Pharmaceutical subsidisation in New Zealand : a comparison of reference pricing with the Johnston-Zeckhauser scheme.
Degree GrantorUniversity of Canterbury
Degree NameMaster of Arts (Hons)
An alternative scheme has been suggested to the reference pricing framework currently used in New Zealand. The subsidisation scheme outlined in Johnston, M and Zeckhauser, R. (1991) The Australian Pharmaceutical Subsidy Gambit: Transmuting Deadweight Loss and Oligopoly Rents to Consumer Surplus offers only the subsidy required to prompt acceptance of subsidisation by firms. This scheme is valid only where marginal costs are known. This thesis incorporates the creation of a framework for the comparison of pharmaceutical subsidy schemes, the expansion of the Johnston and Zeckhauser scheme into an environment of imperfect information, and the comparison of this modified scheme with the variant of reference pricing used in New Zealand. This comparison finds that the Johnston and Zeckhauser scheme generally provides subsidisation at a lower cost than reference pricing provided that a suitable threshold is placed on the time taken for a firm to accept subsidisation. Unfortunately the JZ scheme does not appear to provide a valid alternative to reference pricing as, on average, it is likely to promote a lower level of efficiency than the status quo. The thesis finds that reference pricing is however not without its problems, as the possibility exists that reference pricing will, in some cases, provide firms with less than the level of profit necessary to convince them to accept subsidisation.