> It seems unlikely that NZ, population 4ish million, is exploiting the drug companies.

The population size has nothing to do with it. If the per-patient share of the fixed costs is $500, anyone paying less than $500/patient isn't paying their share (and someone else has to pay the difference or the research doesn't happen).

> There are insurers that operate in the US alone that have a customer base that is tens of times larger than the whole New Zealand population. Why can NZ demand a better price than them?

Because it isn't a free market in either case. On the one side you have a patent, and on the other side you have a monopsony government regulating prices.

The first situation is completely broken for insurance companies, because patients will scream bloody murder if the insurance doesn't cover a specific drug their doctor prescribed (even when there is a much cheaper one which is 90% as good), but when it's patented that means the seller can charge monopoly rents to a captive buyer.

The second situation is completely broken, because it's prisoners' dilemma again. Why not pay them below the amortized fixed cost? As long as nobody else does that it'll probably be fine, and if everybody else does then you're screwed anyway, so might as well defect. Until everybody does that.

The only one that works is to have the patient paying most of the money that goes to the pharmaceutical company, so they can decide whether the advantage over the prior art alternatives is worth the price they're charging.

> Additionally, you say that the government risks overpaying, yet we pay less than US patients pay.

The risk is of miscalculating the cost. If you're doing an honest evaluation to try to pay your share, there is a nontrivial risk of overestimating and paying too much (as well as underestimating and defunding valuable research), and doing the estimation is hard. For example, you have to account for all the promising but failed research attempts that went before the one that finally succeeded, without creating an incentive to do tons of garbage research that always fails.

Of course, that's before the perverse incentive to purposely defect and pay less than your share, which in practice causes socialized systems to err on the side of paying less and defunding research.

> The drug companies are doing just fine and don’t seem to lack profits.

It's not about total profits. The difference is at the margin. If you spent a million dollars and discover a drug that treats heart disease, you can make a mint, because tons of people have that. But there is some other, more promising treatment that requires you to spend ten billion dollars on research -- or a number of treatments that could each pan out but not unless you try them all to figure out which one. Then you're risking more, but it may still be worth it -- if you can save a million more people for $10,000 each in research costs, that's clearly a win, but it only happens if it's possible to charge $10,000/patient for the result.

The drug companies that still exist will still turn a profit, because they only do the lower cost lower reward research. The ones that can't turn a profit given the laws will cease to exist, or never exist to begin with because investors estimate the reward to be less than the risk at the outset.

Refusing to pay more than e.g. $500/patient is effectively setting the value of a human life at $500.