How much does the NHS spend on drugs per year?


According to the most recent data from NHS Digital, in 2017/18 the overall drugs cost at list price in the NHS, before any discounts, was £18.2 billion.


This is an increase of 4.6% from £17.4 billion in 2016/17 and an increase of 39.6% from in 2010/11.


Hospital drug use accounted for just over half (50.4%) of the total at £9.2 billion (2017/18). In fact total hospital costs are up by 10.8%, compared to a 1% decrease in the primary care sector over the most recent year.


How are prices set in the UK?


Pharmaceutical products in the UK are priced by the manufacturer and are not subject to direct price controls.


Companies set the price of drugs based on a number of factors, including the number of patients it will benefit, how many similar drugs are on the market and the price of competing products.


Although, there are no direct price controls in the UK, the price of pharmaceutical products are controlled via indirect processes, discussed below.


The prices that the NHS will pay for a pharmaceutical product are published monthly in the drug tariff. This price is known as the list price and is normally what pharmacists will be reimbursed when they dispense the product.


How do prices in the UK compare to other countries?


It is not easy to compare drug prices across markets due to the complicated nature of rebates and discounts that operate. It is however clear that drug prices in the UK are much lower than in several other developed markets and substantially lower than in the USA.


In 2017, the Commonwealth Fund investigated why health spending was so much higher in the USA, than in nine other developed markets, despite similar drug usage. Its conclusion was that “While drug utilization appears to be similar in the US and the nine other countries considered, the prices at which drugs are sold in the US are substantially higher.”  The report noted that the reasons for markets outside the USA, having much lower prices included certain price control strategies, like centralised price negotiations.


One example of high prices in the USA compared to the UK is the cost of insulin. A BBC story reported in March that retail prices in the US are around £220 per vial, for all insulins from the three major brands that control the market.


By comparison in the NHS there is no insulin listed that costs more than about £20 for one vial and many are much cheaper.

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How does the NHS keep prices low?


For a pharmaceutical company, the NHS in the UK is the country’s market; the private healthcare market is tiny in comparison to the NHS. If the NHS won’t buy your products then you have no real market share. Such centralised buying power gives the NHS the upper hand to a great extent in pricing negotiations and discounts based on volume sales.


On top of this buying power, prices are controlled through a number of indirect methods, including: a voluntary agreement between the industry and the government that covers the profit that company’s can make on drugs; and for new drugs, an assessment by the National Institute for Clinical Excellence (NICE) of cost-effectiveness prior to a recommendation for use.


What agreements are there between the pharmaceutical industry and the NHS?


In the absence of direct price control mechanisms, successive UK governments have for many years relied on agreements with the pharmaceutical industry and market competition to keep drug costs from spiraling out of control for the NHS.


There is a voluntary agreement, renegotiated every five years, between the Association of British Pharmaceutical Industries (ABPI) and the Department of Health which covers the vast majority of branded products, i.e., those still covered by patents.  


Under this scheme, originally known as the Pharmaceutical Pricing Regulations Scheme (PPRS), the industry members agree to a variety of measures to control prices and spending by the NHS. The primary control is the payment mechanism, whereby members of the scheme make payments ‘back’ to the NHS if growth in NHS spend on branded medicines supplied by the scheme’s members exceeds an agreed percentage.


In January 2019, the PPRS was revised and renamed the Voluntary Scheme for Branded Medicines. The cap for increase in costs to the NHS was set at 2%. If in any of the next five years, the rise in drug spending by the NHS is above 2%, then the industry that has signed up to the scheme is required to pay back the NHS the overspend.


Around 80% of branded products are covered by the voluntary scheme. Branded products not covered by the scheme are included automatically in a statutory scheme, which also has a payback mechanism.


What products aren’t covered by the voluntary or statutory scheme?


Generic medicines, those that are not protected by patents, are not covered by any price control scheme. UK governments have relied on market competition to control the prices of these products. This has worked to a large extent, generic versions of best-selling branded products are sometimes 90% cheaper than the original branded products.


There has been a problem, however, with relying on market competition. Although a product may be old and produced as a generic, it will not necessarily have many or in some cases any competitors on the market. Some manufacturers took advantage of this situation and hiked the price of a generic product year-on-year knowing that there could be no comeback.


There have been cases where prices for some generics rose dramatically leading to a sudden increase in NHS costs. An article in Pharmaphorum reported that dramatic price increases included the anti-epilepsy drug phenytoin sodium, the price of which was reportedly increased by up to 2,600%.


The Competition and Markets Authority (CMA) has investigated these cases of dramatic price hikes. A change in law in mid-2017, however, should close the ‘loophole’ in the existing legislation that prevented the control of prices of unbranded generics supplied by companies that are members of the voluntary scheme for branded products.


What other ways does the NHS control prices?

New innovative products are assessed by NICE (National Institute for Clinical Effectiveness) for cost-effectiveness, using measures of improved ‘quality of life’ compared to existing therapies. If NICE considers that the drug’s effect on quality of life is not great enough to justify its price tag, then the drug is not recommended for use by the NHS.


The decisions by NICE often lead to discussions and negotiations with the manufacturers and the result is often a deal under which the NHS pays a lower price for the drug.


In particular, new medicines that NICE considers to be cost-effective, but which would cost more than £20 million in any of its first three years on the market are subject to price negotiations, in an effort to reduce the price. Unless a deal is reached, then NICE can delay access to the drug.


NHS England and individual NHS organisations also undertake negotiations with manufacturers for discounts, such as those based on volume use. In November 2018, NHS England negotiated five deals with five manufacturers to get a cheaper version of one of the most expensive drugs used in the NHS, adalimumab, used to treat rheumatoid arthritis.



What happens when the drug pricing mechanism doesn’t work?


Recent years have seen a number of situations where the drug pricing mechanism has failed and NHS patients have been unable to access certain drugs.


The failure to agree a price for Vertex’s Orkambi, to treat cystic fibrosis, has resulted in many patients being unable to access what is the only treatment for this condition. Vertex is refusing to reduce its price for the product, which the NHS says it can not afford.


As already noted, in other cases, generic manufacturers have taken advantage of a loophole that existed for generic product prices and priced the product so high that the NHS has restricted its prescribing. This has led to patients either not receiving the drug or buying overseas where the drug is much cheaper.


What will happen to drug prices post Brexit?


Drug prices and costs for the NHS will inevitably rise sharply under a no deal brexit  scenario, according to the Nuffield Trust, which has investigated the scenario using data and reports from multiple sources. The estimate was produced in November 2018, but the scenario still holds if we leave without a deal in October. Other versions of brexit will also increase the price of pharmaceutical products but by varying amounts.


According to the Nuffield Trust, a no deal brexit will increase the cost of unbranded (generic) drugs by £830 million and branded drugs by £920 million by the end of 2019/20.


Overall, the cost to the NHS is estimated to be £2.3 billion by the end of 2019/20.


Some of these increased costs have already happened due to the effect on prices of the drop in the value of sterling after the EU referendum. Mark Dayan estimates that this seems to have added around £500 million to the NHS trust deficits in 2016/17.


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