For two decades, New Zealand has been placed consistently at the foot of OECD rankings for state expenditure on pharmaceuticals. In this article, we explore New Zealand's containment of pharmaceutical spending as a ‘divergent’ case of pharmaceutical policy in a liberal democracy. To elucidate the likely institutional mechanisms and interests behind this phenomenon, we conducted a case study of New Zealand's drug reimbursement policy. In doing so, we derived sensitising concepts from major accounts of pharmaceutical policymaking (Corporate Bias Theories and Reputational Theory) and theories of the western state (Historical Institutionalism and Corporate Domination Theory). Drawing on 28 expert interviews and documentary analysis, we identified three main mechanisms of spending containment. First, New Zealand's state bureaucracy use pricing strategies that rely on a spending containment strategy coordinated by bureaucratic managers. Second, these managers shape the policy preferences of expert committees involved in scientific drug assessment. Third, on a meta‐level, conditions for spending containment are enabled by the judicial‐legislative arena. As such, we find support for Historical Institutionalism and Reputational Theory and more limited support for Corporate Bias Theory and Corporate Domination Theory. Our explanation posits further conceptual linkages between the macro/societal and meso‐organisational theoretical levels.

This paper explores policy mechanisms behind New Zealand's remarkable track record of cost containment in public pharmaceutical spending, contrasting with most other advanced economies. We drew on a review of official policy documents and 28 semi-structured expert interviews. We found that decision making in pricing and reimbursement policy was dominated by a small group of managers at the Pharmaceutical Management Agency (PHARMAC), the country's drug reimbursement and Health Technology Assessment Agency, who negotiated pharmaceutical prices on behalf of the public payer. In formal negotiation over patented pharmaceutical prices these managers applied an array of pricing strategies, most notably, ‘bundling’ consisting of discounted package deals for multiple pharmaceuticals, and ‘play-off tenders’, whereby two or more pharmaceutical companies bid for exclusive contracts. The key pricing strategy for generic drugs, in contrast, was ‘blind-tenders’ taking the form of an annual bidding process for supply contracts. An additional contextual condition on bargaining over pharmaceutical prices was an indirect strategy that involved the cultivation of the PHARMAC's ‘negotiation leverage’. We derived two cost containment mechanisms consisting in the relationship between pricing strategy options and various reimbursement actors. Our findings shed light on aspects of the institutional design of drug reimbursement that may promote the effective use of competitive negotiations of pharmaceutical prices, including specific pricing strategies, by specialist public payer institutions. On this basis, we formulate recommendations for countries seeking to develop or reform policy frameworks to better meet the budgetary challenge posed by pharmaceutical expenditure.