The Pharmaceutical Journal Vol 267 No 7177 p827-828
8 December 2001

Guild of Healthcare Pharmacist Procurement and Distribution Interest Week :
Overcoming the Weakest Link

Reforms for the supply of medicines in primary care

Centralised purchasing, familiar to those in the hospital service, was one of the options recommended in a report commissioned by the Department of Health from Oxford Economic Research Associates (OXERA). The project leader, Dr Helen Jenkins explained that they had been asked to explore remedial and radical reforms for the supply of medicines in primary care to ensure that the National Health Service got the best value for money.

The landscape for the project was one in which the NHS drugs bill was increasing and the proportion of generic medicines was rising. The community penetration of generics in the United Kingdom was one of the success stories for generic prescribing, said Dr Jenkins, and this had resulted from the far-sighted policy decision to persuade doctors to prescribe generically. This pattern gave great strength to the UK market.

The NHS could make better use of its buying power in the community sector, said Dr Jenkins. There appeared to be two key issues — first, an uncompetitive element in the generics market and second, a principal agent problem — structural changes were weakening the underlying rationale for reimbursement. Dr Jenkins explained that the existing system assumed that pharmacists worked as independent agents and therefore had strong incentives to purchase better and drive prices down. As soon as integration occurred, such a system would cease to function effectively, she noted. A further problem was lack of transparency with prices. OXERA had discovered that a product could have many different prices — discount, brochure, Drug Tariff, hospital etc — and sometimes the price paid was 80 per cent lower than the list price (for reimbursement).

In framing its advice, OXERA had started from the standpoint that the generics market was inherently competitive and that the competitive forces should be used by the NHS to ensure that it met its objectives. In the interim the DoH had instituted a maximum price scheme, and, not surprisingly, said Dr Jenkins, prices had moved up to the maximum permitted levels. Transparency was often difficult to achieve because of the vertical integration in the supply chain.

A competitive market was good at delivering value for money but did not always deliver supply continuity or security — two elements that were important for the NHS. The NHS needs to think carefully about what margins it would allow in order to reward innovation. A more subtle issue was the way in which community pharmacists functioned in the bigger picture. There was an external benefit to the NHS from the triage role played by community pharmacy and this was not readily rewarded within the competitive framework. If a competitive system seemed appropriate, then the biggest entry barrier was always the investment required by the generics company to obtain a UK product licence, but other factors included the dosage form, the size of the market, and patent strength.

The next step was to segment the market and examine how different groups of products would behave in a competitive environment (see Panel). The "risky" products were those which gave cause for concern. "Any system would leave the NHS with concerns about these," said Dr Jenkins. It would also need to be sure that the chosen system did not drive more products into this category. Products were classified as being risky if there were concerns about the price (market access issues) or supply security. A case in point occurred a few years ago when there appeared to be many suppliers for some generics — only upon the closure of Regent was it discovered that they all came from the same manufacturing plant. Another key element in the system was the judgement of chief buyers. These were often highly skilled and able to trade off short-term and long-term gains effectively. These skills would need to be developed in the community sector.

In a competitive system, if the price rose then more products came into the market, which may work in the long-term interests of the NHS. Considering how the different market segments would perform in relation to the regulatory aims of the NHS, Dr Jenkins said that in the "no concern" group, the system should ensure price transparency and the NHS should reap the benefits. In the "risky" group, the broad aim would be to ensure that entry conditions were favourable (to increase the number of products) and that branded products continued to exist (to ensure supply security). In the "problematic" group, where there was no apparent risk to supply security, but there was uncertainty as to whether the market price reflected the manufacturing cost, competitive tendering offered the potential for the highest gains. Dr Jenkins pointed out that the main risk of competitive tendering was the potential loss of unsuccessful players, leading to a monopoly situation. The NHS needed to guard against the "all or nothing" mentality where firms threatened to move their operations out of the country, if unsuccessful. A successful tender enabled the manufacturer to plan but the purchaser was still at risk of supply disruption. Penalty clauses and splitting the order into tranches offered the purchaser some protection here, she added.

Key conclusions of the report were that the existing competitive forces should be harnessed, transparent market mechanisms should be used to ensure that the NHS benefited and that the underlying entry incentives should be improved. Possible strategies included, increasing competition in the marketplace, introducing competition for the market or modifying the existing system by reforming reimbursement and increasing the amount of information.

One questioner pointed out that community pharmacists derived a portion of their income from the profit on generic medicines. Dr Jenkins said that the economist’s answer would be to "pay for what you are getting". Community pharmacists should be rewarded for their triage and information-giving roles. "This is not about nationalising; it is about rewarding for advice," she said.

Future prospects for wholesaling

Pharmaceutical wholesalers would survive only if they became logistics providers, predicted Richard Platford, Pricewaterhouse Cooper. Analysts had shown that on average in Europe, for every 100 euros spent on medicines, the manufacturer received 66 euros, but 34 euros were spent in getting the product to the patient. This had focused attention on the processes involved and would drive manufacturers to try to regain control of their product prices, he said. Other options for wholesalers would be the management of drug distribution in hospitals and in home delivery services.

Speaking on behalf of the British Association of Pharmaceutical Wholesalers, Jeremy Poole, Director of Hospital Sales, AAH, presented a slightly different viewpoint. He suggested that wholesalers could become innovative supply chain partners by building on their traditional strengths — breaking bulk and building of assortment. Possible options hinged on increasing information flow and adding value. Wholesalers could provide medicines management education, vendor-managed inventory and out-sources distribution services, he suggested. This would require investment in information technology and automated systems. At present, although the technology was well-established, only 50 per cent of orders to AAH were transmitted electronically, he noted.