The government's proposals on controlling drug prices and profits have been widely hailed as radical. But Alan Earl-Slater believes there is a better alternative

One of the most interesting proposals in the Health Bill is the plan to regulate prices and profits on the sale of drugs to the NHS. There has been a voluntary agreement - the pharmaceutical price regulation scheme - between the Department of Health and the Association of the British Pharmaceutical Industry covering this since 1993.

But the agreement was due to be renewed in September 1998 and the government and the ABPI are in closed negotiations regarding a successor. A recent review of the PPRS assessed its objectives, its strengths and weaknesses, and possible alternatives.1

Now the government plans to penalise companies that contravene a future agreement (see box, above right). This suggests that the government believes the current agreement is either not working, or not working well enough. It is probably also a direct response to last year's evidence of price hikes by some small drug companies, which bought drugs from larger companies and then sold them to the NHS at inflated prices.2

Analysing the Health Bill

The first - and major - difficulty in any analysis is that the government's plan relates to an agreement that has not yet been made. But logic dictates that the current PPRS agreement (covering all drugs sold to the NHS except generics) will have to be revised. This is because it regulates both prices and profits, while the plan proposes regulating one or the other.

The ABPI's response is that the proposed system of fines will be unnecessary for its members as they have a good record of complying with the PPRS.3 It is true that few transgressions of the PPRS agreement have come to light. So unless company behaviour changes, the ABPI is probably right.

But it is not clear what will constitute a contravention of the plan. In addition, the penalties are not restricted to ABPI members, but may be applied to other drug companies as the health secretary sees fit. As these companies compete with those in the ABPI, the plan will indirectly affect ABPI members.

The current PPRS agreement already includes statements on price and profit control and penalties. Section 8.2 states that if a company's annual financial return document 'shows profits which the department considers to be unacceptably high, it will negotiate with the company one or more of the following':

price reductions;

delays in, or restriction of, price increases;

a repayment (to the government) of that amount of past profits which the DoH considers excessive.

In section 7.2 the agreement specifies that companies must give the government four weeks' notice on intended price rises, 'stating the amount of the proposed increase and the reason, in sufficient detail to satisfy the department that the increase is justified'.

It goes on to state in section 7.5: 'If a company acquires from another company a product already in the PPRS... any price change on or subsequent to acquisition should be agreed by the department. In its consideration of any such proposal, the department will take account of the effect on the NHS drugs bill.'

Alongside, but not actually part of the PPRS agreement struck in 1993, was a government demand for a 2.5 per cent price cut on drugs sold to the NHS. According to the DoH's PPRS Report to Parliament in December 1997, the 2.5 per cent price cut would have resulted in a saving of£211m between 1993-95.

It is not clear whether the new plan will be in addition to, or in place of, such controls.

Looking even further back, recommendations were more enlightened. In 1953 the joint committee on prescribing (the Cohen committee) recommended that:

drugs of no proven therapeutic value should cease to be provided under the NHS;

new drugs of proven therapeutic value should be prescribable;

existing drugs 'not therapeutically superior to standard preparations should be prescribable in the NHS subject to satisfactory price arrangements with the manufacturers'.

These recommendations were not fully taken on board by the government of the day. But in 1957 the government did agree with the ABPI on price controls in the voluntary price regulation scheme. And there have since been developments akin to the 1953 recommendations, such as the introduction in the 1980s of the NHS blacklists - lists of products for which the government would refuse to pay.

But it is striking how modern the Cohen committee recommendations appear today in the light of recent government reforms, such as clinical governance and national service frameworks.

The only radical part of the present government's plan is that it is considering giving the price or profits control rules a legal basis. Those who like transparency may also argue that specifying the size of the fine is a radical aspect. But it would have been more radical, and more helpful, to spell out the conditions under which penalties would apply.

Better regulation?

Prime minister Tony Blair is on record as saying: 'I have decided that no regulatory proposal which has an impact on business should be considered by the government without a thorough assessment of the risks, costs and benefits, a clear analysis of who will be affected and an explanation why non-regulatory action would be insufficient... Without prior assessment... clearance for such proposals will not be given.' 4 He goes on to say: 'Good economic analysis will help... but open public debate is the key.'

