Consultation outcome

Proposed changes to the statutory scheme to control the costs of branded health service medicines: consultation response

Updated 2 March 2023

Executive summary

The statutory scheme is one of 2 schemes, alongside the 2019 voluntary scheme for branded medicines pricing and access (VPAS, or the ‘voluntary scheme’), that control the prices of branded medicines to the NHS. Any company that supplies licensed branded medicines to the NHS is subject to the statutory scheme unless they opt to join VPAS. VPAS began on 1 January 2019 and runs until the end of 2023.

It is intended that both schemes should work together cohesively and in a complementary fashion to create an environment where medicines are supplied at an affordable price, in a way consistent with supporting both the life sciences sector and the broader economy. To this end, the government aims to maintain broad commercial equivalence between the 2 schemes.

The VPAS payment percentage increased from 15% in 2022 to 26.5% in 2023, in part due to high growth in medicines sales in 2022. However, the increase in the payment percentage between 2022 and 2023 is also in part due to the impact of the amendment agreed with the Association of the British Pharmaceutical Industry (ABPI) in January 2022 to in effect defer part of the payment calculated to be owed in 2022 to 2023. Had this amendment not been agreed, the 2023 payment percentage would have been 22.6% rather than 26.5%.

Between December 2022 and January 2023, the government consulted on changes to the statutory scheme. The scheme operates under the Branded Health Service Medicines (Costs) Regulations 2018 (‘the 2018 regulations’) as amended by:

• the Branded Health Service Medicines (Costs) (Amendment) Regulations 2018
• the Branded Health Service Medicines (Costs) (Amendment) Regulations 2020
• the Branded Health Service Medicines (Costs) (Amendment) Regulations 2022

This document analyses the responses to the consultation and sets out the government’s response to the issues raised.

In summary, following detailed consideration of consultation responses, the government has decided to implement its proposals as consulted on, to increase the payment percentage in the statutory scheme to 27.5% in 2023. Where companies have made payments at the lower rate of 24.4% between January and March 2023, they will pay a higher rate of 28.6% for the rest of the year.

These changes will continue to control the growth of medicines sales in the statutory scheme at 1.1% and maintain broad commercial equivalence with VPAS. The changes are expected to result in savings to the NHS of between £17 million and 19 million by 2023 compared to leaving the payment percentage unchanged. Our impact assessment estimates a total net present value of the change of between £79 million and £88 million, largely due to the additional services and treatments that the NHS will be able to provide.

In the response on the government’s reasons for the proposed changes, we discuss each question in turn:

• first, we set out the government’s consideration of responses received on proposals to change the payment percentage 2023
• the second section covers responses received on the level of the amended payment percentages and the underlying methodology.
• the third section considers responses on our assessment of the impact of our proposals, as well as their effect on those areas where the NHS Act 2006 requires us to consider and consult on. These include:
  • the economic consequences for the life sciences industry in the UK
  • the consequences for the economy of the UK
  • the consequences for NHS patients
• the final section considers views expressed on our assessment of the implications for the statutory duties of the Secretary of State for Health and Social Care

Annex A provides analysis of the relevant statutory duties in relation to the final decisions made about the proposed amendments.

The final impact assessment is published alongside this document.

The amendments to the 2018 regulations will be set out in the Branded Health Service Medicines (Costs) (Amendment) Regulations 2023 (‘the amendment regulations’) and will come into force on 1 April 2023.

Introduction

The voluntary scheme and the statutory scheme for branded medicines pricing aim to limit growth in the cost of branded medicines to the NHS. This is done to safeguard the financial position of the NHS, while taking into account the need for medicinal products to be available to patients and the health service on reasonable terms. The schemes also take into account the need to support the development of innovative new products and enable patients to access innovative treatments, as well as supporting the UK life sciences industry, the wider economy and patients.

On 16 December 2022 the government published a consultation on updating the statutory scheme payment percentage for 2023. The proposed change aims to continue to control medicine spend growth in the statutory scheme to 1.1% and maintain broad commercial equivalence with VPAS. The changes are expected to result in savings to the NHS of between £17 million and 19 million by 2023 compared to leaving the payment percentage unchanged. Our impact assessment estimates a net present social value of these changes of between £79 million and £88 million.

The consultation on these proposals closed on 26 January 2023, with 33 responses received.

