The Pharmaceutical Price Regulation Scheme

Early last week, the Office of Fair Trading (OFT) published its report on the Pharmaceutical Price Regulation Scheme,1 a uniquely British mechanism for determining the prices the National Health Service pays for brand name drugs (currently costing around £8bn (€12bn; $15.6bn) a year). For 18 months the enquiry team had analysed the scheme, heard evidence, looked at arrangements in other countries, and modelled alternatives in an NHS context. Early on Tuesday 20 February it delivered its verdict: the scheme was no longer fit for purpose and needed to change.

The Pharmaceutical Price Regulation Scheme (formerly the Voluntary Price Regulation Scheme) has been running since 1956. It is a voluntary arrangement between the Department of Health and individual drug companies, which determines the prices companies can charge the NHS for their drugs.2 The scheme has helped keep drug companies based in the United Kingdom in good stead since its inception.

The question that now arises is to what extent the scheme serves the purposes of industry rather than the interests of patients. This question has been raised in at least two parliamentary health select committee enquiries in the past 13 years34, but this is the first time that a detailed and specific “public” investigation has been undertaken. The enquiry team has had sufficient resources, expertise, and access to otherwise confidential material to do the job thoroughly. Moreover, the team has published the results in a detailed yet accessible manner.

The purposes of the scheme are clearly set out in the agreement of November 2004 (agreements are negotiated every five years; the current arrangement came into force in January 2005 and is due to end in 2010).2 From the start, it is clear that the goals of the scheme are compromised as they present an insurmountable conflict—the scheme is tasked to secure the provision of drugs for the NHS at “reasonable prices” while simultaneously determining prices that are high enough to “sponsor” (more recently called “promote”) the wellbeing of UK based companies. Interestingly, this has always been the way in which UK government worked to ensure that UK manufacturers were competitive in an international market.

The workings of the scheme are simple: each year companies give the Department of Health details of their historic capital (the monies they have tied up in plant, machinery, factories, raw materials, etc). After taking into account allowances for costs on research and development, promotion, and information, the department uses a formula to determine the total amount the company can charge the NHS (“return on capital”) for all of its products (its basket of drugs). To reach the permitted return, companies can price their drugs high at the time of launch. Moreover, if the return on capital is not reached each year the company can raise the prices of other drugs in its basket. Conversely, if the permitted return is exceeded, the company is required to reimburse the excess to the NHS (“in reality the reimbursements are negligible”1).

The strands of the scheme are such that many of the outcomes run counter to the interests of the NHS. High prices at launch are essentially inevitable, drugs are developed (and rewarded) that do not necessarily offer clinical advantage, and the industry alone determines prices according to what they believe to be their product's value. Moreover, as the prices have been negotiated by the Department of Health on behalf of ministers, it is essentially impossible for government to argue that prices are too high.

Furthermore, there is a real risk that the work of bodies such as the National Institute for Health and Clinical Excellence (NICE) and the Scottish Medicines Consortium, at a national level, and the many drugs and therapeutics committees at a local level is undermined if money saved is centrally reimbursed in a secret deal. Finally, the system no longer appears to be sustainable as an organ of government because of its inherently conflicting goals and the level of secrecy surrounding decision making and outcomes.

The proposals in the OFT report are persuasive. Broadly, under a new Pharmaceutical Price Regulation Scheme drug prices would be negotiated at launch for each drug individually by (ultimately) an independent commission using robust evidence of the product's perceived clinical value. Representatives of NICE and the Scottish Medicines Consortium would be involved in determining the price, and presumably if they have agreed on its clinical value then the product would be available to the NHS immediately after launch (an end to “NICE blight”). Finally, any notion of reimbursement or sponsorship would be lost.

Industry will not like these changes. Because the fine details for determining perceived clinical value are not yet spelled out, companies may be concerned that prices could be forced down. They may worry that the stability of financial returns will no longer be guaranteed, which would pose difficulties in long term investment. Until now they have shared the risk of drug development with the NHS (if things went wrong they could expect reimbursement); under the new scheme they would be alone.

The OFT deserves congratulations for its enquiry into the Pharmaceutical Price Regulation Scheme and for the recommendations made. The old system is arcane and archaic and has to change, and the OFT has provided a sound basis for debate and offers an appealing alternative. The mystery is that the system was not changed years ago.