Pharmac: How New Zealand’s Drug Buyer Squeezes Prices and What It Costs

Pharmac is the purest example anywhere of a single national buyer using a hard budget cap to dictate terms to the pharmaceutical industry, and its record shows both how much money that saves and who bears the cost. This article explains why the agency was created, how its commercial tactics work, who controls it, the political interventions that have reshaped it since 2024, the latest budget and performance figures, and what executives in any industry can learn from its approach to procurement. It is part of the New Zealand Company Stories hub.

Why was Pharmac created?

Pharmac was created in 1993 because New Zealand’s medicine bill was rising much faster than the health budget and no one was responsible for controlling it. The government set up a small agency with one task: manage the list of subsidised drugs within a fixed sum.

The Pharmaceutical Management Agency began as a joint venture owned by the four regional health authorities of the time. Before it, subsidies were set by a department with little commercial expertise, and manufacturers faced a fragmented buyer. The reforms of the early 1990s, which applied market disciplines across the public sector, produced a body that would behave like a purchasing department rather than a regulator.

Its remit widened in stages. It became a stand-alone Crown entity in 2001 and began assessing cancer medicines. It took over management of the national immunisation schedule in 2012 and of medicines used in public hospitals in 2013, and later began negotiating national contracts for hospital medical devices. In 2022 its budget, previously held by 20 district health boards, became a single national appropriation.

How does Pharmac’s buying model work?

Pharmac maintains the Pharmaceutical Schedule, the list of medicines the state will pay for. A drug that is not on the list is in effect unavailable to most patients, so suppliers must accept Pharmac’s terms or forgo the entire national market.

The process begins with a funding application, usually from a manufacturer. Clinical advisers, led by the Pharmacology and Therapeutics Advisory Committee, assess the evidence. Pharmac’s analysts estimate the health gain per dollar, expressed as quality-adjusted life years per million dollars spent. Applications that pass are ranked against one another on a confidential list known as the Options for Investment. When money is available, Pharmac works down the list, negotiating with suppliers as it goes.

Two features make the system unusual. The first is that ranking is relative, not absolute: a medicine is funded only if it offers better value than the other things the same money could buy. There is no threshold above which funding is guaranteed. The second is that the budget is fixed in advance. Pharmac’s statutory objective is to secure the best health outcomes reasonably achievable from the funding provided, which makes the cap a legal duty and not merely a target.

What tactics does Pharmac use to cut prices?

Pharmac relies on five commercial tools: reference pricing, sole-supply tendering, bundled multi-product deals, confidential rebates and expenditure caps. Each exploits the fact that a supplier’s alternative to a deal is zero sales.

• Reference pricing: medicines with similar effects are grouped, and the subsidy for all is set at the price of the cheapest. Dearer brands must cut their price or lose patients.
• Tendering: for off-patent medicines, suppliers bid to become the sole subsidised brand for a fixed period. Tendering began in 1997 with paracetamol and now covers more than half of funded medicines by volume.
• Bundling: a company seeking funding for a new drug offers price cuts on older products in its portfolio, releasing money to pay for the new one.
• Rebates: the supplier keeps a high published price, which protects its position in other countries that benchmark against it, and pays a confidential refund to Pharmac.
• Caps and risk-sharing: contracts limit total spending on a drug, with the supplier bearing the cost if use exceeds forecasts.

The scale of rebates is striking. In 2024/25 gross pharmaceutical expenditure at list prices was NZ$2.713 billion, while the net medicines budget was NZ$1.689 billion. The gap of about NZ$1 billion is the discount that never appears on any price list. Pharmac also reported NZ$151.8 million of new commercial savings from negotiations that year.

Who controls Pharmac?

Pharmac is a Crown entity governed by a board appointed by the minister. Ministers set the total budget and issue an annual letter of expectations; by long convention they do not direct which individual medicines are funded.

The board has been chaired since April 2024 by Paula Bennett, a former deputy prime minister. The chief executive is Natalie McMurtry, a Canadian pharmacist and former senior official in Alberta’s health ministry, who started in September 2025. She replaced Sarah Fitt, who resigned in February 2025 after sustained criticism of the agency’s dealings with patient groups; Brendan Boyle acted in the role in between. The responsible minister is David Seymour, leader of the ACT Party, as Associate Minister of Health.

