The Pharmaceutical Price Regulation Scheme - Office of Fair Trading

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The Pharmaceutical Price Regulation Scheme Outcomes Demand side problems in the broader NHS lead to prescribing that in some major cases is not cost effective. In our view, the fact that existing PPRS controls do not take account of the therapeutic value of drugs significantly undermines the extent to which they can address these problems and secure value for money for the NHS. Under current pricing arrangements, drugs that have very similar clinical effects can have widely divergent prices – we have observed price differences of 500% or more for very close substitutes. Reviewing some major drug categories on an indicative basis we identified over £500 million of expenditure in 2005 that could have been put to more cost effective uses. For one drug alone we estimate that the use of more value-reflective prices could potentially have saved £350 million in that year for use on other drugs and treatments. For off-patent brands with chemically identical generics some £65 million could have been saved. Effect on patients This has major effects on patients. Where prices are out of line with value, the NHS is not making the best use of available resources to improve patient health. The effects of this are felt by patients through reduced access to both drugs and other forms of healthcare. For example, if too much is spent on an existing drug, Primary Care Organisations may have to balance their budgets by restricting access to new, innovative drugs or by reducing elective care procured in hospitals for a given period. These trade offs are shown most clearly in the work of NICE, SMC and AWMSG. NICE, for example, has recently rejected a number of new cancer drugs partly on the basis of cost to the NHS. These difficult choices are inevitable given the limited resources the NHS has at its disposal and we welcome the creation of NICE, SMC and AWMSG as important moves towards a fairer and more efficient system of deciding how to use NHS resources. But where access is restricted on cost effectiveness grounds, it is vitally important that all drugs – old and new – are assessed on the same basis. This does not happen across the board under current arrangements because of the limited remits these bodies have been given. To restrict access to new treatments while ignoring inefficiencies in current expenditure is not an efficient use of resources. Nor is it in the interests of patients. Effect on investment When the prices of medicines are inefficient this will also distort the investment incentives of firms. Specifically, companies will not be given the right incentives to invest in drugs that are most beneficial to society, including areas of unmet clinical demand. We have found that UK prices are likely to have a significant effect on incentives to invest since, although UK revenues represent only about four per cent of global demand, other countries set many of their prices with reference to those in the UK. Together these countries account for around 25 per cent of global demand. Furthermore, our international research has confirmed that UK prices are used in implicit price comparisons (that is, as part of company / country negotiations) even where they are not used in formal international reference price schemes. More value-reflective prices in the UK could therefore bring major gains over time as they drive investment in areas of clinical need. Our focus in this study is not on whether aggregate expenditure on drugs in the UK is too high – this is a matter for central Government. Rather we believe that the NHS could make better use of the resources it has – the efficiency savings we have identified could be used to improve access to and uptake of innovative and effective medicines that will have a significant effect on patients’ lives. We note that DH analysis suggests that overall prices in 4
February 2007 the UK have historically been higher than the rest of Europe, but that the situation changed after the 2005 price cut. UK prices in that year were not the highest in Europe but in the upper half of the range. In general, we would expect the effect of the price cut to be strongest in the year in which it is introduced. Therefore it is not clear whether this is a temporary or longer term realignment of prices. We are aware that price comparisons are sensitive to a range of factors, such as the choice of comparator products and exchange rates. They also ignore the effect of rebates between companies and payers, which are particularly important in the higher priced countries such as the US and Germany and therefore will tend to overstate prices in those countries with reference to those in the UK. Several stakeholders have expressed to us the view that the scheme should be considered as an instrument of industrial policy (that is, as a means of attracting R&D investment into the UK). We have found that the scheme itself does not provide explicit incentives for companies to invest in the UK (the R&D allowances under the scheme apply to R&D wherever in the world it is undertaken, not just to R&D incurred in the UK). Furthermore, the scheme could not be revised in the future to provide such explicit incentives. Any attempt to offer firms better prices if they located in the UK would almost certainly fall foul of EU legislation on state aid and the free movement of goods. The Government has much more effective instruments at its disposal for attracting investment into the UK, such as investing in the scientific skill base or improving the environment for clinical trials. Examples of initiatives that do this, such as the creation of the UK Clinical Research Collaboration, are to be welcomed. Options for reform We have considered a number of options for reform in the course of the study. Some involve incremental changes to existing instruments, such as amendments to the profit cap to address the potential disadvantage to which small firms are put under current arrangements. This could include smoothing the assessment of profitability over time or allowing an R&D allowance that is more commensurate with small companies’ global R&D / sales ratios. However, while such measures may bring small improvements, they would not address the fundamental concerns we have with existing arrangements. To ensure value for money from NHS expenditure and give good, stable investment incentives to companies in the long run, there is a compelling case for reform of the scheme towards a value-based pricing system that would relate the prices of products to their clinical value relative to existing treatments. For on-patent brands, this report sets out in detail the key principles that we think should guide reform and the many different design options that need to be considered. But it is possible, at a high level, to identify two broad options. The first option – which we have called ex post value-based pricing – would involve retaining up front freedom of pricing for companies for new active substances but would replace company-wide profit controls and price cuts with a series of ex post reviews of the cost effectiveness of individual drugs or drug classes. These reviews would set a maximum price for a product in accordance with the clinical benefits it delivers relative to an appropriate comparator. The timing of reviews would be designed to coincide with major events (such as new drugs entering the market, comparators going off patent, or the results of Phase 4 trials providing new clinical information). The timing of reviews and principles to inform them could be set out in a PPRS-style framework agreement between industry and government. The second option – ex ante value-based pricing – would again replace PPRS profit and price controls. In addition to the ex post reviews for existing drugs, it would involve a fast track ex ante assessment of a new drug’s cost effectiveness (starting during the licensing 5
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