The government is separately engaging with industry on a future voluntary scheme. As part of that engagement, we are aiming to further understand the impact of the voluntary and statutory schemes on the UK business environment, and discuss the opportunities and barriers facing the pharmaceutical sector, with a view to informing the design of the next schemes for 2024 and beyond.

The rest of this document summarises the key issues raised in the consultation and sets out the government’s response to the answers received. It also includes an analysis of the impact of the proposed amendments on the Secretary of State’s various statutory duties, such as the public sector equality duty and the Family Test.

Response on the government’s reasons for the proposed changes

Proposals to change the payment percentage 2023

Do you agree or disagree with the proposal to update the payment percentages?

Outline of proposals

The consultation proposed to update the payment percentage for the statutory scheme in 2023, to come into force from 1 April 2023.

The change was proposed to maintain broad commercial equivalence with VPAS, following greater than forecast medicines sales growth in 2022, and the impact of the amendment agreed with the ABPI in January 2022 to in effect defer part of the payment calculated to be owed in 2022 under VPAS to 2023. An equivalent amendment was also made last year to the statutory scheme. These have resulted in an increased VPAS payment percentage in 2023. Without the proposed amendment, this would have resulted in the statutory scheme payment percentage being set too low to continue to maintain broad commercial equivalence with VPAS in 2023 annual sales growth at 1.1%.

By making this amendment we would ensure continued broad commercial equivalence between the statutory scheme and VPAS, thereby protecting the stability of both schemes.

Summary of responses

Most respondents (30) disagreed with the proposal to update the payment percentages. A minority of respondents (3) agreed with the proposal. The responses received were often broad in scope and most critical responses expressed dissatisfaction with the level of the payment percentages in VPAS as well as in the statutory scheme.

Respondents, including those who disagreed with the proposal, accepted that the change derived from the principle of maintaining broad commercial equivalence between VPAS and the statutory scheme and some stated their support for this policy in principle. However, several argued that payment percentages in VPAS had increased to a level where it was no longer appropriate to maintain broad equivalence, and that payment percentages across both schemes should be reduced.

A related theme raised by some respondents was that the statutory scheme payment percentage should ‘sunset’ to 0% in 2024. Respondents argued that the Department of Health and Social Care’s (DHSC) stated policy is to maintain broad commercial equivalence between VPAS and the statutory scheme, but noted that this is not yet possible to do beyond the expiry of VPAS as there is no successor scheme yet agreed.

Several of the responses argued that payment percentages at the level set in VPAS were too high and would negatively affect the life sciences industry in the UK thereby reducing its competitiveness, and developed this theme in detail in their answers to further questions. Respondents argued in particular that the ‘signalling effect’ of an increased payment percentage in the statutory scheme would lead to reduced life sciences investment in the UK (over and above any impacts of the change on the smaller group of scheme member companies). They proposed that, to avoid this effect, the government should not update the statutory scheme so as to send a ‘signal’ to industry that payment percentages in a future voluntary scheme were likely to decline.

A large proportion of respondents argued that other measures to ensure control of medicines spending, such as National Institute for Health and Care Excellence (NICE) value assessments, are sufficient to protect NHS budgets, and that the rise was not necessary. Some companies who responded to the consultation extended this argument further, arguing that as there were economic benefits to greater NHS spending on branded medicines, and that as NICE ensured medicines were clinically and cost effective, no attempts to control overall spending on branded medicines were needed. Some responses also cited reports that they argued quantified the net benefits of increased spending on medicines in the UK.

Some respondents stated that the increase would have a disproportionate impact on biosimilars and blood products. Respondents argued that, as biosimilar products generate savings by competing with brand originators, and that blood and plasma derived medicines have low profit margins and compete internationally for a limited supply of raw materials, these products should be exempt from payments in the scheme.

Some responses suggested that the growth of medicine sales, which has driven the increase in payment percentages, is artificially high due to the COVID-19 pandemic, and argued that it was unfair to punish industry for this with higher payment percentages.

Respondents made several further points in their responses to this question that were developed in more detail in their responses to subsequent questions:

Government response

With regard to the argument that payment percentages in both schemes have risen too high for the principle of broad commercial equivalence to be relevant, the government has set out its position elsewhere that VPAS should remain in effect until the end of 2023 as agreed with industry, and with rates calculated on the basis that was agreed with industry. Moreover, as companies chose to join or remain in VPAS for 2023 did so on the basis that the government would uphold is stated policy in respect of the schemes, these companies may also be unfairly disadvantaged should the government subsequently fail to do so. As such, the government’s position remains that maintaining broad commercial equivalence necessitates updating the statutory scheme rates for 2023.