The arm’s-length arrangement is the core of the design. It lets politicians say that funding decisions are made by experts, and it lets Pharmac tell suppliers that lobbying ministers will not work. Negotiating leverage depends on the credibility of that claim. Pharmac’s operating budget, separate from the medicines money, is only about NZ$32.5 million a year, a tiny overhead for an organisation managing NZ$1.8 billion of purchasing.

How is Pharmac’s budget set?

Ministers set the Combined Pharmaceutical Budget each year through the government’s Budget process, after Pharmac submits a bid describing what different funding levels would buy. For 2026/27 the budget is NZ$1.806 billion, up NZ$46 million or about 3%.

The pattern shows a large one-off step followed by increases that roughly track inflation and population. The 2024/25 jump reflected a NZ$604 million four-year injection announced in June 2024. Budget 2026, delivered on 28 May, added a further NZ$54 million over four years, about NZ$13.5 million a year, from a health package of about NZ$1.5 billion. Patient organisations described that as enough to keep existing medicines funded as prices and volumes rise, but not to add many new ones.

A fixed annual budget also explains Pharmac’s caution. Committing to a new medicine creates a cost that recurs every year. If future budgets are uncertain, the rational response is to fund less than the current year’s money would allow, or to demand contracts with caps.

What were the turning points in Pharmac’s history?

The turning points were the moments when politics overrode the model: Herceptin in 2008, the cancer-drugs promise of 2024, and the reset of the agency’s culture that followed. Each showed the limit of public tolerance for a purely budget-driven process.

In 2008 a newly elected government funded a 12-month course of the breast-cancer drug Herceptin after Pharmac had agreed to pay only for a shorter course. It was the first clear breach of the convention that ministers do not pick medicines. A long campaign over the melanoma drug Keytruda ended with funding in 2016 after a budget increase. In 2022 an independent review chaired by the consumer advocate Sue Chetwin found the agency too focused on cost containment and too opaque.

The largest intervention came in 2024. The National Party had campaigned on funding 13 named cancer treatments. When the May 2024 Budget omitted them, the backlash was immediate, and in June the government announced NZ$604 million over four years. Pharmac, rather than ministers, chose how to spend it, and has since funded 66 additional medicines or widened uses, including a large group of cancer drugs, which the government says benefit more than 200,000 people. In 2024/25 alone it funded 31 new medicines and widened access to 52.

The episode demonstrated something suppliers had long argued: the binding constraint on access in New Zealand is the size of the budget, and not Pharmac’s bargaining.

What does Pharmac’s model cost patients?

The cost is delay and absence. New Zealanders wait longer for new medicines than patients in most rich countries, and some treatments funded in Australia or Britain are not funded at all. Those who can afford it pay privately; others go without.

The figures most often cited come from critics. The ACT Party, which now holds the Pharmac portfolio, says New Zealand spends 4.9% of its public health budget on medicines against an OECD average of 13.3%, and that 139 applications sit on Pharmac’s list of things it would fund if it had the money. Industry-commissioned comparisons regularly place New Zealand at or near the bottom of the OECD for access to new medicines. The measures are contested, since low prices partly explain low spending, but the direction is not in dispute.

Pharmac’s own data confirm the delay. In 2024/25 the average time to assess a funding application was 40.7 months against a target of under 38. The agency reports that the figure for ranked applications has since fallen to about 27 months, and from July 2026 it has a target of assessing new applications within 18 months.

A private market has grown in the gaps. Some private hospitals and clinics administer unfunded cancer drugs to patients who pay tens of thousands of dollars, and health insurers sell policies covering non-Pharmac medicines. Crowdfunding appeals for treatment are a familiar feature of New Zealand life. Critics see a two-tier system; defenders reply that money spent on one expensive drug would otherwise buy more health elsewhere.

What do the latest numbers show?

In 2024/25 some 4.1 million New Zealanders received a funded medicine, Pharmac estimated that 89,436 people benefited from new or widened funding, and national device contracts covered NZ$655 million of hospital spending. The agency employed 195 people.

The performance measures now being reported reflect ministerial priorities. A July 2026 progress report against Mr Seymour’s letter of expectations lists a target of clearing a backlog of 150 older funding applications, publishing advisory committees’ provisional recommendations within 30 days, and widening the definition of a rare disorder from one affecting 1 in 50,000 people to 1 in 2,000, which lets more applications proceed before the medicines regulator has approved the product.

Staff turnover of 20.5% in 2024/25 points to an organisation under strain during the leadership change. The forecast for 2026/27 shows the agency running a small operating deficit as it funds a 12-month “reset” programme, including a new consumer and patient advisory structure.

