The OFT's (Office of Fair Trading) long-awaited investigation into the UK’s Pharmaceutical Price Regulation Scheme (PPRS) found that the National Health Service (NHS) is overpaying for drugs by up to £500 million a year. The PPRS controls the profit on sales of medicines to the NHS and has been in place in various forms for more than half a century. But this once beacon of stability in the turbulent world of European pricing is now under threat from the competition watchdog.
OFT proposals
The 120-page OFT report concluded: “We recommend that Government reform the PPRS, replacing current profit and price controls with a value-based approach to pricing, which would ensure the price of drugs reflect their clinical and therapeutic value to patients and the broader NHS. We believe this would provide major benefits to patients and innovative companies in the short and long term.”
- Value for money: the OFT found that the more cost-effective use of medicines would allow patients greater access to drugs and other healthcare benefits they are currently being denied. “The same level of expenditure could be used to produce greater benefits for patients.”
- Better incentives to invest: value-based pricing would give companies greater incentives to invest in therapeutic areas most beneficial to society, particularly in areas of unmet clinical need. “Given the international importance of UK prices, these benefits would be felt not just in the UK , but globally,” said the report.
- A stable, sustainable system: the OFT argument runs that value-based pricing would improve stability in the long run for government and industry by avoiding reliance on “increasingly arbitrary profit and price controls and ensuring instead that future pricing decisions are based on an informed, rational debate about how to make the best use of available NHS resources”.
The OFT argues that changes should encourage pharmaceutical companies to invest in the development of medicines where there is the greatest need. “Focusing prices on the needs of patients rather than on the costs of drug companies would be good for both patients and for business,” said OFT Chief Executive John Fingleton. But he predicted opposition from the industry “because they make quite a bit of money on one or two drugs which are close substitutes for existing drugs”.
The OFT chief was right. In a briefing on the same day as the OFT report was published, the Association of the British Pharmaceutical Industry (ABPI) gave its backing to the PPRS. “The PPRS… has been continually improved over a long period of time. [It] has changed every five years and should continue to evolve, for example to ensure young start-up companies are treated fairly under the scheme.” ABPI Director-General Richard Barker added: “Under the PPRS, we have five years’ stability, which is very important for an industry with a 10-12 year investment cycle.”
Value for money
On the specific aim of the PPRS to deliver value for money, the ABPI pointed to a National Audit Office report that estimated NHS savings from the PPRS at £1.2 billion. In its second submission to the OFT investigation, the ABPI wrote: “There is evidence of a growing integration of value-for-money considerations into the demand for medicines in the UK. The PPRS does not hinder that process.”
Additionally, the ABPI cited a study of launch prices in the UK covering the period 2000-2006. The study concluded: “There are clear indications that the raft of demand side initiatives introduced since 1997 are creating a climate within the UK where prices are linked to therapeutic value and are competitive in a European context.” The study also found a clear trend for products considered to have therapeutic advantages over their competitors to be priced at a premium and, conversely, products unable to establish therapeutic advantages to be priced at a discount to competitors.
Internationally, the study found products launched as first in class almost invariably attracted a lower price in the UK compared with an average of prices in France, Germany, Italy, Spain and the Netherlands. And most products launched into established classes attracted a lower price in the UK compared with the average in the comparator countries. According to the ABPI, this provides clear evidence that the PPRS provides the necessary checks and balances between incentivising innovation and delivering value for money in the NHS drugs bill.
What next?
The Department of Health (DoH) and Department of Trade and Industry have 120 days to respond to the OFT’s recommendations. A DoH statement said: “It is important that we have fair prices which give value for money to the taxpayer. However, we recognise the importance of the pharmaceutical industry to healthcare and the development of medical advances and it is in all of our interests to encourage research and reward innovation.”
Although the OFT’s findings are not binding, most commentators believe that change will eventually come. Jonathan Winawer, formerly responsible for pharmaceutical industry policy in the Department of Health and currently a Principal with IMS Health, Pricing and Reimbursement, thinks the government will be forced to act. “The government won’t ignore the OFT’s findings because the PPRS is no longer fit for purpose and the shift to value-based pricing makes sense. The problem is that it might take years to enact reforms – the existing PPRS, for example, still has nearly three years to run. Even then, with the government under cost pressures in the NHS, the great advantage of across-the-board price cuts of the type enacted under the PPRS is that they are immediate – even if they are a fairly blunt instrument.”
On a more general level, Winawer thinks the PPRS’ profit control mechanism hasn’t worked for a number of years. “Under the rules of the scheme, companies are unlikely to be assessed as making excessive profits and to risk having to pay surpluses back to the Department. Part of the reason is that, in an era of globalisation, so much cost is hidden in transfer pricing. Despite the complex provisions laid out for transfer pricing in the PPRS, it is just not possible for the government to assess profits against this background of internationalisation.
Extracted from Pharma Pricing & Reimbursement, published monthly by IMS Health. For further information, please contact Nicky Richards, or call +44 1223 273200.
Copyright IMS Health, 30th April 2007