How the United Kingdom Controls Pharmaceutical Prices and Spending: Learning From Its Experience

Abstract

To control costs and improve access, nations can adopt strategies employed in the United Kingdom to control pharmaceutical prices and spending. Current policy evolved from a system created in 1957 that allowed manufacturers to set launch prices, capped manufacturers’ rates of return, and later cut list prices. These policies did not effectively control spending and had limited effects on purchase prices. The United Kingdom currently controls pharmaceutical spending in 4 ways. (a) Since 1999, it has typically paid no more than is cost-effective. (b) Since 2017, for medicines that will have a significant budget impact, National Health Service England seeks discounts from cost-effective prices or seeks to limit access for 2 years to patients with the greatest need. (c) Since 2014, statutes and a voluntary scheme have required branded manufacturers to pay the government rebates to recoup the difference between the global pharmaceutical budget and actual spending. (d) For hospitals, generics and some patented drugs are procured through competitive bidding; community pharmacies are reimbursed through a system that provides an incentive to beat average generic market prices. These policies controlled the growth of spending, with the largest effects following budget controls in 2014. Changes since 2008 have reduced savings, first by paying more than is cost-effective for cancer drugs and then by applying higher cost-effectiveness thresholds for some drugs used to treat cancer and certain other drugs.

Keywords

pharmaceuticals HTA cost control price control budgets cost-effectiveness comparative effectiveness

Introduction

The United Kingdom has a National Health Service (NHS) that covers the entire population, although ∼10% of the public purchases private health insurance.^1,2 This article explains the current UK pharmaceutical cost control policies that apply to NHS purchases. It traces their evolution, assesses the strategies employed, and draws inference for reform in other countries.

The current policy includes 4 main components. First, since 1999, the NHS has typically not paid more for branded medicines than the National Institute for Health and Care Excellence (NICE) has found is cost-effective. Second, since 2017, for drugs anticipated to have a significant budget impact, NHS England and NHS Improvements (hereafter referred to as NHS England) can seek discounts from prices that NICE has found are cost-effective, or it can limit access to such drugs for 2 years to patients with the greatest need. Third, since 2014, the Department of Health (DOH) has used a budget to control the growth of total NHS-branded pharmaceutical spending.³ Fourth, for generics (and a limited number of brands with competition), the NHS purchases most hospital medicines through competitive bidding and reimburses community pharmacies with prices reflecting market pricing.

Contemporary policies were grafted onto the Voluntary Scheme that began in 1957. Initially, the Voluntary Scheme regulated mainly profits, but not launch prices. However, the creation of NICE in 1999 introduced de facto limits on prices that could be charged to the NHS (although NICE was initially charged with reducing regional variation in decisions about what should be funded). Changes in 2014 transformed the Voluntary Scheme into a system of budget regulation. Budget controls are a powerful cost-containment tool because they take into account not only prices but also the volume purchased and the mix of drugs prescribed, each of which also affects spending.

Price and Profit Controls Through a Voluntary Scheme

Following World War II, the government ended drug price controls and its formulary of essential medicines. It negotiated a Voluntary Scheme under which manufacturers set launch prices, and the government regulated company rates of return or post-launch prices. The Voluntary Scheme evolved through 5 phases (Table 1), 4 of which predate contemporary policy.

Table 1.

Key Elements of Contemporary U.K. Pharmaceutical Cost Control Policy and Key Developments in the Voluntary Scheme for Branded Medicines Pricing and Access.

Key elements of contemporary pharmaceutical cost control policy
1	1999	NICE cost-effectiveness thresholds cap required payment for new drugs
2	2014-2023	A statutory and Voluntary Scheme require branded manufactures to pay rebates when total spending exceeds government set budget
3	2017	NHS England negotiates price reductions for drugs with budget impact or can prioritize access for 2 years
4	1990s to present	Government employs market competition to procure drugs at prices lower than maximum allowed reimbursement

Key developments of the voluntary scheme
1	1948-1957	The government negotiates prices without explicit criteria
2	1957-1969	A Voluntary Scheme employs price and profit controls
3	1969-1993	Profit controls replace price controls in the Voluntary Scheme
4	1993-2014	List price cuts supplement profit controls in the Voluntary Scheme
5	2014-2023	Following enactment of a statute in 2013, the Voluntary Scheme requires branded manufactures to pay rebates when total spending exceeds the government-set budget

NICE, National Institute for Health and Care Excellence; NHS, National Health Service.

