Select Committee on Health First Report

6  Drug pricing

Current system

300. The Pharmaceutical Price Regulation Scheme (PPRS) is a mechanism for determining the profit made by drug companies through the sales of branded medicines to the NHS. The scheme is negotiated every five years by the Department of Health and the Association of the British Pharmaceutical Industry (ABPI). The broad outlines of the Scheme are published but the details of any negotiations are not reported, with most information involved treated as commercial in confidence. The objectives of the PPRS are to:

301. There are three main operating principles:

Allowances for innovation and marketing expenses are built into the PPRS. Generic preparations are not considered under the scheme.

302. Various problems with the PPRS have been reported. For instance, it has been argued that the profit cap has no effect and profit repayments are extremely rare. Companies may report higher assessed costs of drug development rather than higher profits. There have also been complaints about the lack of transparency of the scheme.[292]

303. The perceived limitations of the PPRS in achieving value for money for the NHS, in addition to the lack of independent review of the scheme since its establishment over 50 years ago, led the Office of Fair Trading (OFT) to examine the PPRS in detail. The OFT produced a report on the subject, which was published in February 2007.

The OFT's findings

304. The report highlighted the fact that, under the PPRS, two drugs for the same condition that have a very similar level of benefit to patients, may vary by up to 500% in price (ie. the difference between a branded drug and a generic version). This indicates that value to the patient has no effect on the price of the product. It also found that the profit cap had a negligible impact, with only 0.01% of payments affected. The system of price cuts was criticised as ineffectual. Simeon Thornton, formerly of the OFT, who led the investigation, told us that the findings indicated that the PPRS was no longer "fit for purpose".[293]

305. The report concluded that a system of "value-based pricing" whereby each drug would be reviewed and priced "in accordance with the clinical benefits it produces relative to an appropriate comparator" would offer better value for money to the NHS. The OFT's recommendations for such a system included:

  • all new active substances would be assessed to determine cost-effectiveness before they came onto the market (ex ante) through a fast track appraisal process;
  • the existing stock of drugs would be assessed on a rolling basis through ex post reviews;
  • risk-sharing contracts could be agreed in principle if there was insufficient information at the time of launch to reach a robust view on the cost effectiveness of a drug;
  • different pricing arrangements could be negotiated to accommodate situations in which value differs by indication and / or subgroup;
  • The price of branded drugs should fall once a generic version enters the market.

The OFT recommended that NICE should play a key part in the new system of value-based medicines pricing.

Government response

306. The Government issued an 'interim response' to the report. It neither accepted nor rejected the proposals for a system of value-based pricing of drugs. It stated that the PPRS had been effective in the past, had contributed to a "stable pricing regime" and had helped "sustain a strong pharmaceutical and bioscience industry". It added, however, that:

we agree with OFT that encouraging cost-effective prescribing is crucial and we will continue to explore further opportunities in this area.[294]

307. The Government agreed that better mechanisms were needed to ensure that the NHS paid a fair and affordable price for medicines. It added that the uptake of cost-effective medicines needed to increase. However, the response indicated that any new pricing system must "encourage research and reward innovation". The system must also provide a stable market for industry.

308. Discussion between the Government and the pharmaceutical industry is ongoing. The Minister could not tell us when the Government's final response to the OFT's report would be published. She said negotiations were ongoing:

We have given our interim response and it would be inappropriate for me to go further because of the negotiations starting on the PPRS. I feel I am caught here between a rock and a hard place…

I am not trying to be unhelpful, I am saying I can only lay out the principles. I am acknowledging the points you are making but we now need to proceed with those detailed negotiations.[295]


309. The evidence we received revealed much support for the OFT's recommendations in principle, but many voiced concerns about how such a system would work in practice. The main issues were:


310. Mr Thornton, who led the OFT's investigation, told us that the PPRS does not reward companies for producing the best medicines and as such does not ensure value for money for the NHS. Although it encourages innovation, the PPRS does not send the right 'signals' to drug developers:

PPRS profit and price controls take no account of the value to patients of the drugs companies are producing.[296]