Applying the prime minister's own criteria, it would be fair to assume that there should have been a thorough assessment of the government's drug price control plan, including public consultation. But how can a thorough assessment have been carried out when the plan relates to an agreement that has not yet been declared? And if the thorough analysis has not been done, then Mr Blair himself, as he states, will not give the regulation clearance.

Practical problems

A major practical problem relates to the emergence of other strands of healthcare reform. The government will have to ensure that its plan fits in with all the other new developments in the NHS, including the National Institute for Clinical Excellence, Prodigy (prescribing rationally with decision support in general practice study) and NHSnet.

But even if the government's plan does go through, what is meant by a contravention? If it is based on measures to prevent drug companies from setting excess prices or making excess profits, how would the government actually decide what is excessive? Even if the government can overcome the methodological problems, it will face a number of empirical difficulties. Will it be able to gather robust data to make make analysis and come to a defensible decision?

In the 1950s, the Guillebaud committee looking at rising drug costs to the NHS concluded that there was not enough statistical information on what was happening to the drugs bill to make any firm recommendations.

Then the Hinchcliffe committee on effective prescribing stated that the Ministry of Health lacked basic statistical information on the drugs market. Since then there has been some improvement in prescribing data, but there are still difficulties in gathering data on prices and profits.

Collecting data on profits is particularly difficult, as the DoH knows. What is 'excessive' and what are 'reasonable' profits? Even the 1967 Sainsbury committee, which looked into the relationship of the pharmaceutical industry with the NHS, did not come up with a robust working definition of 'reasonable profits'.

And there is evidence that suggests regulation actually drives out competition from the marketplace - presumably quite the opposite of what the government wants.5

Legal problems

If the government's proposals are put into practice, they will have to fit into EU and UK law, in particular the EU's 1989 transparency directive. Article 1 of this makes it clear that if national authorities decide to have a price or profits control scheme it must operate within the terms of the directive: the pricing and profit control plans must be transparent, verifiable and objective.

The government has publicly acknowledged that the drug industry's contribution to a healthy economy goes beyond simply supplying drugs. For example, it provides jobs, education, investment, sponsorship of basic and academic research, exports and tax revenue.

Indeed the pharmaceutical industry in the UK is one of the few in the world that has consistently run a surplus on its balance of payments.

Couple this with the trend toward internationalisation and company mergers, which always result in job losses somewhere, the government's plan could encourage some companies to locate or invest outside rather than inside the UK. And if the government assumes that its plan will slow the inexorable rise in the NHS drugs bill, all the experience from abroad suggests that it will soon be proved wrong (see box, left).

A better way ahead

Assuming that few drugs would contravene the government's plan as it stands, a more efficient and effective approach might be to ask NICE to review the merits of drugs and to offer recommendations and guidelines. This goes back to the Cohen committee sentiments of 1953.

Instead of imposing fines on companies for breaching an agreement (whatever that agreement turns out to be), the government should ask NICE to investigate the case, looking not only at the price of the product, but also at its value for money. This is surely preferable to having lawyers and politicians scrap over prices or profits.

Using NICE would encourage co-operation rather than conflict. While such an approach would not be easy, it would be better for the NHS, for drug companies and for the government. Just as importantly, it would be better for patients.


1 Earl-Slater A. The Pharmaceutical Price Regulation Scheme. Hospital Pharmacist; 6: 30-32.

2 Price rises 'inevitable'. Pharmaceutical Marketing 1998; 10 (4), news.

3 Companies face fines if overcharging NHS'.

Pharmaceutical Marketing 1998; 2 (4), news.

4 The Better Regulation Guide. Prime Minister's foreword. Cabinet Office. London, August 1998.

5 Danzon P, Chao L. Does regulation drive out

competition in pharmaceutical markets? University of Pennsylvania. Draft, April 1998.