Select Committee on Health Written Evidence

Memorandum submitted by Ms Anna Dixon and Ms Sarah Thomson (CP 44)

  Anna Dixon is Lecturer in European Health Policy in the Department of Social Policy at the London School of Economics and Political Science and currently a Commonwealth Fund Harkness Fellow in Health Care Policy based at the University of Oregon, USA. Author of numerous articles on health care financing including co-editor of Funding Health Care: options for Europe (Open University Press, 2002)

  Sarah Thomson is Research Officer in Health Policy at LSE Health and Social Care and a Research Officer at the European Observatory on Health Systems and Policies and author of numerous articles and chapters on user charges and private health insurance


  This evidence focuses on user charges that apply to prescription drugs within the English National Health Service (NHS). We present evidence to suggest that the prescription charge scheme (PCS) as currently designed results in inequities in access. User charges may be appropriate to achieve certain objectives such as utilization of cost-effective drugs but they are a weak instrument compared to incentives for providers on the supply side (eg doctors, nurses and pharmacists). We present data on types of user charging schemes found in other countries and recommend that a system of variable coinsurance rates be considered for drugs in the NHS. We would argue that rational use of cost-effective health care can best be promoted through ensuring that the behaviour of providers is controlled.


  1.  User charges may be appropriate depending on their objectives and how they are implemented. Economic theory underlies arguments put forward both in favour of and against user charges for health care. There are a number of stated objectives that user charges may achieve:

    —    reducing unnecessary or excess utilisation;

    —    reducing overall expenditure (cost containment);

    —    raising additional revenue; and

    —    directing utilisation to more appropriate care/services.

  2.  Neo-classical economists claim that the use of health services exceeds socially beneficial levels when health care costs are fully covered by insurance or free at the point of use. Because the price of using health services is effectively zero, individuals make use of more health care then they would if they had to pay for it at the point of use (Arrow 1963; Pauly 1968). It is often argued that user charges (such as prescription charges) will reduce "excess" utilisation and selectively discourage the use of health services that provide little value to the individual.

  3.  A number of arguments are used to criticise the neo-classical economic model which would suggest user charges are inappropriate:

    —    the diverse nature of health care "goods";

    —    the existence of information asymmetries in the health care market;

    —    individuals may not be well-informed about their own need for health care;

    —    individuals may be unable to distinguish between effective and ineffective or harmful treatment;

    —    health care providers are usually better informed than patients; and

    —    providers can influence both the type and quantity of health services used (Evans 1984).

  4.  The case for user charges as a means of reducing excess utilisation is weak, particularly when charges are applied to health services that are used as a result of a provider's recommendation, referral or prescription (Chalkley and Robinson 1997).

  5.  The prescription charge scheme (PCS) in the NHS may be regarded as inequitable for the following reasons:

    —    it exempts some patient groups but not others; the list of medical conditions exempt from prescription charges has not been updated since 1968 and excludes several chronic conditions that have become prominent since then, such as cancer, multiple sclerosis, arthritis and HIV/AIDS; patient groups such as diabetics are exempt, but those suffering from cystic fibrosis, chronic asthma, hypertension and a variety of dermatological conditions are not;

    —    the blanket nature of some exemptions means that some people with high incomes may be exempt while some people with low incomes may not be exempt; for example, the PCS exempts anyone aged 65 and over and all pregnant women (although the latter could be seen as a means of protecting the health of the foetus); and

    —    it presents a financial barrier to access to prescribed drugs for people with low incomes, particularly those whose earnings are just above the threshold for receipt of government benefits.

  6.  The PCS (along with other NHS charges) undermines a core principle of the NHS, which is to provide services that are free at the point of use (Department of Health 2000).


  7.  There is no optimal level at which user charges should be set. Such a decision will depend on the balance between revenue raised (income), administrative costs (direct expenditure) and the ability to control expenditure. We look at these issues in turn.

Revenue raising

  8.  The revenue-raising potential of user charges may be limited by the existence of protection mechanisms, high transaction costs, fraud or providers' reluctance to enforce charges (Brandt, Horisberger et al. 1980; Evans and Barer 1995). However, increasing the financial burden on individuals lowers equity in access to health care. Those with low incomes are most likely to be discouraged from using health services, while those in poor health will suffer most from lower levels of use. Attempts to exempt these groups of people are not always successful (Brandt, Horisberger et al. 1980) and the claim that any extra revenue raised can be directed towards people with low incomes or in poor health may be difficult to substantiate in practice.