Phase 1: 1948-1957: The Government Negotiates Prices Without Explicit Criteria

Initially, the Ministry of Health (MH) negotiated NHS purchase prices individually, a time-consuming task, without a fixed methodology. The burden and unsatisfactory results led the MH to seek an industry-wide pricing formula. The MH proposed price and earning caps based on production costs, similar to those for utilities and other government contractors. The Association of the British Pharmaceutical Industry countered with a plan that became the template for the 1957 Voluntary Price Regulation Scheme (VPRS) for the branded pharmaceuticals.

Since then, the Association of the British Pharmaceutical Industry and the government have renegotiated an agreement approximately every 5 years. Renamed the Pharmaceutical Price Regulation Scheme (PPRS) in 1978, it has since 2019 been called the Voluntary Scheme for Branded Medicines Pricing and Access (the Voluntary Scheme). Most companies participated because they believed that the 1939 Defense of the Realm Act authorized regulation of drug prices and that it was preferable to negotiate cost-control mechanisms.

Phase 2: 1957-1969: The Voluntary Scheme Employs Price and Profit Controls

Under the first VPRS, manufacturers set launch prices. After 3 years, the MH could set prices using 1 of 4 methods. It could: (a) employ the price of a comparable unbranded drug; (b) pay 12.5% markup on the cost of ingredients, production, and distribution; (c) adopt the export price (if exports exceeded 20% of sales); or (d) individually negotiate prices.⁴ The MH preferred the first 2 and manufacturers the latter 2. Using prices of comparable unbranded drugs followed prices in a competitive market. Basing prices on production costs allowed only modest markups and rates of return. In contrast, setting prices on branded drug export prices followed prices protected from competition by patents. Relying on negotiation required manufacturer agreement without a price ceiling.

Over time, the Voluntary Scheme lengthened the free pricing period and employed more frequent individual negotiations than the other pricing methods.⁵ The 1961 and 1964 VPRS allowed free pricing for 3 and 4 years, respectively. Under the 1957 VPRS, only 11% of post-launch prices were set through individual negotiation, whereas half were in 1967.⁶ Later agreements added a research and development allowance into the cost-based pricing formula.

In 1965, the MH appointed the Sainsbury Committee to study the pharmaceutical industry. Its 1967 report recommended basing prices on production cost rather than allowing free pricing unless firms exceeded the allowed return, which it found was typically done “because of the difficulties … in the costing of individual products.”^5,7

Phase 3: 1969-1993: Profit Controls Replace Price Controls

The 1969 and subsequent Voluntary Schemes, until 2014, employed profit rather than price controls, contrary to the Sainsbury Committee recommendations. They lowered post-launch prices only if firms exceeded allowed rates of returns. Moreover, companies could modulate prices: that is, reduce prices where they faced competition in return for raising prices where there was none. Firms that exceeded allowed profits were required to forfeit the excess profits or lower prices; firms earning <75% of their profit target could raise prices. The 1978 and 1986 renamed PPRS continued this policy.^5,7

Phase 4: 1993-1999: List Price Cuts Supplement Profit Controls

From 1993 to 2014, the Voluntary Scheme cut list prices uniformly, without an explicit methodology, in addition to capping rates of return.⁸ Price cuts applied to drugs already marketed and did not affect launch price. Price reductions ranged between 2.5% and 7% (Table 2). Each subsequent Voluntary Scheme continued to cut list prices, until 2014. However, the creation of NICE in 1999 introduced a different kind of cost control: de facto caps on prices the NHS would be willing to accept for drugs starting from the product launch, regardless of list prices that manufacturers set under the Voluntary Scheme.

Table 2.

PPRS and Statutory Scheme List Price Cuts: 1993-2013.

Regulatory scheme	PPRS	Statutory scheme
Year	List price cut	List price cut
1993-1998	2.5% annually	None
1999-2004	4.5% annually	None
2005-Sept. 2008	7% annually	None
2008 (Sept.)	Price freeze	Price freeze
2009	3.9%	5.8% less than 2008 list price
2010	5.8%	5.7% less than 2008 list price
2011	5.7%	5.5% less than 2008 list price
2012	5.5%	35.3% less than 2008 list price
2013	5.3%	3.9% less than 2008 list price

PPRS, Pharmaceutical Price Regulation Scheme.