311. Professor Adrian Towse of the Office of Health Economics agreed that the PPRS encouraged the development of new medicines but admitted that it had little effect on the price of medicines relative to each other. This means that the cost of similar drugs may vary greatly and the production of drugs that are valuable to the NHS and those that are not are both rewarded:

[The PPRS] does not incentivise efficient relative prices. That is not its job.[297]

312. Some witnesses argued that innovation should be encouraged for its own sake, as it was likely to lead to overall benefit to patients in the long term. Medicines manufacturers in particular claimed that small improvements in product profiles were necessary in order to achieve significant gains over time. Professor Peter C Smith told us that innovation should be promoted in certain circumstances:

There may however be reasons beyond health benefits why one may want to accept certain therapies, for example perhaps for the research benefits that it confers and the promise of longer-term benefits in terms of cheaper therapies in future.[298]

313. However, many witnesses told us that the current system did not promote the development of drugs that would most benefit NHS patients, yet there was an expectation that products would be purchased simply because they were new. Professor Karl Claxton from York University stated:

It is rather like saying that everybody should be compelled to buy the first generation iPod on the basis that if they do maybe Apple will produce a product that people will buy without being compelled to do so. It over-incentivises innovation in things that are not of value to the healthcare system.[299]

314. Professor Towse argued that innovation and development in areas of unmet need should be encouraged through better prescribing, rather than changing the pricing system. If prescribers gave patients medicines that were both valuable to the patient in terms of health benefit and represented value for money for the NHS, this would indirectly encourage the development of better, and possibly cheaper, medicines. Increased demand would lead to increased supply of the type of products needed by the health service. He told us:

You do not need to force down prices; you just need doctors to change their prescribing.[300]

He claimed that we need "a better version of what we currently have"[301] rather than a completely new system.


315. A system of value-based pricing would require evaluation of products individually at the time of launch. We have already discussed the limited public evidence that is available and the associated difficulty of assessing medicines at this point. There was much concern that the value of new products would not be demonstrated fully, and that this would lead to adoption of a lower than justified price. Professor Towse told us it would be "hugely constraining" to provide all the necessary information before launch:

It is unrealistic to assume that everything must be on the table before the drug is launched. We should not allow ourselves to get the NHS into a position where that is the case. We must be able to collect good quality evidence once the product is launched.[302]

316. Others agreed that the value of some products was unlikely to be clear just after products were licensed.[303] Dr Richard Barker from the ABPI stated that determining value at launch would be difficult in the real world:

So [the OFT's] proposal of value-based pricing sounds very straightforward but I think anybody who has looked at their recommendations very closely will realise that it is actually very hard to do in practice.[304]

317. Professor Jon Nicholl from the University of Sheffield told us that there would always be uncertainty about the benefits and risks of medicines at launch. Moreover, it might not be possible to resolve these uncertainties, even with additional research.[305]

318. As we discussed earlier, the provision of better evidence at launch would allow more effective evaluation of whether medicines are appropriate for use in the NHS. If the benefits are proven, it was argued that it would be easier to determine a suitable price.[306] Professor Claxton recommended that a product's price should be linked to the evidence that proves its efficacy:

A link between price and the value of evidence provides incentives for manufactures to invest in the type of evidence needed by the NHS early in the development of their products.[307]

319. On the other hand, it must be possible to determine appropriate prices for medicines using the information that is currently available. Public authorities in France and Australia carry out medicines pricing and, most importantly, medicines manufacturers themselves are able to determine prices they believe to be suitable for their products.


320. Companies were concerned that a value-based system would drive down the prices they are able to charge for their products. Professor Towse admitted that companies currently charged, "what they think the market will bear and what returns they can get".[308] This would not be possible with value-based pricing.

