The Pharmaceutical Journal
Vol 279 No 7465 p176
18 August 2007

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Could value-based drugs pricing work?

With the Government's overhaul of the Pharmaceutical Price Regulation Scheme set to focus on ensuring it delivers value to patients and the NHS, Tom Moberly (on the staff of The Journal) looks at criticisms of the current scheme and how a value-based scheme might work

In February 2007, the Office of Fair Trading recommended that the current medicines pricing system be replaced by one in which the price the NHS pays for a drug reflects its value to patients. Earlier this month, the Government said it agreed that a new system should be developed and that it should focus on delivering fair prices and value to the NHS, to patients and to the taxpayer.

This raises some questions. Why does the current system need to change, would replacing it with a value-based pricing scheme work, and what problems would a value-based pricing scheme need to overcome?

Criticisms

The Government acknowledges that the Pharmaceutical Price Regulation Scheme has helped to ensure a stable pricing regime and sustain a strong pharmaceutical and bioscience industry over the 50 years it has been in place. However, it believes that a new system “fit for purpose for the 21st century” is now needed.

Announcing the Government’s interim response, competition minister Stephen Timms said: “Since [the PPRS’s] inception, significant changes have occurred, both in the pharmaceutical industry and in the delivery of health care. Blockbuster drugs are rare, with innovation now increasingly focused on ever-smaller patient populations. This creates major challenges in ensuring affordable delivery of these benefits to patients.”

The Pharmaceutical Services Negotiating Committee also believes that the time is right for a “thorough review and reform” of the PPRS. Commenting on the Government’s announcement of its intention to review the current scheme, Sue Sharpe, chief executive of the PSNC, said: “In recent years, the activities of certain manufacturers have given rise to a range of problems for pharmacy contractors relating to the terms on which they procure medicines for NHS patients.”

The PSNC believes that changes should be made to the reimbursement arrangements for both branded generics and off-patent brands as part of the reform of the PPRS arrangements. The committee is concerned that PCTs are encouraging the prescribing of branded generics, leading to unequal geographical distribution of core pharmacy funds and increasing costs for the NHS, a concern the OFT expressed in its report.

The OFT also has reservations about the profit-cap basis of the present scheme. Speaking before the Government made its interim response, Simeon Thornton, a team leader at the OFT, said: “There are a number of practical difficulties with assessing profits in the pharmaceutical sector. Analysing global research and development costs, and determining which should be attributed to the UK, can be fraught with difficulties.”

Another weakness of the current system is, Mr Thornton added, that the price cuts periodically applied to the PPRS are blind to the value of drugs to patients. “The revenue that companies receive from life-saving medicines is reduced to the same degree as that from medicines with marginal demonstrable benefits,” he said.

It is also likely, he added, that these price cuts will increasingly be anticipated by pharmaceutical companies when they launch drugs ahead of an expected price cut and that they will respond by setting the initial price at a level higher than they otherwise would have done. “Using across-the-board price cuts in this way is therefore not a sustainable pricing method for the future and may not deliver major savings to the NHS.”

The OFT has recommended a hybrid system of value-based pricing, with pre-launch prices reviewed periodically after launch as new information becomes available. Using such a system would, the OFT argues, diffuse delays that might otherwise result from introducing assessments ahead of launch.

Medicines could undergo a relatively quick analysis before they are made available, similar to the assessments conducted by the Scottish Medicines Consortium or the All Wales Medicines Strategy Group. A more thorough analysis, along the lines of those performed by the National Institute for Health and Clinical Excellence, could then be carried out.

A hybrid system would also allow some medicines to be introduced on a risk-sharing basis and have their final price decided at a later basis, the OFT believes. Patients would have access to a drug they might otherwise not be able to receive. The manufacturer would find a market for the drug. And the NHS would pay a reasonable price for any benefit gained.This might be necessary if, for instance, insufficient information was available at launch to assess adequately a drug’s value to patients.

Complexity

However, the BioIndustry Association warns that the complexity and far-reaching consequences of developing a new pricing model should not be underestimated. “The manner of implementation and the methodology used for calculating cost-effectiveness and value will be critical,” Aisling Burnard, chief executive, said. “It is vital that the impact of any radical change is properly assessed and not rushed into.”

The OFT acknowledges, however, that introducing a value-based pricing system will not be easy. “The challenges that a value-based pricing system faces need to be recognised,” Mr Thornton said. “There is a case for early stage engagement with pharmaceutical companies, along the lines recommended in the Cooksey review [of health care funding].”

In addition, new evidence for the value of a medicine may emerge over time. “That is an argument for incorporating ex post assessments of value and possibly for risk sharing, as has been suggested for Velcade. It is not a case for ignoring value altogether.”

Any value-based pricing scheme will also need to decide how it determines the value of a medicine. It will need to include its value to the patient in terms of quality and length of life, but it might also need to recognise different benefits for different patient groups and for a variety of indications. There might also be a case for considering the value to carers, as well as to those involved with storing, transporting and administering the medicine. All these considerations will need to be taken into account.

Timing and stability

The Government says it will be taking work forward on analysing the OFT’s proposals and discussing them with industry over the coming months. However, the OFT had recommended that any changes should be introduced when the current PPRS expires. The American Pharmaceutical Group, which represents 10 major pharmaceutical companies, agrees that changes should not be brought in until the scheme is renegotiated.

“The current PPRS is scheduled to run until 2010,” it said in a statement. “Renegotiating it now runs counter to the OFT proposals and brings instability and uncertainty to the UK, which is bad for patients, business and the UK economy. Any fundamental change should be fully thought-through and effective from 2010.”

The Ethical Medicines Industry Group, which represents small- and medium-sized pharmaceutical companies, is concerned that a major overhaul of the current system could also lead to instabilities and therefore be counter productive. “The negotiations proposed by the Government could distort the stable pricing offered by the current PPRS and this would be detrimental to the NHS and patients,” it said. “Making short-term savings on products that are already cost effective will only backfire in the long-term.”

However, Mr Thornton said that the developments the OFT has proposed are part of a long-term model. “It is sustainable because it is based on the best use of [funding], which is in the interests of patients and innovative companies,” he said. “Changing to value-based medicines pricing will have major implications. There will be winners and losers, but that is unrelated to the question of overall spending and we are not recommending a decrease in expenditure on medicines.”