CHAPTER 4
Evaluation of the issues The previous chapters established that Pharmac’s activities in administering the subsidy regime have produced major cost savings for New Zealanders, and these represent a national income gain. They also established that the subsidy regime is inherently controversial and distortive. The true health and wellbeing gains are not known.
Evaluation framework – Private good vs public good The central question of what the problem is with private arrangements for which the subsidies are the remedy is particularly pertinent because prescription medicines are a private good, as are food, clothing and housing. First, their use is rivalrous. The pill that you, the reader, swallow cannot in general benefit anyone else. Second, access is easily excludable. Supply can be withheld from those who do not meet any restrictions (e.g. meeting the supplier’s price or government’s criteria for importing and domestic sale). Those two attributes create a presumption in favour of competitive unsubsidised provision, along with a welfare safety net to alleviate affordability problems. (The contrast is with public goods, such as communicable diseases. One person’s failure to inoculate or self-isolate can harm others by infecting them. Compulsion may be needed, subsidy or no subsidy.) Problems with subsidising private goods include: • the distortions introduced to private choice from altered relative prices, thereby potentially producing a poor fit between
34 PHARMAC: THE RIGHT PRESCRIPTION?
what is consumed and might have been consumed; • the costs to the community of measures to collect and avoid taxes and of decisions that increase one’s likelihood of being able to take advantage of the subsidy;108 • flawed bureaucratic and political decisionmaking, no matter how well-meaning, due to incentive and information problems; • regulatory creep. (Subsidies invite over-use, waste and other unintended consequences. To limit their fiscal cost and emerging unintended consequences, governments are compelled to take supplementary measures to limit use and thereby individual freedom of choice.)109 Pharmac is incentivised by its statutory objective to have a fiscal cost/therapeutic efficacy focus. That is not necessarily the focus of those whose money is being spent. Public policy arguments that might be put forward for subsidising medicines of a private good nature despite such drawbacks include: • Egalitarianism – no one should be denied treatment for money reasons; • Monopoly – patented medicines are over-priced; • Paternalism (merit good) – people do not do what is best for themselves; • Lack of knowledge – people do not know what is best for themselves. All four arguments are weak. The first three are general. New Zealand governments do not subsidise necessary food, clothing or housing for those who can afford to buy them. On the monopoly aspect, Chapter 2 shows the effectiveness of disciplined procurement