Phase 5: 2014 to Present

Starting in 2014, the Voluntary Scheme enforced a global pharmaceutical budget and companies paid rebates when spending exceeded the budget. Firms that did not join the Voluntary Scheme were regulated under a statutory scheme that most firms found to be financially less favorable.

National Institute for Health and Care Excellence Caps Payment to No More Than is Cost-effective

In 1999, the United Kingdom created NICE to evaluate the clinical effectiveness and cost-effectiveness of new drugs, a form of health technology assessment.⁹ NICE appraised many drugs and determined whether they are cost-effective. Since then, the NHS is not obligated to fund drugs that are not cost-effective. With certain exceptions, cost-effectiveness appraisals cap prices that the NHS pays. Although commissioners can in theory prescribe drugs without restrictions, very little prescribing occurs for treatments not approved by NICE.⁹

When NICE finds that a branded drug is not cost-effective, manufacturers face 2 unattractive options: (a) lower their effective price to the NHS or (b) forego nearly all NHS sales. Manufacturers typically want high list prices because most European nations employ external reference pricing;¹⁰ they cap their health insurance payments based on list prices in the United Kingdom and other nations. Therefore, instead, pharmaceutical firms typically maintain list prices and offer the NHS confidential discounts, using patient access schemes or commercial arrangements. First used in 2002, patient access schemes became common in 2009. NICE listed 207 commercial arrangements on its website in February 2021.

Prior to NICE, drug coverage decisions were made by more than 200 local formulary committees, which may have had differing views on local priorities for funding and typically lacked expertise in assessing cost-effectiveness.¹¹ Coverage varied by hospital and region. The introduction of NICE appraisals provided analytical rigor in reimbursing drugs and reduced coverage variations. However, some regional variation in uptake persists because hospitals and commissioning agents control purchasing.¹² Clinical commissioning groups and specialized commissioning within NHS England sometimes cover drugs that NICE has not appraised, on an individual patient basis, in response to a doctor’s request.

Initially, NICE appraised about half of new drugs. In selecting drugs to appraise, NICE considered the population size, disease severity, resource impact, and whether, without guidance, there would be significant controversy over the evidence on clinical effectiveness and cost-effectiveness. Drugs infrequently appraised included some expensive medications for small populations referred to as “highly specialized technologies” and some inexpensive drugs.

Previously, some clinical commissioning groups did not purchase some drugs NICE appraised as cost-effective in order to allocate resources in other ways. Press exposés referred to regional variations as postcode lotteries.¹³ To reduce geographic differences, since 2005, a positive NICE appraisal has created a legal obligation for NHS commissioners and clinical commissioning groups in Wales to cover medicines.

Manufacturers initially criticized the use of cost-effectiveness appraisals, but today find them beneficial because a positive appraisal guarantees coverage, and they have pressed for NICE to conduct more appraisals. Since 2020, NICE has appraised each major indication of nearly all medicines with new active substances.³

NICE evaluates the improvement in life expectancy and quality of life resulting from medical treatment.¹⁴ When it began, NICE did not formally adopt a cost-effectiveness threshold; however, a review of its decisions found that in its early years, NICE decided that medications were cost-effective if they had an incremental cost-effectiveness ratio of less than £20,000 to £30,000 per quality-adjusted life-year (QALY). Although not mandated, that threshold has become the accepted practice with 2 important exceptions: certain drugs face a higher threshold (and higher price),¹⁵ and some drugs are financed through a cancer drug fund initially created to bypass cost-effectiveness restrictions and now reformed to manage prompt access and employ higher cost-effectiveness thresholds.

Relaxing NICE Cost-effectiveness Thresholds

Professor Karl Claxton’s 2015 study measured the marginal cost of various NHS expenditures to provide an empirical basis for determining cost-effectiveness.¹⁶ He examined the impact of local changes in expenditure and therapeutic areas on mortality and made inferences with regard to changes in quality of life. His conclusion: the cost-effective threshold for a QALY is £13,000 to £15,000, not the £20,000 to £30,000 NICE employed. Critics suggest that there should not be 1 threshold for all therapies because NHS expenditures are not uniform; however, no other empirical study exists of QALY costs in the NHS.

