Debate on UK Phamaceutical Pricing
Debate on PPRS: Barbara & Mike Birtwistle

The comments in red are Barbara Arzymanow’s comments on Mike Birtwistle’s article, the text of which is reproduced in black. Barbara stresses that she does not believe either that the PPRS is perfect or that a very carefully designed value-based pricing system could not be an improvement. However, she believes that much work remains to be done to avoid serious pitfalls that she has described elsewhere. The best value-based pricing systems would incorporate many elements of the PPRS, including: (1) the transferability of revenue between products and (2) rewards for R&D even if it turns out to be unproductive.

 

Triple failure - why the PPRS is bad for patients, the NHS and drugs companies

Submitted by  Mike Birtwistle  on 23/08/2011

It is hardly surprising that the Government’s   response  to its consultation on value-based pricing received relatively little mainstream comment.  The world has been somewhat diverted by phone hacking, defaults and riots.  NHS watchers have also been distracted by the ongoing reform sagas: Coalition infighting, massive structural change and the not insignificant challenge of saving £20 billion are all more engaging.  In any case, Government responses to consultations rarely do get much comment, particularly when they give as little away as this one. Agreed.

 
Predictably, however, pharmaland has been abuzz with chatter about the policy and there remains a good deal of trepidation about changes to long standing pricing policies.  Others should take an interest too.   Value-based pricing may be a slow burner, but it has the potential to have a profound impact on the politics of health, as well as the services that patients are able to receive on the NHS.  Much like that other infuriatingly complex area of policy – competition – value-based pricing may not immediately capture political attention, but its impact could be significant. 
Agreed.
 
The penalty for failure of value-based pricing could be grave.  Delayed availability of new drugs, unpredictable costs and charities representing different disease areas pitted against each other is not a recipe for a quiet NHS, or for political success.  This policy will matter, although its implications will only be felt in the medium term – beginning in 2014, which is tantalisingly close to the expected date of the next general election.
Agreed.
 
Yet despite these political dangers, the reasons for change are compelling.  Think how many stories there have been about NICE ‘banning’ new drugs on the NHS, postcode lotteries and top ups?  Eliminating these would be political gold dust.  Today I will explore the problems with the current pricing system – and the reasons for change – before returning tomorrow to consider some of the challenges which need to be addressed before value-based pricing can be considered an effective alternative.
Agreed.
 
The PPRS isn’t working 
 
Those who fear the introduction of value-based pricing (on both the NHS and industry side) do so primarily on the grounds that it might destabilise manufacturers, the NHS or both.  This is as much a case of ‘better the devil you know’ as anything.
The reasons for concern over value-based pricing are (1) that there is no intellectually honest, non-controversial way of determining the value of a drug (2) market realities like patent expiries, parallel importing and parallel exporting prevent individual drug prices from being fixed at the level that we might choose (3) rewarding companies purely on the basis of launched drugs does not help with the policy objective of persuading companies to sustain R&D during barren periods and to invest in the UK.

 
The Pharmaceutical Price Regulation Scheme (PPRS), which value-based pricing would over time replace, has existed since the late 1950s and throughout this period its fundamental principles have remained the same.  It attempts to marry the twin goals of delivering value for money for the NHS as a purchaser of branded drugs, whilst also creating a stable and attractive operating environment for the pharmaceutical industry in the UK.  Over time an additional goal has been added of encouraging access to innovative medicines for NHS patients.
Agreed.
 
In many ways this approach – blending industry policy (supporting the pharmaceutical industry) with procurement policy (getting a good deal for the NHS) and quality policy (helping patients get access to the best medicines for them) is contradictory.  The interests of the industry champion and its major customer will not necessarily be aligned, and nor should they be.  The argument for maintaining this somewhat illogical arrangement has been that it has proved effective.  However, this is no longer proving the case.
I fundamentally disagree. All legitimate interests can be aligned in a well thought out system.  Everyone should want the best possible treatment for patients at an affordable and fair price, both now and in the future. The NHS does not want cheap drugs now at the expense of a lack of future progress. The NHS, the drug industry, patients and charities should all be committed to R&D and should work together when advantageous. The recent reduced effectiveness of pharmaceutical R&D has not been caused by failings in the PPRS. The problem has been partly a global trend caused by increased bureaucracy in R&D and partly, in the UK, the erosion of the influence of the PPRS resulting from a period of suspension under the last Labour Government, the powers granted to NICE, the plans to move towards a value-based-pricing system, insufficient focus on retaining centres of excellence and the dominance of the USA in the biotechnology company arena.
 
A stable platform for industry? 
 
