The Department of Health and Social Care (DHSC) has consulted with industry on its plans to change the rules governing NHS spending on branded medicines, with the new regime intended to take effect on 1 January 2024.

In this article, we discuss the branded medicines regime, consider the proposed changes and how they may affect businesses in the Life Sciences sector in the UK, and discuss some of the industry feedback to the proposals.  

How the cost of branded medicines to the NHS is regulated

Unsurprisingly, the NHS spends a lot on medicines – such spending is second only to staff costs as a share of NHS budgets.

The cost to the NHS of ‘branded’ (as opposed to generic) medicines is controlled by two schemes: the 2019 voluntary scheme for branded medicines pricing and access (VPAS) and a separate statutory scheme set out in the Branded Health Service Medicines (Costs) Regulations 2018 (the Statutory Scheme), which applies to pharmaceutical companies which have not volunteered to participate in VPAS.  

The basic mechanism underlying both schemes involves suppliers of branded medicines paying back to the government a proportion of the payments they receive from the NHS in respect of branded medicines.

The value of this levy is calculated to ensure that the NHS’s net spend on branded medicines grows by only a set percentage year on year (the allowed growth rate).

This approach is intended to strike a balance between the interests of the NHS and patients (in having access to reasonably priced branded medicines) and the life sciences industry (in ensuring that there is a steady (but not unsustainable) year-on-year increase in NHS spending on such products).

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Upcoming changes to the schemes

The 2019 collective agreement governing VPAS is due to expire at the end of 2023, and the DHSC is negotiating with the pharmaceutical industry to agree on a successor voluntary scheme to take effect from 1 January 2024. 

At the same time, and as an independent exercise, it intends to update the Statutory Scheme.  

Importantly, since the allowed growth rate for NHS branded medicine spend with companies in VPAS has been 2% since that deal was struck in 2019, whereas the Statutory Scheme has enforced only a 1.1% allowed growth rate, there is a risk for the large majority of pharmaceutical companies that currently enjoy the benefit of VPAS if that scheme lapses without replacement. 

The amendments proposed by the Department of Health and Social Care (DHSC) are:

  1. To increase the allowed growth rate under the Statutory Scheme;
  2. To add new exemptions from the pricing controls imposed by the Statutory Scheme, including one for new active substances and
  3. To introduce a life cycle adjustment mechanism to control spending on older branded medicines. 

Upcoming changes to the schemes

Increased annual growth rate

 Under DHSC proposals, the allowed growth rate under the Statutory Scheme would increase from 1.1% to 2% per year, which would bring it in line with that currently offered by VPAS (potentially helping to address the concern for pharmaceutical companies outlined above).

Exemption for New Active Substance

DHSC proposes to introduce additional exemptions from payment for certain types of sales (which already exist under VPAS) to the Statutory Scheme to ensure companies can continue to benefit if a successor to VPAS is not agreed. The exemptions relate to (amongst other things):

  • sale of medicines containing new active substances; and
  • centrally procured vaccines.

Life Cycle Adjustment (LCA)

A more radical change to the regime would be the proposed introduction of a pricing adjustment mechanism based on the product’s ‘life cycle’. 

This would mean that new medicines achieve higher prices at the start of their lifecycle (i.e., at launch) and lower prices towards the end (when, in theory, there should be more competition from generic alternatives and biosimilars).

The DHSC considers that there is currently a high percentage of older products that do not face sufficient competition and are, therefore, continuing to be sold at a high price.

The adjustment mechanism proposes to address this by imposing a higher supplementary payment percentage of up to 40% on older products, which will depend on the level of competition present in the relevant market. 

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Response from industry

The Association of the British Pharmaceutical Industry (ABPI) is the representative body of the pharmaceutical industry in the UK and is involved in the ongoing negotiations with DHSC over the replacement of the current VPAS.

In that context, it is clear from ABPI’s public response to DHSC’s consultation on the Statutory Scheme that the parties still have some ground to cover to reach an agreement. 

The ABPI notes that, since the VPAS deal was first struck, payments from pharmaceutical companies under the scheme have had to increase significantly as a percentage of the price of the branded medicines in order to keep the annual growth rate down to its required cap – following post-pandemic surges in demand, the level of the levy has reached 26.5% in 2023.

The ABPI argues that this stifles growth and investment in the sector, and, for example, Antonio Payano, CEO of Bayer UK, stating that the UK aspires to lead globally in life sciences; however, industry cannot support this ambition when it forfeits over a quarter of sales revenue annually in addition to taxes”;

Similarly, the ABPI objects to the introduction of the Life Cycle Adjustment, which it argues ‘will introduce even more instability to the UK market and be too imprecise and open to challenge, placing a considerable additional regulatory burden on companies’.

How the proposed changes to the Statutory Scheme are implemented and how negotiations on the replacement of VPAS progress will be important matters for the NHS, its patients, and the Life Sciences sector in the UK – as Victoria Atkins takes up her new role as Health Secretary following the re-shuffle of 13 November 2023, these are likely to be significant items on her in-tray.

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