UK: The UK Pharmaceutical Price Regulation Scheme (PPRS) And The Statutory Regulations: An Overview And Outline Of How The Schemes May Impact The Life Sciences Industry

Last Updated: 12 August 2014
Article by Christian Hill, Paul Ranson and Helen Cline

Introduction

In the United Kingdom, the pharmaceutical, medical technology, medical and industrial biotechnology sectors generate a turnover of over £50 billion and employ 166,000 people in 4,500 companies. The pharmaceutical sector is the largest contributor to turnover and employment (388 companies, 78,000 employees and £31.8 billion), followed by the medical technology sector (3130 companies, 64,000 employees and £15 billion).1

The cost of each element of a health service will always be a concern for the governments that support it and medicines are usually the first element of spend to come under scrutiny, probably because of the relative ease of applying pressure, when compared with the cost of manpower and infrastructure. The UK National Health Service (NHS) spends around £10 billion a year on branded prescription medicines in the United Kingdom (approximately 10 per cent of the healthcare budget).2 While the total spend on medicines will continue to increase by a forecast 3.5 per cent CAGR (Compound Annual Growth Rate) from 2011 to 2015, the growth rate for branded medicines is forecast to be just 1.1 per cent CAGR over the same period.

Interestingly, a comparison of the prices of branded medicines in the United Kingdom with prices in a range of European countries and the United States and Australia for 2010 shows that the United Kingdom is among the lowest.2

As to how companies interact with the Department of Health (DH) on pricing, there are two alternatives: the voluntary scheme, the Pharmaceutical Price Regulation Scheme (PPRS), and a set of statutory regulations. It is important to note that technically, for new chemical entities, freedom of pricing remains in the United Kingdom. For branded non-NCEs, the DH reviews and negotiates price, and for generics the drug tariff applies. This means that, in theory, pricing and reimbursement are two separate processes in the United Kingdom, where price setting is a matter reserved for the UK Government and administered by the English DH, while practical uptake or reimbursement is largely a matter for National Institute for Health and Care Excellence (NICE) in England and Wales, AWMSG in Wales where no NICE guidance exists, and SMC in Scotland.

The voluntary scheme, the PPRS, was first established in 1957 and since then has been the established mechanism by which the DH (on behalf of the UK health departments) seeks to achieve a balance between NHS access to good quality branded medicines at reasonable prices and a fair return for the industry to enable it to research, develop and market new and improved medicines. The key advantage of the voluntary scheme is a five-year period of predictability in the market, as it is renegotiated every five years, whereas the statutory regulations may change at any time, subject to approval by Parliament.

Up to the beginning of 2012, 167 companies were signed up to the 2009 scheme. The 64 companies that did not join were subject to statutory controls under the Health Service Branded Medicines (Control of Prices and Supply of Information) (No.2) Regulations 2008 ('the Statutory Scheme').

In addition, consideration was given around the same time to establishing a value-based pricing (VBP) scheme (now known as Value Based Assessment (VBA)), that as proposed would have had the NHS (through NICE) dictating prices to companies – as opposed to deciding whether or not to accept the companies' prices. The change had concerned some in the sector, which is already under serious pressure to cut the cost of medicines in the face of the European financial crisis.

The PPRS

On 3 August 2012, the Association of the British Pharmaceutical Industry (ABPI) and the DH published a Joint DH/ABPI statement on arrangements for pricing branded medicines from 2014.

Pricing negotiations commenced in September 2012 and were set to conclude approximately a year later. These negotiations would determine the arrangements for pricing branded medicines in the United Kingdom from January 2014, including medicines that were already on the market in December 2013 and new medicines launched from 1 January 2014.

The joint statement began as follows:

The Department of Health and the Association of the British Pharmaceutical Industry (ABPI) are committed to reaching agreement on a pricing system that gives patients better access to the most effective medicines, at prices that encourage the NHS to use those medicines when clinicians think their patients can benefit and deliver value to the NHS, and provide a fair reward for these innovative medicines.

When the current Pharmaceutical Price Regulation Scheme (the 2009 PPRS) comes to an end in December 2013, we will move to new arrangements which will incorporate a broader assessment of value of a medicine, known as value based pricing, for new medicines (new active substances), in conjunction with a successor scheme to the 2009 PPRS.