The system of profit caps for manufacturers, combined with allowances for expenditure on research and development, marketing and other support functions, seems like an anachronism in a global, free market.  It is no wonder that the Secretary of State for Health, nothing if not a disciple of market theory, is not a fan. 
I too am a strong believer in the operation of free markets but a business with only one customer, as with the UK arms of drug companies supplying the NHS, cannot fix drug prices purely in accordance with free market principles. Fixing prices according to the value of drugs is not operating a free market because a drug company might be able in a free market to make a greater profit from supplying a product to fewer patients at a higher price (i.e. economic rationing by price). This is not what we want drug companies to do. When a business providing an essential service has only one customer, there is a need for prices to be fixed or indirectly controlled (e.g. through permitted total revenue or profit levels) in a fair way that aligns the interests of the supplier and customer.  Very few examples exist of prices being fixed in other industries by analysing value. As an example, consider a plumber who is the only person offering an emergency service in an isolated village. We would not expect him to charge to stop a serious water leak by assessing the value of his service (e.g. by estimating the cost of damage if he declined to attend). Instead he would probably base his bill on a sensible formula e.g. a reasonable hourly rate plus the cost of materials and maybe an unsocial hours call-out charge. We might adopt other approaches e.g. by looking what other plumbers charge for work in their own areas. We might try to align our interests with his e.g. by offering him a bonus if he prevents damage or arrives within a certain time and by requesting a guarantee. None of these arrangements would be seen as acting against free-market principles. The PPRS is no more than a formula intended to align the interests of affected interests fairly.
 
If this form of profit capping, which bears more resemblance to the 1970s than it does to the twenty first century, genuinely provides a form of stability and certainty for investors that gives the UK an edge as a home for pharma, then there is an argument for maintaining the approach, however anachronistic.  Nevertheless, as an instrument of industrial policy, the PPRS’ impact is patchy.  There is an inherent conflict between the role of purchaser and champion – and it shows.  An effective champion would not permit a previously agreed scheme to be ripped up ahead of time (remember, a key objective is stability), nor would they tolerate some members of the scheme significantly underpaying, leaving others to fill the gap through overpayments.  Yet both of these have happened in recent years (and indeed the over/under payment issue remains unresolved).  The argument that the PPRS has brought a stable operating environment for pharma and the NHS is somewhat undermined by the reality of the last few years.
 The PPRS has always needed to evolve and be updated to reflect changing circumstances. If scheme participants pay inappropriate amounts steps should be strengthened to claw back or refund money in subsequent years.

The PPRS’ record in easing the operating environment for manufacturers is mixed at best.  Recent high profile   closures  of manufacturing facilities have shown that the PPRS is no longer enough – if it ever was – to make the UK an attractive operating environment.  Industry defenders may argue that it makes a challenging situation slightly better, but the PPRS alone is clearly insufficient.  The plethora of initiatives (the  Life Sciences Blueprint ,   Plan for Growth ,   Review of Innovation  to name but three) are testament to this. I fully agree that a drug pricing system alone cannot restore the UK’s historical position as one of the most attractive bases for pharmaceutical investment. Other desirable action relates to R&D tax credits, the patent box, support for academia, tax benefits for investors in biotechnology companies, cooperation over R&D within the NHS, the encouragement of centres of excellence and moves towards the adoption of a common approach with other EU countries.
 
Getting the best deal for the NHS
 
Nor, however, has the NHS achieved its objectives of getting the best possible deal.  The PPRS works by delivering overall price reductions over a set period of time.  However, manufacturers do not have to deliver an across the board cut, instead reducing the prices of some drugs, whilst keeping others high (‘modulation’). 
Agreed.
 
This process can have two flaws: firstly, it doesn’t focus price cuts on those drugs which are deemed to deliver less value (for example drugs not recommended or have never been appraised by NICE).  Secondly, it encourages manufacturers to cut the prices of drugs where they face intense competition (hence increasing their competitiveness) but to maintain the prices of drugs where there are no direct competitors.  This latter category is surely the area where the NHS needs the most help in securing value, as market forces will be able to apply less pressure on prices.  Yet the PPRS has limited impact in this area. 
Under the PPRS the total cost of drugs to the NHS is not affected by how prices are distributed between products. Normal market forces in nearly all industries imply greatest price competition in the most competitive areas. Drugs without direct competitors tend to be amongst the most recently launched and most innovative so that competing agents have not yet emerged.  If a drug is too expensive to be afforded under the PPRS, the reason is that the drug company cannot earn a high enough profit to sustain its business. The same problem would generally arise with value-based pricing and with less flexibility.


Defenders of the system argue that the UK has amongst the lowest drug prices in Europe, which is true.  However, it is more a function of the declining value of sterling in recent years than it is the impact of our medicines pricing system.  Unfortunately, when the pound reduces in value so does the purchasing power of the NHS, so the health service feels little benefit from cheaper comparative prices. The declining value of the pound has not been the problem. The UK has always had amongst the lowest drug prices in Europe.
 
Securing fair access for patients? 
 
In terms of access to medicines, progress has been made in reducing variations in prescribing.  Yet recent studies have shown that significant differences still do occur, both within the UK (and despite the mandatory nature of a positive NICE technology appraisal) and compared with other countries. 
Variations in prescribing are certainly very substantial but generally reflect differing medical opinions. The best approach in my view relates to the continuous professional development of doctors.
 