Administrative costs

  9.  The costs of administering the PCS exemptions may be high relative to the amount of revenue generated by non-exempt prescriptions. If the objectives of the PCS are to generate revenue while preserving equity, then the use of prescription charges is a weak instrument.

Expenditure control

  10.  The PCS is unlikely to succeed in controlling expenditure in the long term for various reasons and may encourage inefficient patterns of health services utilisation.

  11.  Prescription drugs are provider-initiated care (that is, initiated by the prescribing doctor, usually the general practitioner, and not the patient). Consequently, a demand-side incentive such as the PCS is unlikely to have much impact on controlling drug expenditure. Supply-side controls such as prescribing budgets and prescribing guidelines are more effective in ensuring the rational use of drugs. Furthermore, total expenditure on pharmaceuticals is generally rising due to increases in the cost per item rather than volume. Therefore, pricing regulation is more likely to have an impact on overall spending than volume controls.

  12.  Prescription charges are a weak instrument for deterring frivolous or unnecessary consumption of high-cost or low-effectiveness pharmaceuticals. As a result of prescription charges a patient may choose not to fill a prescription or not to take a full course of medication by not filling a repeat prescription, but this behaviour might lead to worse health outcomes. Also, because charges apply to all prescription drugs, regardless of whether they are high or low cost, branded or generic, high or low efficacy, they do not encourage cost-effective patterns of drug utilisation or substitution of generic drugs by pharmacists.

  13.  User charges are unlikely to contain health care costs in the long term, as spending on health care is primarily driven by supply-side factors (Evans and Barer 1995).


  14.  Prescription charges in the United Kingdom (UK) are flat-rate payments; regardless of the cost of the drug, the patient pays the same amount, with the remaining cost met by the NHS. Drugs received in hospital or from a hospital pharmacy are not subject to co-payments. The current system of exemptions from prescription charges is extensive, accounting for about 85% of all prescriptions dispensed.

  15.  Lowering the charge could reduce financial barriers for some non-exempt categories of patients.

  16.  The current system of means-tested exemptions means that those who fall just above the threshold are disadvantaged. Raising the income threshold for exemptions would enhance equity but result in revenue losses. It would still leave those whose incomes fell just above the exemption cut-off at a disadvantage. As will all means testing, there is a trade-off between targeting benefits and the need to keep down administrative costs.

  17.  The current system of charges results in inappropriate utilisation patterns. Drugs prescribed in hospital are not subject to any charges, but in an attempt to shift costs to primary care, hospitals are increasingly reducing the amount of drugs prescribed on discharge. This requires individuals to go to their general practitioner for follow up prescriptions after discharge from hospital. The availability of prescriptions for P category drugs leads to a perverse situation in which those who are exempt from prescription charges will go to the general practitioner simply to get OTC drugs on "free" prescription. Some people may try to avoid having to pay prescription charges by going to an A & E department instead of seeing their general practitioner. Standardisation of charging across settings would reduce this problem.

  18.  Updating the list of exempt conditions to take into account developments in drug technology would ensure that the system was more equitable for patients with different conditions. Ensuring that patients with chronic conditions have access to appropriate prescription drugs without financial barriers could have a positive impact on efficiency by reducing inappropriate utilisation of health services due to poor drug compliance. It would also result in a reduction in revenue.


  19.  If the objective is to improve efficiency by promoting more appropriate and cost-effective use of drugs and to reduce expenditure on pharmaceuticals, there appears to be no logic in applying a demand-side measure to a prescribed substance. Furthermore, there is no evidence to suggest that user charges are successful in controlling overall levels of health care expenditure. It would be more effective to introduce supply-side measures aimed at influencing the behaviour of prescribers (general practitioners) and suppliers (pharmacists).

  20.  Abolishing the PCS would remove any financial barriers for those not currently exempt, thereby enhancing equity and bringing drug coverage in line with other NHS services (that is, free at the point of use).

  21.  It would be useful to evaluate the phased abolition of prescription charges in Wales.

User charges in other countries

  22.  There are a variety of different forms that user charges may take in different health care systems. These include:

    —    flat-rate payments: fixed fees per item prescribed or per prescription;

    —    co-insurance: the patient pays a fixed percentage of the total cost of a good or service;

    —    deductible: the patient pays the full costs of goods and services consumed directly out of pocket up to a defined ceiling after which the services are free (costs being met by the insurer or the NHS); deductibles can apply to specific cases or to a period of time (usually a year);

    —    extra billing: the patient pays the difference between the reimbursement value and the actual price of the good or service (see reference pricing, below).