The current branded medicines pricing scheme, the PPRS, is a voluntary scheme agreed between the Department of Health and the ABPI as the recognised body representing the branded pharmaceutical industry.

Our joint aim is to achieve a negotiated agreement for the new arrangements, including value based pricing. We expect negotiations will begin later this year and these will cover both value based pricing and the successor scheme to the 2009 PPRS. In addition to the voluntary arrangements that we hope to agree through negotiation, there will continue to be a statutory scheme for those companies that choose not to participate in the voluntary arrangements.

On 6 November 2013, the DH announced that the 'heads of agreement' of the voluntary PPRS had been agreed between themselves and the ABPI, acting on behalf of the pharmaceutical industry. The headline of the agreement was that the industry would not face the now traditional 'up-front' price cut but that a payment will be calculated based on NHS net sales based over and above an overall drugs bill cap. This was intended to be a one-off contribution to 'austerity', after which it may 'get back to normal' from the end of 2018.

The growth caps are set out below, as are the estimated payments back to the UK DH required of the industry (subject to some exceptions); 2014 is set at a specific level but thereafter it will be based on actual increases in the NHS drugs bill.

The exemptions include the fact that new chemical entities (NCEs) are exempt from the manufacturer's rebate calculations but will be included in the overall drug bill growth calculations. This effectively means that established products, in line with previous years' PPRS schemes, pay for future market entry and growth of new products. It is important to understand that medicines that are not classed as NCEs, based on DH seeking Medicines and Healthcare Products Regulatory Agency (MHRA) confirmation, are neither exempt from the PPRS payments, nor do they enjoy freedom of pricing. Therefore, significant innovations involving new uses for old compounds or examples of 'incremental innovation' are afforded no incentives under the PPRS.

There are certain companies that will be exempt from the payments, in particular companies with greater than £5 million net NHS sales. However, there is no exemption for the first £5 million for those companies with sales in the range £5 million to £25 million as there was in the previous scheme.

The official statement provides more detail as well as web links to the full PPRS agreement.3

The Statutory Scheme

The DH launched a consultation in June 2013 outlining planned revisions to the Statutory Scheme. It proposed 10 per cent, 15 per cent or 20 per cent price reductions for the medicines the NHS purchases through the scheme and 15 per cent was finally settled on as the DH's preferred option.4 It was estimated that this would achieve a net benefit of £1,256.8 million.5

The consultation also proposed that the Statutory Scheme, like the PPRS, should apply to average selling prices (ASPs), which are the prices negotiated by hospitals. These negotiated discounts typically exceed the price reductions required under the Statutory Scheme; therefore, adjusting prices in the Statutory Scheme alone may not reduce the price the NHS is actually paying. However, it was decided in the final regulations that the 15 per cent price reduction would not apply to ASPs as this was deemed to be too complicated and required further consideration. Future consideration by DH on this issue may result in the price reduction being applied in addition to any discounts already negotiated and reflected in the ASPs. This remains one of the key areas of uncertainty for companies subject to the Statutory Scheme.

In addition, the final Statutory Scheme included the removal of certain exemptions, replacing them with one to protect small firms (those with NHS sales of branded medicines of less than £5 million per annum) from the price cut and information provisions. The final Statutory Scheme also revises the information-gathering requirements, so that necessary information is collected and may enable the DH to apply the price cut to ASP in the future.

Beyond the headline changes there could be some other issues to bear in mind when considering the Statutory Scheme:

  • The Statutory Scheme refers to the principle that there should be observance of not just the letter of the law but its spirit; one hopes that this principle would not just apply to companies but that the DH would act similarly and be flexible, for example in its leniency to small and medium-sized enterprises (SMEs).
  • There is no clear appeal process suggesting that judicial review is the only recourse against an unfair decision.
  • Penalties will apply to UK health service sales when 'necessary information' is not provided.

How has the PPRS Deal Affected Value-based Pricing?

The plan had been to develop reforms to the way value is measured, in parallel6 with the negotiations on the PPRS.

The current methodology used by NICE to appraise new technologies including drugs is the calculation of additional health benefits, measured in QALYs (Quality Adjusted Life Year) per unit cost of the new intervention, compared with existing treatment.