Some responses argued that the statutory scheme payment percentage should reduce to 0% in 2024 to reflect that no successor scheme to VPAS is yet agreed. While the government believes that a further consultation is likely to be necessary later in 2023 to define in more detail the terms of the statutory scheme in 2024, standard practice dictates (as was unchallenged in 2018, 2020 and 2022) that the most recent statutory scheme payment percentage should continue to have effect in future years in the event that no further consultation takes place. It would inappropriately put at risk the affordability of NHS branded medicines spend to move away from this established principle.

As with previous consultations, the government does not agree that payment percentage updates are made unnecessary by the existence of alternative cost-control mechanisms. The statutory scheme serves a different function to NICE value assessments and the other cost containment mechanisms mentioned by respondents. A NICE recommendation ensures a medicine meets the threshold for clinical and cost effectiveness. It does not, however, ensure that overall spending on branded medicines remains affordable, hence the need for VPAS and the statutory scheme. The NICE standard threshold of £30,000 per quality-adjusted life year (QALY) is substantially higher than the opportunity cost of £15,000 per QALY elsewhere in the NHS (discussed further in the section on our assessment of the impact of our proposals). This means that increasing spending on medicines at the expense of other healthcare spending may lead to worse patient outcomes.

With regard to the wider economic benefit of spending on medicines, while it is true that spending on medicines has economic benefits, the same is true of wider healthcare spending. Responses typically did not account for the opportunity cost of medicines spend.

The government’s view on whether the payment percentage is set too high and whether it will have impacts on research and development, access and supply is developed in the sections below.

Consideration of the status of biosimilar, blood and plasma medicines is outside the scope of this consultation, which concerns a proposal to increase payment rates, rather than to change the scope of products covered. Nevertheless, DHSC is open to ideas about how a successor to the current statutory scheme arrangements and to VPAS should operate from 2024 onwards.

The government accepts that the COVID-19 pandemic resulted in fluctuations in sales growth but does not agree that 2022 growth in the scheme is now artificially high as a result of the pandemic. Growth has been lower than, or in line with, the forecast made when the VPAS was agreed in 2018. Moreover, DHSC addressed pandemic-related fluctuations by agreeing with industry to amend the 2022 payment percentage and in effect defer part of the rise due in 2022 to 2023.

The level of the amended payment percentages and the underlying methodology

Do you agree or disagree with the levels at which we propose to set the statutory scheme payment percentages?

Do you have any comments on the proposed methodology used in determining the payment percentages (as set out in the impact assessment)?

Outline of proposals

The consultation proposed to set the statutory scheme payment percentage at 27.5% in 2023. As the changes would take effect at the start of quarter 2 (Q2) 2023, companies that made payments in Q1 at the existing rate of 24.4% would pay at a higher rate of 28.6% in the remaining quarters of 2023.

Summary of responses

Almost all respondents (32) disagreed with the proposals. A minority of respondents (1) agreed with the proposals.

The most common argument made by respondents to this question was that the level of the UK payments and spend are out of line with international comparators. Several argued further that there were risks to the global pharmaceutical industry if other markets took a similar approach to the UK. In support of their argument, they cited rebate payment percentages in comparable countries that are lower than in the UK such as Germany (12%), Spain (7.5%) and Ireland (9%). They also cited data from the health information company IQViA which they argued showed that the UK spends about 9% of its total health spend on medicines compared to an average of 15% in “comparable countries” (Canada, Australia, France, Germany, Japan, Italy, Spain and the Republic of Korea).

As in previous consultations, respondents argued that payment percentages at this level would displace global investment in research and development. Several responses noted that DHSC’s impact assessment states that an increase in the payment percentage will lead to a reduction in global research and development. However, they argued that it would also lead to a reduction of the share of global research and development located in the UK specifically, and went on to develop this theme in subsequent questions. Several responses also referred to studies that they argued support the link between price and investment location, and some companies stated that they had deferred investments as a result of VPAS payment percentages. They argued that DHSC’s 2022 consultation response ignored evidence presented by these studies and feedback.

