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
hardly surprising that the Government’s
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
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.
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.
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.
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.
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 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.
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
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.
record in easing the operating environment for manufacturers is mixed at
best. Recent high profile
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
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
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
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
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
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
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
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.
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
Agreed but patient access schemes and other ways of
increasing pricing flexibility should be improved, not scrapped.
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.
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.