Since 2008, following political pressure to cover certain expensive drugs, NICE has moved in the opposite direction that the Claxton study recommended. It allows paying more than £30,000 per QALY for drugs used for end-of-life care and highly specialized technologies; in addition, the United Kingdom established a cancer drug fund to finance drugs that NICE had not assessed as cost-effective.¹⁷ Pharmaceutical firms were able to maintain high prices, in part due to political advocacy for different standards and in part because many people thought it was fair to pay higher amounts to save individuals or delay death.¹⁸ Patient associations (generally financially supported by manufacturers) lobbied for spending more on these drugs, public authorities responded, and manufacturers maintained high prices.

In 2008, the Secretary of State, Alan Johnson, stated that NICE could use a higher-than-usual threshold for end-of-life drugs. A 2009 NICE guidance proposed using a £50,000 QALY threshold for terminal illnesses where patients have less than a 2-year life expectancy and treatment can increase life expectancy by more than 3 months.¹⁹ A charity supporting cancer patients lobbied Conservative party leader David Cameron to pay for cancer medicines that were not cost-effective. In response, the Conservative party 2010 campaign manifesto pledged to create a fund to finance cancer drugs that were not cost-effective. When elected Prime Minister, Cameron allocated £200 million for a cancer drug fund, which removed price restrictions on oncology drugs.²⁰ Clinicians applied for funding on behalf of their patients. Nothing limited access or prices, and the fund soon overspent its budget.

In addition, NICE could find a cancer drug had “uncertain cost-effectiveness,” which allowed covering the drug for 2 years (where the £50,000 QALY end-of-life drugs threshold was plausible) and there could be further data to support cost-effectiveness analysis. By 2014, the fund had spent £416 million; by 2016, £1.27 billion cumulatively—and it then closed.²¹ A new cancer drug fund was founded in 2016 that employs a £50,000 threshold and (if the end-of-life criteria apply) is used to determine cost-effectiveness.

It is argued that highly specialized technologies, by definition, have a small market, so any revenues must be divided over a small number of patients and their price is therefore higher than other medicines. NICE generally avoided appraising highly specialized technologies, and they were nevertheless normally covered by the NHS. In 2017, NICE adopted £100,000 and £300,000 per QALY thresholds for treatments for “very rare diseases.”²² As a result, the NHS pays higher prices for many drugs than if NICE employed a uniform threshold and spends more for patients with a very rare illness, cancer, and treatments at the end of life.

National Health Service England's Budget Impact Test

In 2014, Gilead priced its hepatitis C drug, Sofosbuvir (Solvaldi), at £34,983 for a 12-week course of treatment (and £69,966 for a 24-week course of treatment), which NICE found was cost-effective. It would have cost nearly £1 billion, 1 million to treat the estimated 28,600 hepatitis C patients in England for only the 12-week course of treatment.²³ In response, NHS England granted access to patients in most immediate need; others received less costly and less effective treatments.

In 2017, NHS England adopted a policy for the approximately 20% of new drugs expected to have a significant budget impact despite being cost-effective: those forecasted to cost more than £20 million annually.²⁴ If the manufacturer does not offer sufficient discounts, NHS England can ask NICE to restrict the medicine's use for up to 2 years to certain indications.²⁰ It is unknown how many firms reduced prices, the discounts the NHS received, or the number of drugs with phased-in introductions. It seems likely that NHS England has limited leverage because public opinion will resist denial of coverage when a drug provides dramatic benefits and no alternative therapy exists, precisely when firms are most likely to seek high prices.

