Is the New Zealand Health System Spending Enough on Pharmaceuticals?

New Zealand Future Medicines Policy Summit, 29-30 May, 2006, Wellington

Keywords: Health;

My task is to set out briefly the issues that this panel of economists has been asked to address: whether the New Zealand health system is spending enough on pharmaceuticals. I’ll divide the answer into two. Is New Zealand spending enough on health care? Is New Zealand spending enough on pharmaceuticals in the health budget?

Is New Zealand Spending Enough on Health Care?

There is no scientific answer to the question of whether there is enough health care spending. That is a political judgement. One answer is that individuals can make their own decisions by paying for the health care. Once, however, there is a third party funder – be it the state or private insurance – the individual no longer has to pay, and will want all the care there is available. And their clinician will argue for that too.

The sum of all the care demanded if the cared-for and the carer do not pay for it will far exceed any reasonable share of the total resources available to the community, and far more than would be provided if it was paid for by the patient. Once health care is provided to patients without full charge, some other mechanism has to be introduced to restrain the resources used.

But by how much should the resources be restrained? That is a political decision. As in this month’s budget incumbent politicians have to make a judicious tradeoff between spending more on health and reductions in taxation. (Only Oppositions can clamour for both.)

A common test is to compare a country’s spending on health care with other countries. The usual indicator involves health care spending as share of GDP compared with per capita GDP (after adjusting for international price differences). International comparisons are treacherous, but the latest data for 2001 shows New Zealand is above the trend line. So on this test we are spending more than enough on health care.

That is not what the public seems to think. Politicians listen to them. Since the last international comparison, the government has continued to increase health spending faster than GDP. Providing the public accepts that reduces the room for tax cuts, so be it.

Is New Zealand Spending Enough on Pharmaceuticals in the Health Budget?

Once the overall public budget for health care is set, how much of it should be spent on pharmaceuticals? Note that demand for increased spending in a particular area – say drugs – has to be met by cuts somewhere else in order to stay within budget.

So that the question that faces the advocates of higher pharmaceutical spending is that given the budget constraint, should we spend more on pharmaceuticals and less on, say, primary care or surgery or mental health, or whatever.

In practice the system operates slightly differently. Let me set out how it works.

First the , that is that it provides some positive benefits in some circumstances. However, clinical effectiveness – which is a medical criteria – is not by itself sufficient. Consider a drug costing a million dollars that had some effect on a patient but not a significant one. Were you a billionaire and you thought the drug might improve your lot, you would be welcome to purchase it. But it would not be sensible for a public health system to fund such a drug. So it needs a systematic criterion to make sure the public are getting value for money – for their taxes.

The criterion that Pharmac uses – a standard economic one called cost utility analysis (CUA) – is to judge costs in terms of Quality Adjusted Life Years (QALYs) gained. Basically one QALY is a year of normal life, and the drug’s efficiency is assessed by how many years of normal life its treatment generates relative to its cost.

The criterion recognises that the patient may not have a full quality life after treatment, but that is better than death, or that they had a limited quality of life before treatment and an improved one after. That is what the word ‘adjusted’ in a QALY means. It is calculated by surveying people as to what they think the adjustment should be.

In the case of a pharmaceutical we calculate what improvement the drug makes to the patient’s length and quality of life and that is compared to the net cost outlay of the drug. The net costs include the costs of the pharmaceuticals from which are deducted any expenditure savings elsewhere in the health system. The net cost of a drug which avoids surgery, for instance, is the drug cost less the surgery cost.

A typical conclusion might be that for an outlay of a million dollars say 25 QALYs might be saved. Sometimes the conclusion is a no brainer. It was with statins, which prove to be very efficient means of reducing cholesterol, once their cost came down. Sometimes the calculation is much trickier. I was involved with the evaluation of beta-interferon for multiple sclerosis which required us to make assessments of gains twenty years ahead using very tenuous data.

Suppose there is a million dollars to spend. One drug gives a return of 40 QALYs and the other gives a return of 20 QALYs. It makes sense to use the drug which gives generates the highest number of QALYs for the same outlay, so an economist recommends the drug which gives the 40 QALY return. The QALY to cost criterion aims to get the best return for its spending.

In economic theory a new drug’s QALYs to cost ratio should be compared to a threshold. Pharmac does not use a threshold, but as I understand it drugs with a ratio above 25 QALYs a million dollars tend to be considered more favourably, those below that rate less favourably.

However, the implicit threshold is indicative, not definitive. It’s a bit like doing a blood test on a patient. If the indicator is well outside the range the physician knows what to do. But within a certain range, other factors will be taken into account. Pharmac uses expert panels to do this.. If the drug does better than that threshold, the drug is added to the list of those which are funded from the public purse (outside hospitals).

The parallel with the clinician’s decisions is a good one. The CUA criterion is based on a robust scientific theory although it is sometimes difficult to apply because of a lack of data. I have heard doctors criticising CUA in as ill-informed manner as some proponents of alternative medicine criticise conventional medicine. Of course the criterion should be subject to rigorous criticism – Pharmac invited me to do that last year. But the criticism should be informed.

Pharmaceuticals are unusual in the rigour of the assessment as to whether they should be used in the public sector. Surgery, for instance, is not subject to this scrutiny. This means that there are other treatments which are probably inefficient compared to with the use of pharmaceuticals. If so we should be spending more on drugs and less on such inefficient procedures, although it is a difficult to get their practitioners to give them up. One piece of good news, which I did not expect when I started my Pharmac review, is that the criterion means that more efficient drugs will replace inefficient procedures where practical.

Where does the implicit threshold come from? Each year Pharmac and the government (that is politicians) agree on what is called an ‘indicative budget’, which represents the amount that the pharmaceutical bill is meant to be kept below. The indicative budget implicitly sets the threshold. The government’s increasing of the indicative budget has been a factor in the fall in the implicit threshold from 40 to 25 QALYs per million dollars.

When one is sick, or one’s patient is sick, these complicated calculations may seem to be almost irrelevant. One just wants whatever, and every, drug or treatment which is available. And the patient willing to pay privately can have it. However, providing it via the public health system also involves a willingness to pay on the part of the public. The QALYs per million dollars of net outlay is the best we have. It deserves to be understood, respected, and – where possible – improved.

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