Proposal to modify PHARMAC’s approach to competitive procurement

Medicines Consultation Closed

We are proposing to standardise the way that we contract for pharmaceuticals as a result of competitive procurement processes:

creating a consistent approach between the community and DHB hospital markets and improving on the methods that we have used for many years.


PHARMAC’s role is to decide which pharmaceuticals are publicly funded for New Zealanders. We have a fixed budget which means we need to make careful and considered funding choices. Every dollar in the budget is used to fund pharmaceuticals and any savings we make are used to fund more medicines for more New Zealanders. We are also responsible for managing national procurement of medicines and medical devices used in DHB hospitals.

One of the key ways that we make savings is by running competitive procurement processes for exclusive or preferential supply through the Pharmaceutical Schedule, meaning that one brand might become the only one subsidised on a prescription and/or the primary brand purchased by DHB hospitals for a period of time.

The proposal

We are proposing to standardise the way that we contract for pharmaceuticals as a result of competitive procurement processes, creating a consistent approach between the community and DHB hospital markets and improving on the methods that we have used for many years.

At present, there are some key differences between how we manage competitive procurement in the community and DHB hospital markets:

  • for community pharmaceuticals, we award Sole Supply Status (SSS) to a product, which means that it becomes the only brand listed in the Pharmaceutical Schedule for funding in the community
  • in DHB hospitals, we award Hospital Supply Status (HSS), which means that it becomes the primary brand that DHB hospitals buy and the supplier is assured of a certain share of the market, as determined by a Discretionary Variance (DV) limit.

We are proposing to replace both arrangements with Principal Supply Status, which would be similar in practice to HSS, but could be applied in either the community or hospital settings (or both).

Under this new approach, the principal supplier’s brand would be the main brand funded in the community and/or bought by DHB hospitals, with an allowance for other brands to be funded by PHARMAC and/or purchased by DHB hospitals.

We are proposing to shift to using Principal Supply Status, with an allowance for other brands of 5%, for the 2020/21 Invitation to Tender and expect it would be used in other competitive supply processes (e.g. Requests for Proposals) in the future.

DV limits have varied for individual hospital pharmaceuticals (1-20% for medicines and 20-35% for medical devices) and we expect that the allowance for other brands under the proposed Principal Supply Status arrangements might need to be set at differing levels from time to time. We would make the proposed level for each individual pharmaceutical clear to suppliers in each competitive procurement process we run.

Consultation closes at 5pm Friday 24 July 2020 and feedback can be emailed to

What would the effect be?

The proposal would mean that PHARMAC would have greater flexibility to respond to the needs of specific groups of patients or individuals who may experience, or are at heightened risk of, adverse clinical outcomes as a result of a brand change.

Brand changes are generally well tolerated; however, individual experiences can vary and we want to be able to respond to people’s needs as they arise. Having the right contractual arrangements in place is necessary to enable this.

Seeking your feedback

As we are preparing for the 2020/21 Invitation to Tender, we are interested in feedback from pharmaceutical suppliers on the general direction of this proposed change. Your feedback will help inform our next steps, including the drafting of the Invitation to Tender.

If we decide to proceed, we will consult more broadly, and in more detail, on what this means as part of the regular consultation process before the annual Invitation to Tender is released, including:

  • seeking feedback on specific changes to the listing agreement as a result of shifting to Principal Supply Status,
  • seeking views on which products or conditions might have a particular need for funding of an alternative brand, and
  • seeking views on the proposed percentage allowance for alternative brands for each individual pharmaceutical proposed for inclusion in the 2020/21 Invitation to Tender.

If, following consideration of consultation feedback, a shift to Principal Supply Status is implemented in the 2020/21 Invitation to Tender, we would also consult separately on any necessary ancillary changes to the General Rules of the Pharmaceutical Schedule in the coming months.