Who are Pharmac’s counterparts and competitors?

Pharmac has no competitor at home, which is the point. Its counterparts are the multinational drug companies across the table and their industry body, Medicines New Zealand. Abroad, its closest equivalents are Australia’s Pharmaceutical Benefits Scheme and England’s NICE, neither of which works to a hard cap.

Australia assesses cost-effectiveness and then funds what passes, with an uncapped budget; it spends several times more per person and lists new medicines sooner. England applies a cost-per-QALY threshold. New Zealand alone combines assessment with a fixed envelope and competitive ranking. That gives it the lowest prices and the longest queues of the three.

The domestic parallel is instructive. Pharmac is a monopoly buyer in the way that Zespri, described in the Zespri story, is a monopoly seller: both use a statutory single desk to gain leverage a small country would otherwise lack, and both are exempt from parts of competition law. Downstream, the medicines Pharmac lists are delivered by wholesalers such as EBOS Group, whose margins are squeezed whenever the price of a drug falls. And New Zealand device makers such as Fisher & Paykel Healthcare earn almost nothing from their home market, partly because its public buyers are so frugal.

What are the main risks to the Pharmac model?

The risks are political erosion of its independence, supply fragility, pressure from abroad on low-price countries and loss of public legitimacy. Any one of them weakens the credibility on which its negotiating position rests.

Political risk is the most immediate. Each ministerial intervention teaches suppliers and patient groups that campaigning works. If companies come to believe that a public campaign will produce earmarked money, the incentive to offer Pharmac their best price falls.

The international environment has also shifted. The United States has pressed drug makers to align American prices with the lower prices paid abroad and has threatened tariffs on pharmaceuticals, as outlined in the article on New Zealand and the 2025 US tariffs. If companies respond by refusing deep discounts in small markets, or by delaying launches there to protect their American prices, New Zealand has little to offer in return: it is well under 1% of global sales. Confidential rebates were designed to manage exactly this problem, but they depend on list prices being the reference that other countries use.

Finally there is scope. In September 2025 the government decided that Pharmac and Health New Zealand would share responsibility for hospital medical devices, rather than Pharmac alone managing a national list. The agency’s expansion beyond medicines has, for now, paused.

What can founders and CFOs learn from Pharmac?

The lesson is that procurement power comes from three things: a credible willingness to walk away, a budget that cannot be exceeded and decision rights insulated from people the supplier can lobby. Pharmac has all three, which is rare in any organisation.

1. Make the budget real. A cap that everyone knows can be breached is a suggestion. Pharmac’s is statutory, so suppliers negotiate against the constraint and not against the negotiator.
2. Rank options against each other. Evaluating each proposal on its own merits leads to approving everything that clears a hurdle. Forcing proposals to compete for a fixed pool exposes true priorities.
3. Consolidate demand, then tender it. Aggregating volume into one contract and awarding exclusivity wins the largest price cuts, at the cost of supplier concentration that must be actively managed.
4. Trade across a supplier’s portfolio. The best concession may be on a product other than the one under discussion.
5. Count the cost of delay. Savings are measured and reported; the harm from slow decisions is diffuse and unrecorded until it becomes a political crisis. A buying function needs service-level targets as well as savings targets.

That last point is the one Pharmac learned late. For CFOs the same pattern recurs wherever a concentrated buyer faces dispersed users, as in the grocery market described in the supermarket duopoly story: buyer power is efficient until those on the other side find a political voice.

What happens next for Pharmac?

The next year turns on the general election due in late 2026 and on whether the reset under Ms McMurtry shortens decision times. The model itself is not seriously threatened; the argument is about how much money flows through it.

ACT is campaigning on raising medicines to 12% of health spending by 2033, lifting the share by a percentage point a year, which on its own figures would take the medicines bill to between NZ$5.4 billion and NZ$6.1 billion. No other party has matched that. Pharmac is also developing methods to count wider social and fiscal effects of medicines, such as people returning to work, for use in its Budget 2027 bid. That would change which drugs rank highest and strengthen the case for a larger budget.

More modest tests come sooner: the 18-month assessment target, the backlog of old applications and the new patient advisory committee. If those are met, Pharmac may regain the public trust it lost in the past few years. If a future Budget again leaves it with only enough to stand still, the queue of unfunded medicines will lengthen and the pressure for another political rescue will build. Pharmac has spent three decades proving that a small country can pay less for medicines; it has yet to settle how long patients should wait in return.

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