In June 2013, the DH provided NICE with terms of reference for the development work to support value assessments in the context of VBP being the then-favoured approach. These stated that the methods for value assessment of branded medicines under VBP should:

  • be applied to medicines within the scope of the VBP system, and incorporated into the methods for other categories of guidance at NICE's discretion;
  • adopt the same benefit perspective for all technologies falling within the scope of VBP, and for displaced treatments;
  • be as transparent and predictable as possible;
  • be informed by the best available evidence;
  • include a simple system of weighting for burden of illness that appropriately reflects the differential value of treatments for the most serious conditions;
  • encompass the differential valuation of 'End of Life' treatments in the current approach within the system of Burden of Illness weights;
  • include a proportionate system for taking account of Wider Societal Benefits;
  • not include a further weighting for Therapeutic Innovation and Improvement;
  • produce guidance for patients and the NHS which describes the clinical and cost effectiveness of the technology and its position in clinical practice.

VBP has clearly not happened, with the concept of having NICE setting prices under the VBP concept seemingly abandoned and VBA now likely to be delayed until late 2014, nearly a year after the new pricing agreement came into effect.

On 6 January 2014, NICE launched a consultation on the guide to the processes of technology appraisals (this considers exactly what happens and when, throughout technology appraisals), which was open until 28 March. This consultation does not address the methods of technology appraisals (such as the consideration of burden of illness and wider societal impact), which are the subject of a separate consultation after the NICE Board approves the relevant proposals. At the NICE board meeting on 22 January 2014, papers were presented to the board for their approval, beginning the process of a public consultation on the NICE methods to assess health technologies.7 These papers laid out the draft proposals, which appeared to water down the original intentions of government further still by offering an alternative to wider societal benefits (WSBs) that were originally proposed as the key new criterion for value assessment. Instead, wider societal impact would be assessed using the absolute shortfall in QALYs resulting from living with a disease or condition. NICE states that this alternative approach may not be fully consistent with the terms of reference, but the institute believes that its merits should be considered alongside those which accompany the approach explored by the DH.

NICE is quite clear that any approach to wider societal benefit will inevitably take age into account. The age of any individual has an impact on what they are able to contribute to, and consume from society. They state that 'it would be quite wrong for NICE to use the simple fact of the age distribution of people with particular conditions as the basis for deciding whether or not the NHS should offer new treatments, just as it would be wrong to use gender or any of the other "protected" characteristics under the equalities legislation.'

On 9 January 2014, NICE responded to a press article on the topic of their changing methods. Sir Andrew Dillon, Chief Executive of NICE, said: 'We have no intention of introducing a change to our methods that would disadvantage older people.'8

This is somewhat reassuring in the sense that future legal challenges based on protected characteristics are likely to be fewer, but it does suggest that any new value-based assessment of technologies will not be dissimilar to what we have today. In fact, what this appears to mean in practical terms is that the NICE process will be largely 'business as usual' and, as has been the practice in the past, the QALY will be at the heart of every decision.

However, the threshold that NICE applies to determine whether a medicine is good value for money may be changing. In the existing methods guide (2013), manufacturers are asked to present the probability that the treatment is cost effective at maximum acceptable ICERs of £20,000 to £30,000 per QALY gained. In the latest proposals from NICE, they state that the threshold at which a technology is judged to be good value for money for the NHS is currently £20,000 per QALY gained. Is this a reduction to the threshold by stealth, or a genuine oversimplification by NICE?

UK Pricing and Health Technology Assessment: the International Dimension

Medicine prices differ across the European Union (EU) due to factors that are often beyond the control of companies. In Europe price is decided at a national level; it is not an EU competence. National health and pharmaceutical policies and priorities, wholesaler and pharmacy margins, VAT rates, pack sizes, distribution channels and exchange rate fluctuations all influence price in any individual EU Member State.9 There is an EU Pricing Transparency Directive10 but in broad terms it only covers the requirement for national pricing and reimbursement decisions to be open and objective, to be within stated timelines and reviewable, and for there to be an appeal mechanism. It is currently under review.

Within Europe, Member States compare and sometimes reference their prices to other countries' prices. Reference pricing is very complex, and to avoid unanticipated results the relevant authorities need to take account of differences between Member States such as purchasing power, GDP per capita, country-specific pharmaceutical regulation and polices, and also countries under austerity measures, especially where temporary measures have been introduced to adjust price.

