News: Fixed prices or competitive tendering: latest options for generic medicines

The Pharmaceutical Journal Vol 267 No 7158 p109-114
28 July 2001

Fixed prices or competitive tendering: latest options for generic medicines

Following a fundamental review lasting almost two years, the Department of Health is putting forward two options for achieving greater control over the market for generic medicines. The first is a reference-based, or fixed, price scheme using the prices charged by manufacturers plus a wholesale distribution margin. The second option is to introduce competitive tendering for some or all of the generic medicines used in the National Health Service. However, concerns have been expressed as to whether either of these schemes will work.

Reference pricing

In order for a reference-based or fixed price scheme to work, the Department of Health would need to gather significantly more information about the prices actually charged for generic medicines than it does at present. The consultation document envisages manufacturers and wholesalers supplying data for the majority of generic lines on a monthly basis. This would be used to set an NHS price for each presentation (form or strength). The reimbursement price for community pharmacies would generally be based on the NHS price plus a wholesale margin which reflected the cost of wholesaling and encouraged pharmacies to seek out the best deal. Arrangements would need to be made to take into account agency schemes, direct sales to pharmacies, internal company transfers and any stock or volume discounts.

Competitive tenders

Central competitive tendering for generics would be a major change in the way that the market currently works. The OXERA report says that savings of around £30m in the short-term could be made, based on experience overseas. Problems could be the establishment of a costly tendering system together with long-term problems in maintaining supply and competition in the market and avoiding collusion or bid-rigging. OXERA favours a rolling system of contracts, with the total contract for any product split into, for example, six parts and awarded at four-monthly intervals to more than one supplier.

The whole problem of how centrally purchased generics would be efficiently distributed to individual pharmacies appears to be the largest hurdle to overcome. Two approaches are suggested for distribution: distribution by wholesaler or distribution under contract. The first would see wholesalers buying product from contracted suppliers and distributing it as at present. A central clearing house might be needed to avoid wholesalers discriminating between suppliers. Alternatively, wholesalers might be given contracts to distribute given preparations. This could lead to an increase in orders and deliveries for pharmacies.

The department issued a consultation document, “Options for the future supply and reimbursement of generic medicines for the NHS”, on 23 July. The document outlines the problems which occurred in the generics market in 1999, the results of the review carried out for the department by Oxford Economic Research Associates (OXERA) and details of how the two options might work and their possible benefits to the NHS. The consultation document and full copies of the 222-page OXERA report are available from the Department’s website (www.doh.gov.uk/generics).

Department of Health sources told The Journal that a full discussion of the two options was sought. The document reached no conclusions and other proposals which might help the department to reach its objectives of securing value for money for the NHS and supporting a competitive market would be welcomed, as long as they did not imply a return to the situation which existed at the start of 1999. The consultation process lasts until 22 October. The Department is also consulting on the current maximum prices scheme which it envisages being rolled forward for another year while discussions on the two new options proceed.

The OXERA report did not provide all the answers but it had been a useful analysis, the Department believed.

The department says that the problems in 1999 revealed a number of weaknesses in the generics market, particularly a lack of transparency over the nature of the market and prices. It says that in some cases manufacturers’ price lists appear to be produced solely for the purposes of satisfying the requirements of the Prescription Pricing Authority. Prices are most opaque to the ultimate payer — the NHS. It adds that vertical integration — the growth of wholesaler owned chains — has increasingly undermined the independence of the market and NHS inquiries into discounts achieved by community pharmacies. Vertical integration is expected to increase.

Other options put forward but rejected by OXERA include a windfall tax on excessive profits made in 1999 (rejected as difficult and discouraging to future investment); reforming the Drug Tariff and discount inquiry (some of which will take place as the use of information technology increases); and enforcing separation between wholesalers and pharmacy chains (seen as complex, time-consuming, meeting serious resistance from industry and probably unsuccessful).

The British Generics Manufacturers Association welcomed the consultation and said that it would be considering its response in detail. The association would not be drawn on commenting on either of the two options put forward by the department.

Michael Watts, executive director of the British Association of Pharmaceutical Wholesalers expressed concerns about whether competitive tendering would be viable in practice. Open competitive tendering under European rules might lead to British generic manufacturers being undercut by overseas suppliers. Distributing centrally purchased stock would be problematic as none of the pharmaceutical wholesalers would be able to offer a full distribution service to every pharmacy every day.

However, the BAPW was pleased to be included in the consultation process and would be setting up a working party to consider all the issues in detail.

John D’Arcy, chief executive, National Pharmaceutical Association, said that the OXERA report covered a lot of complex issues. Any new scheme had to be conducive to supporting the community pharmacy network and to ensuring that patients received continuity in the supply of their medicines.