In recognition of the challenges in ensuring uptake of medicines, the last PPRS contained an innovation package.  Seen as a key prize for industry, progress on implementing some of the measures has been partial at best.  Taken as a whole, the package has failed to deliver on the potential promise identified at the time of the last PPRS negotiations.
The fundamental problem is the limited time that prescribing doctors spend updating themselves on the evidence in support of different drugs.
 
The groundbreaking report published last summer on
  the extent and causes of international variations in drug usage  shows that, although overall the UK is in the middle of the pack as a user of drugs, it is a very low user for some categories such as new cancer drugs and hepatitis C medicines.  The explanations are very different: for the former the barrier has been the technology appraisal process but for the latter the drugs have been recommended by NICE and yet are still not reaching patients.  The reasons for both situations are complex and require a different blog than this one to explore, but it is clear that the PPRS is not having the desired impact. The problem is not the PPRS. NICE has made a number of poor decisions. Steps are also needed to encourage doctors’ appreciation of new evidence on drugs.
 
How free is pricing?
 
The PPRS – and much of the support that remains for it – is predicated on the idea that the UK has a ‘free pricing’ environment, essentially meaning that manufacturers can charge what they want.  The benefits of this approach are seen to be that the state does not overtly interfere with the price of an individual drug and that manufacturers are encouraged to make the UK one of the first launch countries for new drugs, enabling patients to benefit earlier.
Exactly. The PPRS  gives greater pricing freedom than most proposals for value-based pricing.
 
This is all good in principle, but doesn’t happen in practice.  First, pricing isn’t that free.  Manufacturers have to set a price at launch and are not allowed to vary it (outside the confines of the PPRS).  Therefore they cannot do what manufacturers of other products do, which is to adjust the price depending on commercial success.  Secondly, manufacturers cannot charge what they want.  The existence of NICE, with well established thresholds has established a de factor pricing ceiling.  Equally, because the UK is seen as a free pricing system, it is used as a reference price by other countries (the
  Office of Fair Trading  estimated that 25% of overall global demand comes from countries which use the UK as a reference price and many more informally compare prices).  This has the effect of limiting the scope for price cuts in the UK as global companies perceive that delivering these would undermine their global pricing position.  Whether this fear is accurate or not is irrelevant: as long as manufacturers believe their price could be undermined, they will be reluctant to offer UK price cuts to help ensure uptake in this country.  In short, pricing transparency creates a pricing straightjacket.  If this is free pricing, it is a very constrained form of freedom. NICE has had greater powers than are desirable. Most possible value-based pricing systems would restrict individual drug prices more than the PPRS.
 
The net result of this is that, although patients theoretically benefit from early launches of new drugs, their ability to access them on the NHS is usually constrained for months, if not years.  Despite guidance saying otherwise, many commissioners do not make drugs available until NICE has recommended them.  NICE has many strengths but speed is not one of them and the practical impact of ‘NICE blight’ is to diminish any benefits gained from early launches.
Agreed.
 
There have been attempts to increase pricing flexibility.  The uptake package negotiated as part of the last PPRS included two measures to provide greater flexibility in demonstrating the cost effectiveness of new drugs have had variable impact.  Measures to enable flexible pricing (where a manufacturer can either increase or decrease the original list price as more evidence on its effectiveness becomes available) have yet to take off.  Conversely, the use of patient access schemes (whereby a manufacturer takes steps to increase the cost effectiveness of a drug without changing its list price) have enabled NICE to approve several drugs, particularly in cancer.  Yet the schemes proposed have often proved to be complex, cumbersome and have met with squeals of pain from the NHS tasked with implementing them.
Agreed but patient access schemes and other ways of increasing pricing flexibility should be improved, not scrapped.

What next?
 
The PPRS is a relic of a bygone era and the benefits it once delivered to the NHS, industry and, most importantly, patients are no longer apparent.  The combination of pricing (through the PPRS) and NICEing (the separate health technology appraisal system) is cumbersome and lacks the flexibility necessary to ensure rapid access to drugs at good value to the NHS in such a way that safeguards manufacturers’ global position. 
The problem has been NICE rather than the PPRS.
 
The Government and industry (and certainly those representing charities) have experienced declining levels of confidence in the PPRS and it is time to design a system which better reflects the needs of modern medicine and the realities of a global drugs market.  The question then becomes what system?  As with many aspects of the NHS, drugs pricing has evolved over time in sometimes irrational ways.  Breaking it open and starting again will create lots of uncomfortable questions.  Get the answers wrong and you risk creating some unpalatable solutions.  Tomorrow I will examine some of the issues at stake as a new system of value-based pricing is created.
Agreed but the PPRS has, despite its spots and warts, still been regarded as perhaps the best pharmaceutical pricing system in the world. If advancing mankind through new medicines is the primary goal, then the results obtained during the era when the PPRS was the strongest have been the most successful for the UK drug industry. Old-fashioned or traditional ideas are not necessarily in need of change for its own sake. Excellence should be encouraged, not undermined.

Barbara Arzymanow