321. Some witnesses argued that lower drug prices would be a positive outcome.[309] Dr Kiran Patel told us:

If drugs were cheaper we would not be having a lot of the debates that we have today.[310]

322. On the other hand, Professor Claxton stated that drug prices overall need not fall, if the value of medicines to the NHS is proven:

It is perfectly possible that the overall NHS spend on branded drugs may increase, particularly if new and valuable pharmaceuticals which can command higher prices are developed.[311]


323. The inclusion or exclusion of generic drugs in cost-effectiveness analyses could affect prices charged under a value-based system. The industry argued that the price of branded, on-patent drugs should not be compared to generics.[312] New, branded, products are likely to be considerably more expensive than similar generic versions, and therefore appear poor value for money. At the same time, if a drug is innovative and represents incremental value to patients, there will be no generic version. According to Mr Thornton it makes no sense to exclude generic medicines from cost-benefit analyses of new products:

Given the limited resources the NHS has at its disposal, it cannot afford, on grounds of both efficiency and fairness to patients, to ignore relevant comparators on the grounds that they are 'too cost effective'. If the best available treatment is a generic, then treatments must demonstrate their benefits in relation to the generic to receive higher prices…[313]

He added that consideration of cheaper alternatives was necessary to give companies the right incentives to invest in areas of greatest medical need.

Threat to industry

324. Medicines manufacturers have threatened to move their research, development and manufacturing interests elsewhere, possibly in response to the prospect of lower prices. Some witnesses dismissed these threats as "red herrings", however.[314] Mr Thornton stated:

there are lots of explicit drivers for where investment takes place, such as having good clinical trial networks, financial incentives, tax incentives and a well skilled labour force. There is a question as to whether that sort of threat is really credible.[315]

Professor Nicholl added:

There is every incentive for the companies to continue to conduct R&D here. As to why they are against [a value-based pricing] scheme, a rather sinister voice whispers to me that perhaps the products are not quite as effective as they would have us believe.[316]

325. On the other hand, UK prices for medicines may affect prices in other countries. The UK medicines market represents only 3% of global sales, so the direct effect of changes to how the NHS pays for medicines on overall revenue would be small. However, many other countries use the UK as a reference point for setting their own prices. Witnesses estimated that such countries constituted about 25% of global demand for medicines.[317]

326. Drugs manufacturers indicated that they might prefer not to bring products to market in the UK rather than risk many other countries adopting a lower price.[318]

Risk sharing and drug pricing

327. The OFT report recommended that the problems of price setting with limited data and uncertainties about treatments at launch could be mitigated using risk-sharing schemes. The financial risks associated with uncertainty due to lack of evidence would be split between the NHS and the manufacturer. As Professor Peter Smith told us:

There are three [possible] approaches to take. One is to wait and do more research; one is to take a provisional decision that one may reverse in the future; and the other is in some way to get the companies to share the risks of accepting the drug early.[319]

328. Key to effective risk-sharing is the adequate measurement of the effects of treatment following its introduction to the NHS. Witnesses told us that "monitoring studies" should be conducted to determine whether the NHS or the manufacturer should pay for the treatment. According to Professor Jon Nicholl, an initial price may be set, based on best estimates of efficacy:

At a later date when the monitoring study is concluded, the cost-effectiveness of the treatment can be recalculated, and the appropriate NHS price of the drug reviewed. If the treatment is less cost-effective than previously estimated there may be reimbursements paid for earlier treatments, as well as a change in the price paid for future treatments.[320]

329. Professor Claxton agreed that a lower price could be set initially, while such studies are carried out, to ensure that the NHS does not lose out financially:

If the type of evidence required cannot be provided with provisional approval, then price ought to be reduced so that the cost-effectiveness of the drug is not uncertain.[321]

330. However, there are problems with this approach. They include the difficulty of imposing clinical trial conditions in the real world of the NHS. According to Professor Nicholl, the universal availability of drugs used under risk-sharing schemes means that there are no comparator groups and no controls. This means that the uncertainties observed initially are not resolved:

One cannot collect evidence which says that the outcomes for patients who are being treated by the treatments being made available under a risk-sharing scheme are better than for patients not being treated by those drugs. In turn the consequence is that we cannot resolve the uncertainties in the cost and effectiveness as we try to do in the first place. [322]

331. Such studies are expensive, and who should pay must be determined. Professor Nicholl and others stated that they should be publicly funded, possibly with a charge to industry to cover the cost of acquiring the information or consideration of the cost when determining the price of a product.[323]