  23.  In the pharmaceutical sector extra billing is often used where a fixed or reference price is set for a group of drugs with similar therapeutic effects. This may be set at the average price of the drugs in the group, the price of cheapest drug in the group or benchmarked to the price of similar drugs in other countries or the price of the generic alternative. The reference price is the amount that the insurer or the NHS pays. If the patient chooses a drug that is more expensive than the reference price, they must pay the difference themselves.

  24.  Other features of user charge schemes exist in other countries:

    —    annual out-of-pocket maximum: in order to limit the total amount spent by an individual in the course of a year, a maximum ceiling may be set on the total amount of out-of-pocket payments; for example, a chronic disease patient who requires a lot of medication might have to pay for their drugs, but if, after nine months, they had reached the out-of-pocket maximum they would not need to pay for drugs consumed in the rest of the year;

    —    variable co-insurance: in some countries different levels of co-insurance (for example, 20%, 50%, 100%) apply to different groups of drugs depending on their efficacy/cost-effectiveness; for example, a 20% co-insurance rate might apply to generic drugs, whereas "lifestyle" drugs with no proven efficacy might carry a 100% co-insurance rate.

  25.  Examples of specific charging policies in different countries and their impacts are evaluated in more detail in Thomson S and E Mossialos (2004), "Influencing demand for drugs through cost sharing" in Mossialos E, M Mrazek and T Walley Regulating pharmaceuticals in Europe: striving for efficiency, equity and quality, Open University Press, which is attached for your information.


  26.  User charges can be used to encourage more cost-effective patterns of utilisation. This is achieved by conveying price signals to users to opt for certain types of health care or follow a particular system of referral or to providers responsible for prescribing treatment (via users) (Brandt, Horisberger et al 1980). Introducing a system of variable co-insurance based on cost-effectiveness aims to increase micro-efficiency. It may also contribute to controlling drug expenditure, as has happened in Italy and New Zealand.

  27.  A variable co-insurance system would negatively affect equity unless there was no charge for effective prescription drugs. Combining co-insurance with other measures such as an out-of-pocket maximum or exemptions for poorer people would help to preserve equity. Depending on how it is introduced, there might be significant costs of obtaining cost-effectiveness information and administrative costs.

  28.  The following suggestions closely follow proposals set out by Walley (Walley 1998):

    —    abolish the flat-rate charge and introduce variable co-insurance rates based on the cost-effectiveness of different drugs, with no charge for effective prescription drugs (see Table 1 below);

    —    all drugs approved by the Medicines and Healthcare products Regulatory Authority and available on the UK market would be assigned to one of the four categories in the variable co-insurance system set out below; the lists would need to be updated on a regular basis; most new drugs would be B or C initially, but a few might be A immediately;

    —    in the short term patients currently exempt might be entitled to B list drugs free of charge to give general practitioners time to adjust their prescribing behaviour and to allow time for evaluation of the reformed scheme; a reduced co-insurance rate for B list drugs might be considered in order to preserve equity for low-income households, although the use of means testing carries administrative costs and is inconsistent with the principle of universality;

    —    protect low-income households and people with chronic conditions from excessive out-of-pocket costs by setting an annual out-of-pocket maximum; this would replace the pre-payment certificates, which currently cap prescription drug expenditure at £33.40 per quarter or £91.80 per year[11].

  29.  Co-insurance rates and cost-effectiveness thresholds would need to be calculated on the basis of information about the value and volume of drugs consumed in each category, the willingness to pay and affordability of different co-insurance rates and the cost-effectiveness thresholds and recommendations of NICE.

Table 1


Co-insurance rate

A—  a selection of effective medicines

—  sufficiently comprehensive to allow treatment of all major conditions

—  free of charge to all
B—  medicines either no more effective than A list medicines or offer minor benefits at a disproportionate cost

—  might require a low co-payment, perhaps related to the cost of the prescription, to a pre-set maximum

—  a maximum cumulative annual co-payment per patient should also be set

—  general practitioners might be allowed to endorse a prescription for exceptional patients who would benefit more from the B list than the A list drug, but would have to justify this
C—  medicines for which effective alternatives are already listed; for example, branded preparations where a generic equivalent is available or which are largely directed at patient convenience, such as many modified release preparations

—  patients pay 50% of the cost of these medicines
D—  medicines not funded by the NHS at all (negative list)

  Source: Walley 1998.

  These views are our personal views and do not represent the position of either the London School of Economics or the European Observatory on Health Systems and Policies

Ms Anna Dixon and Ms Sarah Thomson

London School of Economics

28 February 2006

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