The government has performed a partial U-turn in its policy on dealing with the knock-on effects of the spiralling cost of generic drugs.

Health minister John Denham told the Commons health select committee that the problem was likely to cost the NHS in the order of£160m , but insisted this should be within the ability of local health economies to manage - a message repeated by senior NHS officials.

But this years health authority allocations include an additional£90m for English HA's, specifically for the increased cost in generic drugs .

Money has also been found for Scotland, but not Wales.

The move came as the health select committee issued a highly criticial report on the Cost and Availability of Generic Drugs to the NHS. It pointedly concluded: It would be extremely unfortunate if the success of the primary care group initiative was undermined by sharp and unpredictable rises in drug budgets.

The committee s investigation was triggered by HSJ coverage of the impact of generic price rises on PCG budgets. But the NHS Confederation said the new money would only cover just under half of the cost to PCGs.

Birmingham HA is now predicting a city-wide overspend on its drug budget of£800,000, West Sussex£750,000, Manchester£644,000 and Telford and Wrekin£500,000. The committee s report reflects ambiguity about why generic drug prices have jumped by up to 700 per cent in the past 18 months.

Drug companies and wholesalers blame the closure of a key manufacturer , Regent GM Laboratories, on public health grounds.

They say this has been exacerbated by problems in the operation of category D - a listing that allows pharmacists to dispense more expensive alternatives when generics are in short supply.

The Department of Health says the closure of Regent gave an initial shock to the system, but hinted in a memo to the committee that it believed manufacturers and suppliers had been profiteering from the situation.

The committee s report says the market was ripe for manipulation and urges the Office of Fair Trading, which is already holding an investigation, to look into the category D system.

The government has also ordered a wider-ranging inquiry, to be conducted by Oxford Economic Research Associates, that will report this summer.

Junior health minister Lord Hunt said the government was determined that the NHS is not ripped off.

The Cost and Availability of Generic Drugs to the NHS. The Stationery Office.£13.60.

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