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Having its cake

There is always a tendency for government departments to want to have their cake and eat it as they contemplate the spending of their vast budgets. This can be seen in the Department of Health’s response to the long-awaited report on reforming the market for generic medicines following the problems in 1999.

The Oxford Economic Research Associates (OXERA) report was rumoured to have been delayed because it found that the operation of the generics market was more complicated than mere mortals could understand. Likewise, the desire to produce easy solutions has been frustrated by the complexity and opaqueness of the current market and the perverse incentives that any changes could introduce.

The Department of Health is to consult industry representatives on two options for change (see p109). These are a reference-based, or fixed, price scheme which would extend the current maximum prices scheme — which looks like the manufacturers’ least worst option — and the introduction of a competitive tendering process. Both are fraught with difficulty.

The reference-based scheme highlights the department’s schizophrenic approach to discounts. The OXERA report acknowledges that keen negotiating by pharmacists has for many years gradually forced prices down, although they have never been given any acknowledgement or reward for this work. It is the incentive of beating the clawback which inspires trading pharmacists, as OXERA calls them, to sweat what profits they can out of the system. These profits have always been jealously eyed by the government, but they are the oil that makes the system run at all. Attempting to squeeze all the profit out could reduce the competition the Department wants to see and risks undermining the viability of the community pharmacy network.

Central tendering could force prices down by £30m, OXERA believes (a drop in the ocean of National Health Service spending). However, it risks setting up a costly and bureaucratic new government agency which sucks away part of the savings as its running costs. The logistical problems of distributing centrally purchased stock also look formidable.

The Department of Health is right to be concerned about getting value for money from the amount it spends on generic medicines. It is also right to be concerned that it appears to have little idea what is actually happing in the market place. However, it must realise that in a competitive and dynamic market, it cannot have its cake by setting the price of every last pack of tablets and eat it by seeing prices falling and community pharmacists providing patients with the pharmaceutical service they need.

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