Spending Caps Enforced Through Rebates

Since 2014, the United Kingdom has employed a statute and the Voluntary Scheme to cap branded drug spending. In 2013, a statute authorized the DOH to set launch prices and cut list prices by 15% for companies outside the Voluntary Scheme.²⁵ Most manufacturers did not want the DOH to cut list prices, because a quarter of European nations used U.K. prices in setting their own prices. The 2013 statute therefore enabled a fundamental change in the Voluntary Scheme.²⁶

The 2014 Voluntary Scheme capped total branded pharmaceutical spending. Manufacturers agreed to make up the difference between the DOH pharmaceutical budget and actual sales by paying rebates on their sale revenue. The 2014 Voluntary Scheme allowed 1.1% annual spending growth over 5 years (0% in 2014-2015, 1.8% in 2016-2017, and 1.9% in 2019).²⁷ Based on spending predictions, the initial rebate rate was 3.74% of 2014 sales. Subsequent rebates were adjusted to account for actual spending. Drugs introduced after 2014 were exempt from rebate payment. This policy was continued in the 2019 Voluntary Scheme. Table 3 displays spending growth rates, estimated payments, actual payments, and list price cuts for the 2014 and 2019 Voluntary and Statutory schemes.

Table 3.

The 2014 and 2019 Voluntary and Statutory Schemes: Target Spending Growth Rates, Anticipated Company Payments, and Actual Company Payments or Price Cuts.

	Voluntary scheme			Statutory scheme
Year	Allowed spending growth rate (%)	Estimated payment rate (%)	Actual payment rate (%)	Spending growth rate	2014-2018: list price cuts 2018 (April)-2023: company payment rate:
					List price cuts
2014	0	3.74 (actual)	3.74		15% less than 2013 list price
2015	0	7.13	10.36		15% less than 2013 list price
2016	1.8	9.92	7.8		15% less than 2013 list price
2017	1.8	9.92	4.75^a		15% less than 2013 list price
					Payment Rate
2018	1.9	9.92	7.8^a		7.8% (April 2018)
2019	2	9.6 (actual)	9.6	1.1% per year	9.9%
2020	2			1.1% per year	14.7%
2021	2			1.1% per year	20.5%
2022	2			1.1% per year
2023	2			1.1% per year

The bold indicates the first year of each plan.

Actual payment rate set by negotiation for 2017-2018.

In 2017, legislation replaced Statutory Scheme list price cuts with rebate payments, making it similar to the Voluntary Scheme.²⁸ It required firms to pay 7.8% of their sales revenue in 2018. In 2018, the DOH and Social Care proposed, and Parliament enacted, a revised Statutory Scheme that set spending growth at 1.1% annually.²⁹ Branded manufacturers were predicted to pay rebates of 9.9%, 14.7%, and 20.5% in 2019, 2020, and 2021, respectively.²⁶

The 2019 Voluntary Scheme set the annual NHS pharmaceutical spending growth rate at 2% for each of the next 5 years. Branded manufacturers initially paid 9.6% rebates. Future rates will be adjusted based on actual spending.³ There are rebate exemptions for 3 years on sales of new active substances. Companies selling less than £5 million annually and firms earning less than £25 million have the first £5 million of sales exempted.

Public Tendering and Competitive Generic Pricing

The United Kingdom employs market competition for certain hospital purchases and in community pharmacies. The NHS purchases certain medicines nationally, including most medicines for oncology, retroviral treatment of HIV, treatment of Hepatitis C, vaccines, and other high-cost medicines. Group hospital associations and individual hospitals can purchase drugs to meet needs not met by national purchasing and to meet local needs more rapidly than can be done through national purchasing.

For hospitals, generics and some patented medicines are procured through tendering—that is, competitive bidding. The NHS England Commercial Medicines Unit issues requests for bids. Typically, there are separate tenders for each medication. Usually, there are separate tenders for specific forms of administration and doses. Usually, NHS England seeks 2 or 3 suppliers nationally, and they serve distinct regions. Contracts require sellers to supply as much medication needed for 2 years; the NHS makes the best endeavors to purchase anticipated needs but retains purchasing flexibility.

Community pharmacy reimbursement for branded drugs is set according to list prices established under the Voluntary or Statutory Scheme. For generics, reimbursement prices rely heavily on market competition. A complicated array of arrangements includes surveys of the prices pharmacies actually pay to ensure that reimbursement reflects market prices.

