANCE COSTS for a Trans Tasman Agency Regime Instead of the Current Domestic Regulatory Regime (Negative indicates reduction in costs)
| Industry Type | Cost | To Turnover |
Range |
| Pharmaceuticals | -$1.4m | -0.2% | ~0.2% |
| Complementary Health Care Products |
$2.6m | 2.6% | 1.8-3.4% |
| Medical Devices | $7.0m | 1.1% | 0.8-1.4% |
| All | $8.3m | 0.5% | 0.4-0.6% |
(The estimates in Table III is broadly equal to the estimates in Table I minus the estimates in Table II.)
5.8 In summary, the TTA regime would be cheaper to administer than the current regulatory regime in the case of pharmaceuticals, would reduce the compliance costs of imposing the enhanced regulator regime on complementary health care products by two-thirds, and on medical devices by one-third. As paragraph 5.6 noted, there is no obvious loss of economic benefits from the TTA regime relative to the enhanced regulatory regime. (The NZIER mentions that the possibility of additional exports as a result of the simplification of entry to Australia. It also notes there may be net job losses as firms relocate regulatory affairs to Australia. Both effects are likely to be minor.)
5.9 The risks for this option include those which apply for the enhanced regulatory option (paragraph 4.7 of this report) although the estimates are less reliable (because the proposal involves more unknown parameters and experiences). Additionally there is the risk that if the new regime proves not to work properly, it is likely to be harder to reform because it involves an international partner.
5.10 The economics does not address the issue of the impact of economic sovereignty – in this context the ability of a nation to use all the economic instruments available to it. Sovereignty losses are not fully quantifiable, yet there may be a tradeoff between the loss of sovereignty and the gains from either cheaper regulation (relative to the enhanced regulatory option) or better regulation (relative to current regulatory practices).
5.11 Any tradeoff to be assessed by parliament. At one level the issue is one of deep principle – as the paper by Professor Burrows draws attention to. Such issues are generally outside the economics profession’s competence, although they would observe that any international economic intercourse involves some loss of sovereignty. Usually the smaller partner in the transaction suffers the greater loss.
At a practical level, one might ask under what circumstances might New Zealand want to adopt a different approach or treatment of a class of therapeutic products from Australia? It may be in this case, such circumstances would occur so infrequently that the practical loss of sovereignty would be small.
5.12 It may be that a mutual recognition agreement may involve slightly less loss of sovereignty (albeit possibly offset by a slightly higher compliance costs). However its importance is more about national economic strategy. One view is that CER was about forming some sort of economic union with Australia to obtain gains particularly from a bigger market. This is the view implicit in the NZIER report. An alternative view is that CER is part of a strategy of opening up the New Zealand economy to the whole world. Thus any particular arrangement (such as the regulation of therapeutic policies) is always tested as to whether it enables New Zealand to engage with a wider international economy.
5.13 Conclusion to Should there be a Trans-Tasman Regulatory Agency? If New Zealand is to enhance its current regulatory regime for therapeutic products it seems likely that the compliance costs could be substantially reduced by some an international arrangement.
One such arrangement is the Trans-Tasman Agency (TTA). It is thought to reduce compliance costs on average by $26m-$39m p.a. (1.6-2.0 percent). This would reduce compliance costs of extending to a comprehensive scheme to about .5 percent of prices, on average.
The unquantified benefits of the scheme (additional to the comprehensive regulatory arrangement) would be additional exports. An unquantified cost may be the loss of jobs to Australia. An additional risk arises from the difficulties of renegotiating an international agreement if the new regime does not work properly.
Any international intercourse involves some loss of sovereignty. The TTA proposal is no exception. It is a political decision as to whether the trade-off of the sovereignty loss is compensated by the reductions in compliance costs, which in the case of the TTA seem substantial.
The Select Committee should also consider the possibility of Mutual Recognition Arrangements, insofar as the TTA is not the only means of implementing an international regulatory arrangement. If it is practical, it may be useful to have a separate economic evaluation done on it.Go to top