About competitive procurement

Through competitive procurement processes such as PHARMAC’s annual Invitation to Tender, Requests for Proposals (RFPs), and Requests for Tenders (RFTs) suppliers compete for exclusive or preferential access to the funded pharmaceutical market for a set period of time.

Such processes can result in significant savings for off-patent medicines, freeing up funding that can be used for spending on other medicines.  They are also a very successful way of ensuring continuity of supply for medicines in New Zealand – this is because a supplier has more certainty of the share of the funded market they will gain, so they are more able to accurately forecast demand and order stock from their manufacturers.

PHARMAC has been using competitive procurement for community pharmaceuticals since the early 1990s, initially with spacer devices and paracetamol tablets, eventually evolving into an annual process encompassing hundreds of products. We expanded this to include hospital medicines in 2003 and, in the last few years, we have used market-share based RFPs for selected categories of hospital medical devices (wound care and drug-eluting stents).

In respect of PHARMAC’s annual Invitation to Tender, SSS and HSS are generally awarded for up to three years and are, in the case of a brand change, typically preceded by a five-month transition period during which both the outgoing brand(s) and the new brand are available and funded.

Why we’re proposing this

We are regularly looking to improve how we implement and manage our competitive procurement activity. It is a significant aspect of our business, and we want to ensure that it runs smoothly and that we can get the benefits that we need while minimising any disruptions to people using pharmaceuticals and to the health sector.

We are also working to move to a common approach between the community and hospital markets over time.

In considering how to improve our competitive activity and take a common approach to both markets, we have determined that we need to have greater flexibility to help address situations where an individual person or group of people might need to access an alternative brand, either to enable someone to revert back to their original brand following an initial change or to avoid a brand change altogether.

Details about our proposal

Starting with the 2020/21 Invitation to Tender, we propose to shift to awarding Principal Supply Status, to:

  • a community tender bid (replacing Sole Supply Status),
  • a hospital tender bid (replacing Hospital Supply Status), or
  • a combined community/hospital tender bid (replacing both).

A product with Principal Supply Status would be the primary brand in the Pharmaceutical Schedule, and we expect would be used in the vast majority of circumstances. However:

  • PHARMAC would have the ability to enable the funding of another brand, at its discretion, to help meet the needs of individuals or groups of patients (or other end-users) who may experience, or be at heightened risk of experiencing, adverse clinical outcomes as a result of a brand change. This might be through:
  • In respect of PHARMAC’s annual Invitation to Tender, the principal supplier should expect to supply 95-100% of the market:
    • If PHARMAC’s actions resulted in 0-5% of the funded market being an alternative brand, then no further action would occur.
    • If funded use of alternative brands exceeded 5%, then the principal supplier would have the right to claim a reimbursement payment from PHARMAC of up to 95% of the market, by following the process set out in the tender document.

Any existing SSS or HSS tender contracts would be unaffected by this proposal: this would only impact new agreements, starting with the 2020/21 Invitation to Tender, and future RFP and RFT processes.

If these changes are implemented, we would consult separately on any necessary Pharmaceutical Schedule changes, such as changes to the General Rules, before any principal supply agreements came into effect.

To provide feedback

Send us an email: by 5pm Friday 24 July 2020.

All feedback received before the closing date will be considered by PHARMAC’s Board (or its delegate) prior to making a decision on this proposal.

Feedback we receive is subject to the Official Information Act 1982 (OIA) and we will consider any request to have information withheld in accordance with our obligations under the OIA. Anyone providing feedback, whether on their own account or on behalf of an organisation, and whether in a personal or professional capacity, should be aware that the content of their feedback and their identity may need to be disclosed in response to an OIA request.

We are not able to treat any part of your feedback as confidential unless you specifically request that we do, and then only to the extent permissible under the OIA and other relevant laws and requirements. If you would like us to withhold any commercially sensitive, confidential proprietary, or personal information included in your submission, please clearly state this in your submission and identify the relevant sections of your submission that you would like it withheld. PHARMAC will give due consideration to any such request.