Pharmacies earn income through 2 sources: (a) activity-based payments or service fees and (b) margin on the difference between reimbursement of medicines dispensed and purchase prices. Both are negotiated each year. For the sales margin, a target level is set each year. Rolling surveys examine invoices from pharmacies to assess the margin on a representative sample of medicines. Statistical analysis allows an estimate of the total margin earned on all medicines dispensed by pharmacies in England, which is compared to the negotiated target margin. Any difference between target and actual margin is made good in the following period through adjustments to reimbursement prices. This works in aggregate for England. Each pharmacy owner has an incentive to purchase medicines as cheaply as possible. Pharmacies that purchase at better-than-average prices/margins do well, whereas those that purchase at higher-than-average prices/margins do less well.

There is a complicated parallel system for setting prices of individual medicines. Brands are reimbursed at the Voluntary Scheme list price. For generics, reimbursement of individual medicines is intended to reflect market prices, with sufficient margin calibrated prospectively to yield the aggregate target margin and to adjust for any over- or under-compensation from previous periods.

The Impact of Price, Profit, and Budget Regulation

NHS pharmaceutical spending grew rapidly when the PPRS regulated only company profits and cut prices according to government reports. Prescription drugs in 1950 constituted 8.4% of NHS spending; they grew to more than 11% in 1965.⁵ PPRS reports to Parliament indicate that pharmaceutical spending in England in 1992-1993 was £2641 million, 11.2% of NHS spending.³⁰ It grew to £4339 million in 1998-1999, 13.8% of NHS spending.³⁰

The Office of Health Economics has the longest time series of NHS pharmaceutical spending data. From 1969 to 2011 (42 years), it grew at a 5% compounded annual growth rate, adjusted for inflation (Tables 4 and 5).³¹ The annual spending growth rate from 1969 to 2011 ranged from an 11% increase in 1999 to a 4% decrease in 2005 resulting from a Voluntary Scheme price cut. In contrast, since 2014, annual pharmaceutical spending has increased by less than 2%.

Table 4.

Growth of NHS Pharmaceutical Spending 1969-2011.

Time frame	Total NHS medicines (real value growth rate at 2018 prices expressed as a %)
1969-1980	49
1980-1990	63
1990-2000	104
2000-2010	40
2010-2011	35
1969-2009 (40 years)	595
1969-2011 (42 years)	573
1969-2011 (CAGR over 42 years)	5

NHS, National Health Service; CAGR, Compounded annual growth rate.

Source: Hawe, E., Cockcroft, L. OHE Guide to UK Health Care Statistics, 2nd ed. London: Office of Health Economics; 2013:138. Calculation of Growth rates by Ryan Nagy.

Table 5.

Estimated Total NHS Expenditures on Pharmaceuticals at Manufacturers’ Prices United Kingdom, 1969-2011, in £ million (Cash).

Year	Total NHS medicines^a (nominal value)	Total NHS medicines (real value 2018 prices)^b	Annual real growth rate (%)	5-year real growth rate (%)	10-year real growth rate (%)
1969	144	2328	N/A	N/A	N/A
1970	159	2416	4	N/A	N/A
1975	279	2299	N/A	−5	N/A
1980	826	3479	N/A	51	44
1985	1627	4843	N/A	39	111
1990	2533	5656	N/A	17	63
1995	4583	8655	N/A	53	79
1996	4880	8999	4	N/A	N/A
1997	5327	9524	6	N/A	N/A
1998	5807	10,038	5	N/A	N/A
1999	6551	11,152	11	N/A	N/A
2000	6991	11,559	4	34	104
2001	7672	12,465	8	39	N/A
2002	8623	13,780	11	45	N/A
2003	9557	14,843	8	48	N/A
2004	10,403	15,690	6	41	N/A
2005	10,258	15,046	−4	30	74
2006	10,705	15,216	1	22	69
2007	11,224	15,298	1	11	61
2008	11,635	15,250	0	3	52
2009	12,278	16,178	6	3	45
2010	12,852	16,188	0	8	40
2011	13,079	15,659	−3	3	35

NHS, National Health Service.

Notes: All tables exclude dressings and appliances

These tables have been obtained by deflating the net ingredient cost (before discount) of prescriptions dispensed during the year with a standard manufacturers’ discount rate of 12.5% (15% prior to 1980). They are also known as NHS sales at manufacturers’ prices. These tables are representative of NHS expenditure on medicines, although the discount rate may differ slightly from that obtained by the NHS, which varies from year to year. Tables from 1996 to 2011 for hospital expenditure are based on English data and a population grossing factor to yield a U.K. estimate.

