Inside the government’s plans to curtail the NHS’ spend on drugs and seek more business information from pharma

The NHS drugs bill (reportedly over £15.2 billion in 2015-16) recently came into sharp focus following news reports highlighting dramatic price increases for longstanding generic drugs. Examples frequently cited include the anti-epilepsy drug phenytoin sodium, which had a reported price hike of up to 2,600 percent, and hydrocortisone tablets, the price of which reportedly increased by more than 12,000 percent.

To combat this, as part of what’s called the ‘wash up’ before the General Election, the Health Service Medical Supplies (Costs) Act 2017 was rushed through Parliament and received Royal Assent on 27 April 2017. The Act’s primary purpose is to clarify and strengthen the Secretary of State’s power to limit the NHS’s spiralling drugs bill, but it also gives government power to require the industry to provide information about their businesses.

While the Act has now received Royal Assent, it has not yet come into force and in any event, additional regulations will be required before we see any changes “on the ground”.

Current pricing of branded medicines

There are currently two pricing regimes for branded medicines in the UK: the Pharmaceutical Price Regulation Scheme (PPRS) and a statutory scheme.

The PPRS is a voluntary scheme negotiated between the Department of Health and the Association of the British Pharmaceutical Industry on a periodic basis, generally every five years. Members of the PPRS agree to a variety of measures to control prices and spend. Chief among these is a payment mechanism whereby members make payments ‘back’ to the NHS in certain circumstances. The latest PPRS is due for renewal in early 2019. Those who do not volunteer for the PPRS are subject to the statutory scheme.

The most recent PPRS has not been as successful as the government hoped in delivering savings to the NHS. According to the Department of Health, in 2015 the total spend under the statutory scheme was £942 million compared to £8.1 billion under the PPRS, perhaps an indication that being in the voluntary scheme is more advantageous for pharma companies than not. Current pricing of generic medicines Unbranded, generic medicines fall outside the PPRS and the branded medicines’ statutory scheme. Reimbursement prices (i.e. the price at which pharmacists dispensing on NHS prescriptions are reimbursed) are generally set by reference to market prices. However, this relies on there being competition in the market. A lack of competition can lead to significant price increases as was seen in the phenytoin sodium and hydrocortisone examples.

The PPRS only applies to branded medicines and at present the government has limited control over the unbranded generic prices of companies which are members of the PPRS. So if companies are in the PPRS and have a mix of both branded medicines and unbranded generics, there are fewer statutory controls to their unbranded generics, a loophole which the Act is designed to close with the object of enabling the government to introduce regulatory controls on excessive generic ‘price hikes’ in relation to all generics, whether or not the company participates in the PPRS.

The planned statutory scheme

Draft regulations on a new statutory scheme for branded medicines have been published for consultation. Although they do not contain any specific figures, they provide for a payment back of a fixed percentage of sales income from relevant medicines, similar to the mechanism in the PPRS. However, whereas the PPRS contains an exclusion for products containing new active substances launched after 31 December 2013, the draft regulations do not and so will be less attractive than the PPRS.

It remains to be seen how the two schemes will eventually compare overall and whether, in the long run, two separate schemes will be maintained. Given that the new Act will enable the government to introduce a payment back into the statutory scheme, this will level the playing field between the two schemes and as a consequence will presumably discourage movement out of the PPRS.

New information requirements

The Act provides extensive statutory powers to require manufacturers, distributors and suppliers of branded and unbranded products to record and supply pricing and sales information. The industry already provides some information on a voluntary basis and that is used to set the reimbursement price, but not all manufacturers and suppliers participate. It is hoped that collection of pricing information across the board, including in relation to discounts, should enable a more accurate reimbursement price to be set. It may also result in the Department of Health becoming aware sooner if there are any unfair pricing practices.

The information which can be required is detailed and extensive, including an itemised breakdown of profit figures. Some have argued that the provision of this level of information will be unfairly onerous. Among other things, the published draft guidelines provide for quarterly returns to be made in respect of unbranded generic products, including the identities of buyers and sellers and any discounts, as well as for information about manufacturing, R&D and operational costs to be recorded and supplied on request.

The obligation to provide information will also apply to other medical supplies, a considerable concern to the medical technologies sector, which is dominated by small and medium-sized companies. The draft regulations allow small producers – with a total UK turnover of £5 million or less (a threshold said by some to be too low) – to provide the information as pre-existing documentation, including invoices, rather than in a form specified by the Secretary of State.

What does the Act mean for industry now?

The detail of how the Government will exercise the powers granted in the Act is subject to discussion. What is clear at this stage is that this very short Act has the potential to introduce significant change. It raises a number of questions, such as: What will happen to the voluntary pricing scheme? How will the government define a limit on excessive and unfair generic price ‘hikes’ given the need to maintain a vibrant generic market and stability of supply?

The information requirements are equally important. What will the standardised return documents look like? Who will be responsible for reviewing the data? Having the information is one thing, but understanding and interpreting it is another, which will need to be addressed. An MP commented during the passage of the Bill: “We cannot underestimate the importance of having more consistent, viable and useful information gathering, because information is power.”

Life sciences companies are well advised to engage during the consultations on the new regulations to ensure that legislators and government understand their legitimate needs on price. 

Catherine Penny and Charlotte Tillett are part of the Life Sciences team at Stevens & Bolton LLP. Catherine is a senior associate in the Dispute Resolution team and Charlotte is an IP partner and head of life sciences.