Office of Fair Trading's value-based pricing scheme is well-founded, but could increase overall NHS drug spend

May 30 2007

A report by the Office of Fair Trading has recommended that pricing of drugs is based not on how much the drug costs to develop, but on the benefit that the drug can bring.

After examining the proposals for a paper publishing today in the journal Health Economics, Professor Karl Claxton believes that such Value-Based Payments (VBP) make sense. He is, however, worried that the current plan is overly generous toward pharmaceutical companies and could lead to a rise in the NHS's total drug bill.

In most markets consumers are used to the idea of paying a high price for goods that give a lot of benefit, and a low price for those that perform less well. The consumer is unconcerned about the cost to the company for developing the item. Up until now, this has not been the case for the drug industry. Here prices have been set by the pharmaceutical price regulation scheme (PPRS) which tries to balance the cost to the NHS and profits for the pharmaceutical industry. In effect a lot of the calculation is based on the costs of development and production costs.

"Under the new scheme the NHS will only take on technologies if they are cost-effective , that means the health benefits of using the technology must be greater than health displaced elsewhere in the NHS (due to the additional cost of the technology)," says Professor Claxton, who works in the Department of Economics and Related Studies and Centre for Health Economics at the University of York. This, he believes, will provide a powerful incentive for companies to concentrate on cost-effective delivery when they develop new therapies.

Such a radical shake-up is bound to worry people within the industry, but Claxton believes that most fears are unfounded. Some industry observers, for example, are worried that the result will simply be less revenue for their products. But Claxton believes that while some individual products may earn companies less, the overall spend will either remain fairly constant or could increase. An increase in overall costs would, however, worry the Treasury.

Claxton's proposal is that there should be an agreement to monitor total NHS spend, and link this monitoring to a rebate agreement in which any underspend created by the new system is shared by the industry. Equally, higher than expected spend would lead to a transfer from industry to the NHS. "This would reassure the Treasury and Department of Health that the introduction of VBP will not lead to uncontrolled rises in spending, and industry that there will not be dramatic cuts," says Claxton.

"The OFT report provides a clear and coherent rationale for a move to VBP, The OFT has put down an important marker which will inevitably shape the scope of future policy debates about value, guidance, price and innovation," says Claxton.