Lower prices through reference pricing can force companies to consider the impact of launching a product in one country on the revenues of other countries. Ultimately, when a country's international reference pricing (IRP) policies are extremely aggressive, such as when they base their price on the lowest price in a range of countries in a 'basket', it directly impacts the profitability of launching a product in that country.

The lack of a headline price reduction under the PPRS (as opposed to under the Statutory Scheme) shows that the DH has been persuaded at least of the influence of UK prices on IRP. However, it does overlook the reality of the situation that discounts, rebates and underlying 'net' prices, are taken into account by some Member States, such as the AMNOG process in Germany.11

Impact on the Life Sciences Industry

In his 2013 Autumn Statement, George Osborne (UK Chancellor of the Exchequer) announced that a new science and innovation strategy would be produced in time for the 2014 Autumn Statement and would include plans for spending on new infrastructure. He said: 'To ensure that UK capabilities remain world-leading in the long term, the Government will produce a Science and Innovation Strategy for Autumn Statement 2014', and 'Central to this will be a roadmap of how the Government's long-term commitment on science capital announced at Spending Round 2013 will deliver the research and innovation infrastructure needed to ensure that the UK's capabilities remain world-leading while playing a key role in economic growth and scientific excellence.'12

A recent review of the current Strategy for UK Life Sciences commented that real progress had been made over the past two years, which has had a positive impact on the life sciences industry. This is clearly positive for the United Kingdom, but it is important that the good work done is not undermined.13

Erosion of pricing and its effect on industry is difficult to simply quantify because of the multiple policies and stakeholders involved in the process of taking an innovation from laboratory bench to the patient's bedside.

However, it is common sense to say that lower prices decrease incentives and the ability to innovate, and, perhaps more relevant for patients served by the UK NHS, to launch medicines in a given country. Developments such as these new UK price reductions not only impact the revenues of pharmaceutical companies, but can also act to delay patient access to new innovative treatments.

Innovative companies must constantly adapt to take into account the range of schemes operating in different countries, from schemes focusing only on affordability or cost-effectiveness to those that do not constrain the rewards so as to ensure patient access to highly innovative treatments.

The European School of Management and Technology produced a White Paper in 2009, which concluded that, in designing optimal pharmaceutical pricing and reimbursement regulation, the benefits of more affordable or cost-effective drugs must be traded against the costs of less pharmaceutical innovation, with fewer projects being developed in general and in particular in low-margin therapeutic areas and with little potential of being considered highly innovative at the time of market launch.14

Finally, it is important to consider how the new regime might impact investment in stratified or personalised medicines such as highly effective biotechnology therapies. Such therapies involve the same or higher development costs in smaller populations and typically have a higher unit price. Manufacturers may be understandably worried about the likelihood of achieving acceptable levels of pricing and then uptake through what appears to be an unpredictable route to market in the United Kingdom.

Conclusion

It is certainly a very difficult task to reach a long-term successful balance between facilitating NHS access to good quality branded medicines at reasonable prices and a fair return for the industry to enable it to research, develop and market new improved and innovative medicines.

Will this latest round of negotiation between the DH and ABPI be seen as a success or failure? The answer must be judged over time against a range of measures, including the level of inward investment by life science companies, launch sequencing in the United Kingdom compared with our neighbours in Europe, and the total size of the branded medicines bill and the corresponding size of the repayment to the DH.

Our initial view is that these new arrangements will stifle inward investment into the United Kingdom as companies find it increasingly difficult to justify investment decisions based on lower net UK prices when compared with other global markets.

In its Plan for Growth and its Strategy for the Life Sciences, the UK Government has stated its support for an early access plan (to new innovative technologies) and there are growing rumours of support for an innovative medicines bill, which may or may not come to fruition.

Whatever impact the outcome of the recent pricing negotiations may have, there is the possible unintended consequence of limiting UK patients' access to new innovative medicines, as companies, particularly innovative small and medium-sized enterprises (SMEs), delay launch in the United Kingdom while they negotiate a more favourable unit price elsewhere in Europe. There are clearly short-term financial benefits for the United Kingdom in this new deal, but these benefits may lead reduced patient access and the financial consequences to health and ultimately finances in the longer term. It remains to be seen if the DH and NICE will apply a pragmatic approach to individual cases to reduce the risks to access. In addition, only time will tell how UK pricing policy interrelates with, and impacts on, the government's commitments in its UK life sciences strategy.