Adjusted for 2018 inflation. Based on the Office of National Statistics (ONS) Consumer Price Inflation Index.

Source: Hawe, E., Cockcroft, L. OHE Guide to UK Health Care Statistics, 2nd ed. London: Office of Health Economics; 2013:138. Table 4.7. Estimated total NHS expenditures on pharmaceutics as the manufacturers' prices, UK, 1969-2011. Growth rates calculated by Ryan Nagy.

Profit controls had only modest impact on prices and spending.⁵ The Sainsbury Committee found that returns on capital were easily manipulated because manufacturers determined transfer prices for products, intellectual property, and services acquired from foreign subsidiaries.³ Firms shifted income to other jurisdictions. By 1967, only 27% of NHS pharmaceutical purchases were from British-owned firms. Other purchases were: the United States (49%), Swiss (14%), and other European firms (10%).⁵ Firms also had great leeway in attributing costs to research and development or promotion. The DOH and Social Security lacked the capacity to verify company reports, according to public auditors in 1983.^32,33

The Sainsbury committee found that export drug prices were not competitive because patents created monopolies and that it was not possible to determine “the reasonableness of overall profits without a detailed examination of the prices of individual medicines…because [that] fails to identify the specific products that are largely responsible for the firm's profits.”⁵

Moreover, public officials balanced spending controls against the promotion of British industry.⁵ The same civil servants oversaw the Voluntary Scheme and promoted pharmaceutical sector investment, which had conflicting goals.³⁴ The 12 PPRS reports to Parliament (1996-2014) tout industry employment contributions. One report noted, “…the Departments must…feel satisfied that reasonable…prices are being paid out of the public purse… On the other side, account has to be taken of the…future development of the pharmaceutical industry….to…expand its valuable export trade.”³⁵ Critics argue that the pharmaceutical industry captured regulators.³⁶

Most important, the Voluntary Scheme only restricted excessive profits. The pharmaceutical industry differs from many industries in that much of its capital is in the form of intangible assets from intellectual property, and this affects rates of return. Be that as it may, the Voluntary Scheme allowed rates of return between 21% and 25%. Since 1996, firms have set a profit target of up to 25% and could exceed their targeted profit rate by 40% (raised to 50% in 2014) before returning excess profits. The 2014 allowable rate of return was 21 percentage points, higher than typical in other industries. The 2018 average U.K. rate of return was 12.6% for non-financial corporations, 15% for top industrial firms, and 17.4% for service companies.³⁷ Originally, the Voluntary Scheme regulated returns on capital employed; later, it allowed returns on capital or sales. Most U.K.-based companies reported returns on capital; most non-U.K. companies reported returns on sales.

From 1988 to 1991, an average of 38 out of 60 firms per year earned excessive profit; only 1 was required to reduce prices, while others wrote checks to reimburse the excess profits. An Office of Fair Trading Commission study found that “profit repayments in the 1999-2004 scheme…represent[ed] only about 0.01 [percent] of company PPRS revenues… .”³³

Cutting list prices between 1993 and 2014 had less impact than expected. It reduced purchase prices in retail pharmacies, but often not in hospitals because they received discounts from list prices when competing products were available. Furthermore, once manufacturers understood that the DOH would routinely cut prices, they set launch prices in anticipation of future price cuts.³³ In addition, price cuts did not discourage physicians from substituting low-cost medicines with newer more expensive products nor reduce the growth of sales volume, the former of which accounted for most increased spending.³⁰

The most significant spending controls began recently. Since 1999, NICE cost-effectiveness appraisals have capped most NHS purchase prices, and that helps explains the decline in annual spending growth rate from 10% (1990-2000) to 6% (2000-2011).³⁸ NICE’s impact was less than it could be because, in 2009, it employed a higher cost-effectiveness threshold for drugs used in end-of-life care, cancer, and rare diseases. Spending growth declined dramatically since 2014 when the Statutory and Voluntary Schemes capped annual branded drug spending growth to an average of 2%.

Conclusions

We can draw several lessons from the United Kingdom's experience.

