The Office of Fair Trading’s proposals for reform of the Pharmaceutical Price Regulation Scheme (PPRS) are not about cutting the NHS drugs bill or aggregate prices of branded medicines, the OFT insists.

The rationale for a shift to value-based pricing is to redistribute, not lower, pharmaceutical industry revenues, so that the National Health Service can make the best possible use of existing resources, says Simeon Thornton, team leader for the PPRS study. This emphasis has been lost in some of the initial reactions to the OFT report, he feels, while concerns about dampening incentives for R&D investment in the UK are “a bit of a red herring”.

The Association of the British Pharmaceutical Industry (ABPI) has questioned the logic of dismantling a pricing system that provides a stable base for long-term planning in the UK market. While it “wholeheartedly” supports the NHS’ desire to deliver value for money, the ABPI has “strongly refuted” suggestions that the health service overpays for its drugs.

Industry is also sceptical about pinning down a product’s intrinsic value to the NHS before it has been in widespread use. Nor is it happy with the idea that generics should be included among the comparators for measuring cost-effectiveness or that a form of reference pricing (reimbursement at up to 25% above the generic price) should apply to off-patent brands with generic equivalents in the Category M pricing scheme.

Most of the rumblings around the OFT’s recommendations have been about potential damage to R&D and manufacturing investment if the current pricing flexibilities are removed and investments can no longer be set against profits. The report does acknowledge that, from a global perspective, UK prices can have a marked impact on pharmaceutical investment as countries accounting for some 25% of world demand often set their drug prices with reference to those in the UK.

Offering incentives against EU law

But it finds “very little” evidence that the PPRS acts as a vehicle for industrial policy by drawing R&D investment to the UK. In fact, Thornton says, it is “categorically not the case” that the current scheme provides incentives to invest in the UK, as the R&D allowances under the PPRS apply no matter where these investments are made. Offering more specific incentives would be contrary to EU law.

In the long run, the OFT contends, value-based pricing would provide “the right incentives to invest in drugs that are most beneficial to society, including areas of unmet clinical demand”. Innovative companies would prosper under the new regime – “the essence of effective competition” – although the changes would “create winners and losers” and “clearly not be popular with some companies”.

The new pricing model would also make better (and earlier) use of cost-effectiveness mechanisms already applied by the National Institute for Health and Clinical Excellence (NICE) and other decision-makers in the NHS, Thornton notes.

Essentially this means extending the role of NICE and its national counterparts, the Scottish Medicines Consortium (SMC) and the All Wales Medicines Strategy Group (AWMSG), explicitly to the pricing arena. The OFT envisages these bodies providing co-ordinated assessments of cost-effectiveness to underpin final pricing negotiations by a special unit within the Department of Health. These would apply both at the pre-market stage (ex ante value-based pricing) and at other significant points in a product’s lifespan (ex post value-based pricing), such as every five years or when a comparator product went off patent.

If there were insufficient evidence to determine cost-effectiveness at launch – for example, with chronic disease treatments – then the OFT suggests a risk-sharing approach, with reimbursement subject to repricing and/or repayment if the expected clinical outcomes did not materialise. In the longer term, closer co-ordination between NICE, the SMC and the AWMSG could be formalised by establishing a Commission on the Value of Medicines and, eventually, an independent Medicines Pricing Commission with legal authority to make pricing and reimbursement decisions.

Maximum prices for new and marketed drugs under the revised PPRS would have to fall below a preset threshold or Incremental Cost Effectiveness Ratio (ICER), based on the existing Quality Adjusted Life Year (QALY) concept and expressing the product’s value relative to an appropriate comparator.

The right signal to companies

The OFT is adamant that comparators would have to include generics if they were the most cost-effective alternative. According to Thornton, this would give companies “exactly the right signal” that they needed to gear investment to patient benefits, although incremental innovation (e.g., more convenient formulations) would be taken into account in determining value. The OFT is also sympathetic to suggestions that QALYs and other cost-effectiveness measures should embrace non-patient benefits such as potential impact on carers.

Companies that have disputed the cost-effectiveness models used by NICE or the SMC are unlikely to welcome these bodies taking a direct role in pricing. The OFT says the dissenters are in the minority, though. The QALY measure “seems to us in principle to be a pretty robust approach”, Thornton comments. Moreover, the combination of ex ante and ex post price evaluation should ensure a level playing field between new drugs and established treatments currently not subject to cost-effectiveness assessments.

Thornton also plays down industry concerns that new medicines would become embroiled in lengthy pricing negotiations – up to two years in France, by some accounts – under an ex ante scheme. The facility to “assess effectiveness further down the line should allow a quick view to be taken up front”, the OFT argues. Pricing decisions are reached in a matter of months in countries such as Sweden, Thornton notes, adding that protracted negotiations are often down to a reliance on “once-and-for-all decision-making”.

The OFT is keen to emphasise that its recommendations for PPRS reform are not set in stone. While Thornton claims “quite a strong constituency” of support for the overarching principles of the report, he says the OFT will “remain engaged in discussions” during the coming months on the various options for putting these principles into practice. Peter Mansell