Theories on the causes of rocketing generic drug costs are numerous, but are there as many solutions, asks Jeremy Davies

Generic prescribing is so much a part of NHS policy these days that, in primary care at least, it has almost become a proxy for good clinical practice.

In 1993, generics accounted for just under 12 per cent of NHS spending on drugs. By 1997, this figure had risen to almost 22 per cent. In 1998, GPs prescribed 63 per cent of drugs generically and the Department of Health target is to reach 72 per cent generic prescribing by 2002.

Generics save the NHS money.

But over the past 18 months, such savings have diminished enormously, thanks to what the House of Commons health select committee has described as 'stratospheric' price rises in the generic drugs market. And there is no evidence to suggest a downturn in prices in the foreseeable future.

A 1999 Newsnight survey found the cost of 132 out of 464 commonly prescribed generic drugs had risen by more than 50 per cent in the previous year. The cost of some drugs increased by as much as 700 per cent (see box over page).

Localised primary care group prescribing data suggests prices may be levelling off. But this is by no means certain, and typical estimates suggest that, even taking into account January's extra£90m in contingency funds, PCGs could face drug budget overspends of around 5 per cent at the end of this financial year.

Many predict that as a result they will have to delay progress on service developments funded from other parts of their unified budgets for the rest of this year and 2000-01.

But how did the cost of generic drugs come to rise so much so quickly? The drug industry blames government incompetence; the DoH blames anti-competitive practices among generics manufacturers and distributors.

Unlike the branded drug industry, whose inclination to raise prices is restricted by the pharmaceutical price regulation scheme, the generics industry has always been left to its own devices. The theory was that competition would always drive prices down.

But this equilibrium collapsed, suppliers claim, after the closure in December 1998 of Regent GM, one of roughly a dozen generics manufacturers in the UK. The company manufactured a wide range of generics and had a market share of around 10 per cent.

Regent was closed by the DoH's Medicines Control Agency when deficiencies were discovered in the company's processes which could have resulted in penicillin contamination. It has yet to have its licence fully restored. At the same time, two other generics producers, Norton and APS/Berk, transferred manufacturing facilities outside the UK.

These developments, so the suppliers' story goes, combined to create shortages of generics and price hikes.

Meanwhile, the move towards dispensing drugs in patient packs was also making its presence felt - this as a response to a European Commission directive requiring that patients receive courses of medicines in a pack including an explanatory leaflet describing what the drug does, dosage details and any possible side-effects.

It had expensive implications for manufacturing processes. No longer was high-tech machinery producing millions of pills and automatically weighing them out into, say, 500-pill jars to sell to the pharmacist - who would in turn dispense a course of, say, 30 tablets into a smaller bottle for the patient.

Instead, companies needed machines to sort a set number of pills into blister packs and insert these, with a patient information leaflet, into the relevant cardboard box. This greater emphasis on patient information tied in with a Europe-wide trend towards making patients more informed consumers. It also increased costs, which were passed on to the NHS.

The move towards patient pack dispensing has been known about for many years - the EC directive was introduced in 1992 - and the industry claims successive health secretaries talked about introducing the change-over in a co-ordinated way, with government support. But, they say, ministers walked away from these talks in October 1998, leaving the industry to sort out its own timetable for the changes and to decide their impact on drug supplies and costs.

In its inquiry into the matter, the health select committee was unconvinced. The MPs pointed out several anomalies in this argument, the main one being that production levels of generic drugs have now returned to normal, but prices are still abnormally high.

The committee did find the government had failed to anticipate the real costs and potential for difficulties of the change to patient pack dispensing.

But it stated that '. . . in the absence of what they perceived to be agreed government support for the transition to patient packs, the industry (was) well-positioned to manipulate the market'.

To help prevent future price hikes, the committee pointed to glaring problems in the way the generics market is regulated. In response, the government ordered an Office of Fair Trading inquiry and hired consultants Oxford Economic Research Associates to analyse the market and suggest solutions by the summer of 2000 (see box).

