An analysis of the Office of Fair Trading’s proposals for drug pricing reform published today in Journal of Health Economics says that, while a switch to value-based payments (VBP) makes sense, there are some dangers that it may swell the National Health Service’s already burgeoning medicines bill.

The analysis by Professor Karl Claxton, from the Department of Economics and Related Studies and Centre for Health Economics at the University of York, agrees with the OFT’s proposals in principle, but says that how the new system is implemented will be crucial to its success.

In February this year, the UK pharmaceutical industry was rocked by an OFT report which claimed that the NHS is shelling out too much for branded drugs, and that a radical reform of the current pricing system is needed to claw back some much-needed funds. At the time, the OFT noted that the NHS spends about £8 billion a year on branded medicines, and said it had identified "a number of drugs where prices are significantly out of line with patient benefits."

Its proposals for change were centred on a shift from the current 'profit cap and price cut' Pharmaceutical Price Regulation Scheme, where companies are free to set their own prices "within very broad profit constraints," to a "patient-focused value-based pricing scheme, in which the prices the NHS pays for medicines reflects the therapeutic benefits they bring to patients."

£500m savings

According to the OFT, this would enable the NHS to obtain greater value for money from its existing drug spend, freeing up £500 million that could be used more effectively, "giving patients better access to medicines and other treatments which they may currently be denied."

Although Prof Claxton has put his support behind the move, he warns that VBP “with an inappropriate threshold for cost-effectiveness, or an inappropriate pricing structure, could lead to technologies being adopted at prices where their benefits, in terms of health outcome, do not offset the health displaced elsewhere in the NHS, a situation in which the NHS is damaged rather than improved by innovation.”

If such factors are in place, however, he believes that emphasis on cost-effectiveness could be a powerful incentive for companies to take a closer look at this aspect while pushing their products through development, and this could also give a better chance of ultimately making it onto the NHS’ product menu.

Unsurprisingly, the OFT’s report was met with a barrage of criticism from many factions of the industry. The Association of the British Pharmaceutical Industry, for one, “strongly refuted” the report’s claims that the NHS is paying too much for its drugs, and warned that a system of product-by-product price setting of new medicines when they are launched, favoured by the OFT, “has resulted in significant delays for patients waiting for innovative treatments in some other countries.”

Fears ‘unfounded’

But Prof Claxton says that many of the industry’s fears over the proposed new scheme are unfounded. A key concern, for example, is that VBP will lead to less revenue from products, but Prof Claxton insists that, while some individual products may earn companies less, “the overall spend will either remain fairly constant or could increase.”

He also suggests linking total NHS spend to a rebate agreement, so that any ‘underspend’ as a result of the new system is shared by the industry and, in the same vein, if the bill came in over expectations then the industry would top up the NHS’ coffers. “This would reassure the Treasury and Department of Health that the introduction of VBP will not lead to uncontrolled rises in spending, and industry that there will not be dramatic cuts.”

Prof Claxton concludes that the OFT report “provides a clear and coherent rationale for a move to VBP,” and says it has “put down an important marker which will inevitably shape the scope of future policy debates about value, guidance, price and innovation.”

PharmaTimes is holding a special meeting on the OFT’s report - THE OFT REPORT CONSIDERED – at the Dorchester Hotel, Park Lane, London, on July 5.

Click here for more information or to attend the event