Similarly, some responses cited DHSC’s 2020 statutory scheme consultation, which they claimed acknowledged that if payment percentages are too high this could undermine investment in the UK.

Many of the respondents who anticipated negative impacts on the life sciences sector as a result of the change argued that an allowed growth rate of 1.1% a year is unsustainably low for industry, and therefore does not meet the needs of the health system, the objectives of the statutory scheme, and does not align with the Life Sciences Vision.

In support of their argument, respondents stated that the government had not provided a specific economic rationale for the 1.1% allowed growth rate, which meant growth in medicines spend was below NHS budget growth. They stated that the fact that sales of branded medicines have grown at a substantially faster rate than 1.1% a year demonstrates that statutory scheme allowed growth is insufficient to meet the demand for medicines by the NHS. They argued that this had resulted in a ‘ratcheting effect’ where the payment percentage must increase each year, which had in turn led to a decline in industry profits and a fall in UK headcount. Respondents stated that rebate payments in 2023 were likely to be higher than total growth in branded medicines sales. They argued this did not allow a reasonable return on investment and considered that this was an unreasonable requirement on industry.

Several respondents stated that increased payment percentages in both schemes would make it uneconomic for companies to launch certain medicines in the UK, or would lead to launch delays. Respondents cited an ABPI survey of member companies that found some had delayed or cancelled product launches in 2022 due to higher VPAS rates.

Several respondents stated that increased payment percentages in both schemes would make it uneconomic for companies to continue to supply certain medicines in the UK, therefore increasing the risk of product withdrawals or supply disruption. Some responses also challenged the efficacy of price increases as a mitigation for supply risks, and argued that such mechanisms were not always available, or were not always available to a reasonable timeframe.

One response also argued that the payment percentage in the statutory scheme is artificially high due to the deferral of payments from 2022 to 2023. They considered that this was unfair on companies that were not liable for payments in 2022.

Impacts from the end of VPAS

One respondent noted that the end-of-scheme reconciliation (ESR) process in VPAS allows companies to receive a rebate or make a balancing payment at the end of the scheme if the payment percentage in the final year turns out to be higher or lower than required to control growth to 2%. They argued that, as the statutory scheme has no mechanism for reconciling over or underpayments, the payment percentage set as a result of this consultation may end up not being broadly commercially equivalent with VPAS.

Government response

International comparisons

International comparisons are complex and fraught with difficulties owing to a range of factors such as difference in systems, disease incidence, demographics, clinical practice, patient choice, the availability of alternative treatment options, and wider health system factors.

The data cited by respondents, for example, may not reflect the extent of confidential discounting that takes place in each country and may make comparisons between countries using a variety of data sources that may not actually be directly comparable, and the spending figures for the UK cited by respondents do not appear to be derived from actual NHS spend on medicines.

While many countries use a rebate mechanism to control spending on medicines, direct comparison of the percentages can be misleading as it will not account for differences in the scope and coverage of the rebate, the initial selling price of medicines within that health system, and the relative weight of this form of cost control compared to other national or regional cost control mechanisms.

Furthermore, while respondents noted there were areas in which the NHS performed less well than comparable health systems, responses did not provide evidence that relative spend on medicines are necessarily the reason for this nor did they consider the many areas where the NHS performed above comparable health systems. While we agree that spending on medicines has positive outcomes, the opportunity cost should be considered and no evidence was provided to show that that spending a greater proportion of overall health expenditure on medicines leads to improved policy outcomes.

While the UK may not pay the highest prices globally, there are a number of other compelling benefits to the UK commercial environment, including:

• freedom of list pricing
• a flexible approach to commercial dealmaking
• access to one of the largest single purchasers worldwide
• the positive signal to global markets of a positive NICE recommendation

Allowed growth and sustainability of the pharmaceuticals sector in the UK

The proposed increase in the payment percentage in the statutory scheme reflects high sales growth for companies supplying branded medicines to the NHS. Scheme member companies have benefited from such growth, which, in the absence of updated volume-based rates, would result in additional financial pressure on the NHS.

The statutory scheme payment percentage is calculated to control allowed growth at 1.1% a year as it has done since 2018. The 1.1% growth rate was chosen because DHSC had 5 years of Pharmaceutical Price Regulation Scheme (PPRS) data from 2014 to 2018 that showed controlling growth to this level was sustainable. Such data is now supplemented with statutory scheme data since 2019.