One area ripe for reform is category D of the drug tariff, activated when stocks of a drug run out, when the pharmacist, unknown to the GP, dispenses a branded equivalent. The Prescription Pricing Authority invoices the practice for this more expensive drug and the additional cost is reflected in the relevant month's prescribing analysis and cost (PACT) data. The system contains no safeguards to stop manufacturers holding the market to ransom by joining forces to restrict the supply of generics, thus forcing pharmacists to dispense much more expensive drugs.

A side-effect of the recent increased category D use is that, because such prescriptions invoke more complicated paperwork, PACT data is running over three months late. This makes it even more difficult for PCGs and GP practices to know how much they have been spending on drugs - and harder to predict how much there is to develop other services.

The government's pledge of£160m to help PCGs mop up the mess is unlikely to be enough, says Mark Robinson, Croydon PCG's prescribing manager. 'The generic price rises probably account for, on average, an increase in costs of about 5 per cent against budget. That's a lot of money, especially if, like many PCGs, you had already agreed a very low basic increase at the start of the year, ' he says.

PCGs face two other problems.

The first is to negotiate budgets that will cover the cost of generics at their new plateau - assuming they are not about to start rising again. Budget-setting guidance for 2000-01 instructs PCGs not to factor in price reductions perceived as likely. It is not clear where any extra money will be found if prices continue to rise.

The second is the challenge of keeping GPs on track as motivated generic prescribers.

This is likely to rely on PCGs designing their prescribing incentive schemes carefully to respond to the situation, says West Sussex HA prescribing adviser David Phizackerley. 'It should be fair game for GPs to be able to show they haven't hit their target through no fault of their own, ' he says. 'Groups will need to look sympathetically at such cases. It can be difficult, though, because somebody somewhere has to pick up the tab.'

Prescribing advisers agree that the current generics message must remain the best advice, regardless of whether prices ever fall again, or have now reached a higher baseline.

But, as British Medical Association GPs' committee prescribing sub-committee chair Dr George Rae says: 'The irony is that it's often the practices trying hardest to be cost-effective in their prescribing that are the worst affected.'

Perhaps, says Mark Robinson, OXERA should recommend a PPRS scheme for the generics industry.

'We should apply a ceiling to the cost of generics, with companies having to apply to alter prices upwards, ' he says.

Analysing the generics market: a suitable case for treatment Oxford Economic Research Associates is currently 'conducting interviews with all the players at all stages of the supply chain', says Helen Jenkins, the consultant leading the company's review of the generic drugs market.

The review will, she says, look 'analytically at how the NHS interacts with the generics industry', drawing on OXERA's previous experience of analysing markets in industries including banking, airlines, telecommunications and broadcasting. The company's report is due in the summer. The government asked OXERA to carry out an analysis covering:

a detailed investigation of ownership links;

an analysis of how the NHS reimbursement arrangements and distribution margins affect participants' behaviour;

an understanding of the incentives that exist at each stage in the distribution chain;

a consideration of how these are changing with time.

It also called for a competition analysis covering market boundaries, including how branded and generic markets interact; market shares and concentration ratios and entry barriers.

The resulting analyses will feed into government policy making, which will examine what adjustments could be made to existing systems, and how things might be done differently.

Examples of rising drug costs

Name of drug Price at Price at % Sept 98 Sept 99 increase

Atenolol 50mg 90p£1.46 62

Thyroxine 100mg 21p£1.62 670

Warfarin 5mg£1.21£2.76 128

Frusemide 40mg 26p£2.14 723

Amoxycillin 250mg 47p£1.69 260

Source: health select committee report

Predicted drug overspends due to rising costs

Birmingham PCGs£800,000

West Sussex PCGs£750,000

Manchester PCGs£644,000

Croydon PCGs£500,000

Telford and Wrekin PCG£500,000

Source: health select committee report