Caps on pharmaceutical company rates of return are unlikely to effectively control prices or total spending because companies have great leeway in accounting for expenses and can shift profits among jurisdictions, and it is politically difficult to limit profits strictly.

Cost-effectiveness analysis can provide a principled basis to cap drug purchase prices. Manufacturers typically accept such prices when the alternate is to forego nearly all sales.

Using health technology assessment to cap purchase prices does not eliminate politics or value choices. In the United Kingdom, politics influenced which drugs NICE assessed and whether to use a single cost-effectiveness threshold or multiple thresholds for various categories of illness.

Paying no more than is cost-effective can slow, but not cap, spending growth.

The most effective spending control comes from setting budgets and requiring manufacturers to pay rebates when spending exceeds the budget. Yet budget caps work best when complemented by independent price controls. Without caps, new drug prices will be very high, rebate rates will escalate, and the system will spiral out of control.

Firms often sell drugs for less than maximum purchase prices when there are competing products.

Payers can employ competition while also setting maximum prices based on health technology assessment and employing budget controls.

According to lore, Winston Churchill remarked that Americans can be counted on to do the right thing after they have exhausted the other alternatives.³⁹ That aphorism might also apply to the United Kingdom. It attempted to control pharmaceutical spending initially through price controls, then through profit controls, and subsequently by cutting list prices and capping acquisition prices to no more than is cost-effective. These policies did not cap the growth of pharmaceutical spending. In 2014, the United Kingdom implemented budget controls and required that pharmaceutical firms pay rebates if spending exceeded the budget. This approach worked in the initial 5 years. Time will tell whether this is the United Kingdom’s long-term solution, or whether it will need to explore other alternatives. The apocryphal Churchill comment suggests that even with strong evidence regarding which policies effectively controlled spending in the United Kingdom and which did not, the United States and other nations also are likely to adopt effective policies only after experiencing the limitations of alternatives.

Footnotes

Acknowledgments

The research was supported in part by the IMéRA Institute for Advance Study, University of Marseille, and the Integrated Cancer Research Site. The author benefited from interviews with the following individuals: Amanda Adler, Meinhdert Boysen, Paul Catchpol, Kalipso Chalkidou, Karl Claxton, Blake Dark, Jim Furnis, Lelie Galloway, Katherine Glover, Daniel Law, Peter Littlejohn, Tom Luce, Francois Maignen, William Oliver, Danny Palnoch, David Watson, and Elizabeth Woodson. Thanks for comments on earlier drafts from Jim Furnis, Tom Luce, Francois Maignen, Danny Palnoch, and David Watson. Thanks for help with data from Ryan Nagy. Thanks for research assistance to Sam Hirl and Paola Rossetti. This article report reflects the views of the author, not of those he interviewed or those who reviewed the draft.

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The authors disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: This work was supported by the IMERA Institute for Advanced Study.

ORCID iD

Marc A. Rodwin

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Author Biography

Marc A. Rodwin has been a professor at Suffolk University Law School since 2001. Previously, he was an associate professor at the Indiana University School of Public and Environmental Affairs (1982-2000). He was employed in private law practice from 1982 to 1984. His books are Conflicts of Interest and the Future of Medicine: The United States, France and Japan (2011) and Medicine, Money and Morals: Physicians’ Conflicts of Interest (1993). He is the editor of the Journal of Law Medicine and Ethics Symposium on Institutional Corruption and Pharmaceutical Policy, Vol. 41 (2013). Rodwin's research has examined ethics, economics, and law related to health insurance, managed care, consumer health movements and consumer protection in health care, medical professional ethics, ownership of patient data, clinical trials, and medical malpractice. His recent research examines pharmaceutical law and policy in the United States and internationally. He has held visiting appointments at the French National Centre for Scientific Research, law and medical schools in France, and law schools in Japan. He has received fellowships from, among others, the Harvard Edmond J. Safra Center, IMéRA Institute for Advanced Study, Brocher Foundation, Social Science Research Foundation-Abe Fellowship, and Robert Wood Johnson Foundation Investigator Award. He holds a Ph.D. from Brandeis University Heller School (1991); a J.D. from the University of Virginia Law School (1982); a B.A. and an M.A. in philosophy, politics, and economics from Oxford University (1979); and a B.A. in analytical method and policy from Brown University (1977).

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