The latest round of pricing negotiations leaves open many questions. We have highlighted some of the outstanding issues below to assist innovators as they consider how future pricing decisions in the United Kingdom may impact important strategic decisions including research and development investment and launch strategy.

  • How will the PPRS and value-based assessment impact pricing of medicines under early access schemes, assuming they are a new chemical entity? Will existing patient access schemes be in danger as manufacturers realise they have to reduce the price further than originally negotiated with the DH and NICE?
  • How will UK pricing changes impact the take-up and investment in the United Kingdom in stratified 'personalised' medicines and other innovative biotech technologies?
  • Will current uncertainty in deciding the level of risk associated with the PPRS versus the statutory scheme put companies off from entering the United Kingdom?
  • Will there be an initial UK NHS list price followed by a secret (commercial and in confidence) value-based price once NICE come to review technologies?
  • Will any future legislation on innovative medicines include discussion on pricing, such as further exemptions to price cuts to encourage innovation?

References

2014 PPRS
http://www.gov.uk/government/uploads/system/uploads/attachment_data/file/266539/2014_PPRS_Final_corrected_at_1530_16_Dec.pdf

The Health Service Medicines (Control of Prices and Supply of Information) (Amendment) Regulations 2013: http://www.legislation.gov.uk/uksi/2013/2881/made

Statutory scheme for pricing branded medicines: Impact Assessment
http://www.gov.uk/government/uploads/system/uploads/attachment_data/file/207886/impact_assessment_statutory _scheme_branded_med.pdf

June 2013 Statutory Regulations consultation – response:
http://www.gov.uk/government/uploads/system/uploads/attachment_data/file/255301/Consultation_Response.pdf

Joint DH/ABPI statement on arrangements for pricing branded medicines from 2014
http://webarchive.nationalarchives.gov.uk/20130107105354/http://dh.gov.uk/health/2012/08/abpi-dh-statement/

Christian Hill, Director, MAP BioPharma Limited – corresponding author.

Paul Ranson, Partner, Pinsent Masons LLP, London.

Helen Cline, Legal Director, Pinsent Masons LLP, London.

Footnotes

1 'Strength and opportunity 2011' The landscape of the medical technology, medical biotechnology, industrial biotechnology and pharmaceutical sectors in the UK Annual Update – December 2011 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/32458/11-p90-strength-and-opportunity-2011-medical-technology-sectors.pdf.

2 The Pharmaceutical Price Regulation Scheme Eleventh Report to Parliament – February 2012 (http://webarchive.nationalarchives.gov.uk/20130107105354/http://www.dh.gov.uk/prod_consum_dh/groups/dh_digitalassets/@dh/@en/documents/digitalasset/dh_132793.pdf).

3 https://www.gov.uk/government/news/government-agrees-breakthrough-drug-pricing-deal-with-pharmaceutical-firms.

4 http://www.legislation.gov.uk/uksi/2013/2881/contents/made.

5 http://www.gov.uk/government/uploads/system/uploads/attachment_data/file/207886/impact_assessment_statutory_scheme_branded_med.pdf.

6 http://www.abpi.org.uk/media-centre/newsreleases/2013/Pages/250113a.aspx.

7 http://www.nice.org.uk/aboutnice/whoweare/board/boardmeetings/PublicBoardMeeting22January2014.jsp?domedia=1&mid=AFFFE04B-BFBC-88FA-6D77D36F8ADE91B2.

8 http://www.nice.org.uk/News/Article/nice-responds-to-telegraph-article-on-value-based-assessment.

9 EUCOPE Paper – Pharmaceutical Prices: Why are there differences between Member States? http://www.eucope.org/en/files/2012/10/EUCOPE-IRP.pdf.

10 Pricing Transparency Directive http://ec.europa.eu/enterprise/sectors/healthcare/competitiveness/pricing-reimbursement/transparency/index_en.htm.

11 EUCOPE Paper – Pharmaceutical Prices: Why are there differences between Member States? http://www.eucope.org/en/files/2012/10/EUCOPE-IRP.pdf.

12 http://www.out-law.com/en/articles/2013/december/government-promises- new-strategy-on-science-and-innovation/.

13 http://www.abhi.org.uk/multimedia/docs/press/2014/LSUK%20 Report%20on%20Life%20Science%20Strategy.pdf.

14 http://static.esmt.org/publications/whitepapers/WP-109-03.pdf.

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