332. NICE and the Department of Health have recently accepted a risk-sharing scheme for the multiple myeloma drug Velcade (bortezomib)[324] and the OFT report indicated the positive aspects of risk-sharing. However, significant problems have been observed with such schemes in the past. The scheme to evaluate the benefits and risks of beta interferon and glatiramer for multiple sclerosis does not appear to have been successful (see box below for details). Witnesses warned that "we should be wary of rushing into this as a generalised mechanism".[325]

333. Some treatments may be more suitable for risk-sharing than others. Bortezomib, for example, lends itself to such a scheme because there is a protein marker that indicates whether a patient has responded to the drug or not.[326] Dr Barker told us that such markers were likely to be more common in the future:

increasingly we are developing markers of response and so it will be more practical for medicines to be given with a marker of response as a diagnostic so that everybody has the confidence, the patient has the confidence, the clinician has the confidence, the NHS has got the confidence that this is being given to a patient for whom it will work.[327]

334. Professor Nicholl also indicated that risk sharing schemes would be suitable to determine the relative prices of two treatments where patients and clinicians have not yet decided which treatment is preferable.[328]
Example of the multiple sclerosis risk-sharing scheme

In January 2002, NICE refused to recommend beta-interferon and glatiramer for patients with multiple sclerosis as the cost per QALY for treatment was judged to be too high. The manufacturers of the drugs came to an agreement with the Department of Health whereby the drug could be used in the NHS as part of a long-term trial. It was agreed that if the drug was less effective than £36,000 per QALY, industry would recompense the NHS.

The evaluation is to take 10 years. Sheffield University signed a contract with an MS organisation, four medicines manufacturers and the Department of Health (industry division) for an initial three years. Sheffield researchers wrote a three-year report which was submitted last year. The next seven year contract then went to tender and Sheffield did not bid. In evidence to the Committee, Professor Jon Nicholl, who led the study, suggested that there were problems with the scheme.

Details of the scheme have not been publicised and the report from Sheffield is not in the public domain, but there are indications that the study will not yield reliable information about the beneficial effects of the drugs.[329]

Professor Nicholl told us that the evidence obtained from schemes that used historical controls, such as the MS scheme, was "weak". He stated that his university had decided not to bid for the rest of the contract because, "we were less certain about the ability of the scheme to deliver the science that we hoped it would."[330]

Box 4.

335. An alternative to risk sharing is NICE's recommendation that technologies may be used in the NHS but only in the context of research. This recommendation is made when therapies or procedures do not have strong enough supporting evidence but appear to be promising. It has been argued that an 'only in research' recommendation is a more suitable way of dealing with uncertainty than risk-sharing, because the technology is given in a controlled manner and is not open to all prescribers. It is therefore possible to gain more robust evidence.[331] The approach is supported by NICE's Citizens Council. However, it is hard to implement an 'only in research' recommendation. For instance, there is no way of ensuring that the work is done and there are no criteria for when the recommendation should be made. Such a recommendation is therefore not attractive to Appraisal Committees.

Potential role of NICE in drug pricing

336. Altering the drug pricing system in line with the OFT's recommendations could mean large-scale changes for NICE. The expertise of the Institute would be used in helping to determine the prices of drugs. As a consequence, it would be required to advise on the clinical and economic value of medicines prior to launch.

337. Witnesses thought that NICE already carried out some of the work that would be necessary to introduce a system of value-based pricing.[332] Professor Claxton stated that a stronger version of the current technology appraisal process could be used:

NICE is already conducting the kind of analysis that would underpin such negotiation…I believe that existing processes would have to be strengthened. The principles that underpin the STA are correct and provide a suitable basis, but at the moment all the appraisal committee has to do is decide whether or not it believes that at a given price the product is cost-effective. Is it above or below a certain threshold? Here the demands will be a little greater.[333]

338. Some witnesses indicated that there would be benefits of involving NICE in price negotiations beyond the NHS paying a higher price for valuable medicines and lower price for less beneficial drugs. Dr Crayford stated that such a move could also reduce the perception within the NHS that new products cost too much. He told the Committee:

There is certainly a lot of cynicism in the NHS more widely about the cost …and that may go some way to ameliorate that.[334]

339. The OFT report recommended that NICE could work with the SMC and the All Wales Medicines Strategy Group to advise on the value of all new medicines.[335] Some witnesses wondered if this arrangement in the devolved health services was workable.[336]

340. Other witnesses thought that NICE should not be involved in drug pricing at all. Dame Gill Morgan from the NHS Confederation stated that the issues of price and cost-effectiveness should be kept separate:

The Appraisal Committees are set up to do the scientific analysis about the effectiveness, the risks and the cost benefit. If you start to bring price into that as a variable, I think it would so change the discussion and the debate in those groups that you would not get the decision about cost-effectiveness which I think is a jewel in the crown of NICE.[337]

341. While Mr Dillon stated that he was "intrigued" at the possibility that NICE could become involved in drug pricing[338], Professor Rawlins warned that no changes should be introduced that would reduce the standards of evaluation used by the Institute. He added that any changes to the system should be introduced gradually:

we would not wish in any way to change our standards or robustness or anything like that, and, secondly, I do not think it is possible to suddenly do it. It is not just the amount of money we have to set up the committees and the staff and everything, but there just are not enough health economists around or that sort of expertise around in the country…it would be a massive workload[339]

342. Elsewhere in the world, the organisation that determines best use of medicines is also closely linked with price determination. In France, for example, the Transparency Commission assesses all new medicines, once licensed, before a price is set. Recommendations from this group are passed on to the Economic Committee for Health Products, which negotiates with industry to fix the price of drugs and devices.


343. Given that discussions between the Government and the pharmaceutical industry on future drug pricing arrangements are already underway, we do not make any firm recommendations on how a future system should operate. However, we agree with the Government that better mechanisms are needed to ensure that the NHS pays a fair and affordable price for medicines. Any change to the system of medicines pricing is likely to have profound consequences for NICE and the Institute should be involved in any changes that might affect how it works. Moreover, it should be funded for the alterations in practice it might be required to make.

344. We recommend that risk-sharing schemes be used with caution. They should not be used as a catch-all in cases of uncertainty over a drug's benefit. The Department must bear in mind the evidence that will be foregone in such cases. Uncertainty would be better addressed by the careful design and performance of a publicly funded randomised controlled clinical trial. Better use should be made of NICE's 'only in research' recommendation in this regard.

345. The short evaluation of all medicines at launch, which we recommended earlier, could be established in such a way that negotiations on drug pricing could be incorporated into the process. The NICE evaluation process could also take account of potential improvements in subsequent data about clinical and cost effectiveness, and its consequences for product pricing.

290   This means that if companies make profits above a certain level, they must refund the NHS a certain percentage of the income Back

291   This enables companies with product portfolios to adjust to competitive circumstances-ie. their revenues would otherwise be falling-at cost neutrality to the NHS Back

292   This was covered in our report on The influence of the pharmaceutical industry, Fourth Report of Session 2004-05, HC 42-I Back

293   Q 435 Back

294  Back

295   Q 741, 742 Back

296   NICE 119 Back

297   Towse A, Health Economics 2007; 653-665 Back

298   Q 180 Back

299   Q 439 Back

300   Q 440 Back

301   Q 459 Back

302   Q 457 Back

303   Q 428 Back

304   Q 429 Back

305   Q 461 Back

306   Q 522 Back

307   NICE 116 Back

308   Q 441 Back

309   Q 186 Back

310   Q 284 Back

311   NICE 116 Back

312   Q 398 Back

313   NICE 119 Back

314   Q 485 Back

315   Q 485 Back

316   Q 487 Back

317   Q 505 Back

318   Q 421 Back

319   Q 190 Back

320   NICE 117 Back

321   NICE 116 Back

322   Q 510 Back

323   Q 516, 522 Back

324   The NHS will pay for patients who respond to treatment; the manufacturer will meet the cost of treatment for patients who do not respond Back

325   Q 413 Back

326   Ibid Back

327   Ibid Back

328   Q 511 Back

329   RSM Back

330   Q 515 Back

331   Chalkidou K et al, Journal of the Royal Society of Medicine 2007, 100: 453-460 Back

332   Q 502 Back

333   Q 458 Back

334   Q 358 Back

335   Q 463 Back

336   Ibid Back

337   Q 360 Back

338   Q 712 Back

339   Q 117 Back

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