While it is understandable that industry is concerned about the increase to the payment percentage, 27.5% is within the range of reasonable expectations for scheme members. It is lower than the payment percentage that was forecast for VPAS for 2023 when VPAS was agreed in 2019, and which could therefore have been expected in the statutory scheme given the principle of broad commercial equivalence.

Supply risks

On-patent products typically have high margins and while it is likely that margins will fall due to the proposed increase in the payment percentage, they will remain profitable even at this higher level.

While some off-patent products, such as branded generics or blood products, have potentially lower profit margins and may be more impacted by the increased payment rates, such impacts should be mitigated by their ability to apply for price increases or make use of tender price variation clauses, where warranted, through standard DHSC and NHS processes. While some respondents argued that such mitigations are not effective, DHSC has seen little evidence that such issues cannot be resolved through standard processes, and recently wrote to reassure the industry trade association for the generics sector that these processes would be carried out in a timely fashion to protect supply where appropriate.

Research and development

As set out in more detail in our impact assessment, the government acknowledges that reduced company revenues as a result of increased payment percentages will lead to some reduction in investment in global research and development, of which a proportion will be felt in the UK (worth an estimated £17 million to 19 million by 2023).

The available evidence on this issue is mixed, but typically it suggests that supply-side factors, such as availability of expert scientific labour and favourable tax conditions, are of greatest significance in the decision to locate research and development activity.

A 2008 report by the Organisation for Economic Co-operation and Development (OECD)^{[footnote 1]} found little reason to believe that providing favourable market conditions - for example higher prices - would be a significant determinant of companies’ decisions on where to establish headquarters and undertake research and development. For example, despite the favourable pricing policy of the Canadian government and agreements with industry to increase research and development investment, pharmaceutical research and development activities have not increased significantly in Canada.

Subsequent research (Shaikh and others (2020),^{[footnote 2]} Biomed Alliance, EuropaBio and Johnson & Johnson (2021)^{[footnote 3]} and Charles River Associates (2022)^{[footnote 4]})) has highlighted that these decisions are highly complicated, encompassing a wide range of factors, and may vary by type of investment, with price regulation likely to be one element in decision making. Nonetheless, our view remains that supply-side factors are of greatest impact compared to demand-side factors in company decisions about where to locate globally mobile investments.

This is further developed in response to the question on our assessment of the impact of our proposals.

Impact of the 2022 adjustment

It is established practice that both schemes should operate on an industry-wide basis. The amendment that deferred payments was agreed with industry. Companies that did not make either VPAS or statutory scheme payments in 2022, but who qualify as a payment company in 2023, will have benefited from another scheme exemption in 2022.

Impacts from the end of VPAS

While we agree that the final VPAS payment percentage for 2023 cannot be known until the conclusion of the ESR process, we do not consider that this means we should not proceed with the update proposed in this consultation. It is not possible to know in advance whether sales between Q4 2022 and the end of 2023 will be higher or lower than forecast. While data from Q4 2022 will shortly become available, this is just one of 5 relevant data points, and was not known when the 2023 VPAS rate was set. We therefore consider that the approach most consistent with the principle of broad commercial equivalence is to set the 2023 statutory scheme payment percentage using the same data as was used to set the 2023 VPAS payment percentage, and to monitor the impact of ESR when it becomes clearer.

Our assessment of the impact of our proposals

Do you agree or disagree with the analysis in the impact assessment of our proposals, including impacts on those areas where the NHS Act 2006 requires we consult?

Summary of responses

The majority (25) of respondents disagreed with the analysis in the impact assessment. Six respondents answered that they didn’t know. One respondent agreed with the analysis.

The most frequent themes raised by respondents to this question were developments of the responses given in the previous questions, arguing that the impact assessment does not adequately account for the impact on research and development, access and/or supply.

Research and development impacts

Respondents noted that DHSC’s impact assessment states that an increase in the payment percentage will lead to reductions in global research and development, however they argue that it would also lead to a reduction of the share of global research and development located in the UK specifically, as the ‘signalling effect’ of increased statutory scheme payments on investment had been underestimated in the impact assessment. Responses also pointed to a number of studies that they argue support the link between price and investment location. They argued that the 2022 DHSC consultation response did not take sufficient account of evidence presented by these studies, which they considered demonstrated a stronger link than acknowledged in the response to the 2022 consultation between local demand factors (pricing, access and uptake) and investment in research and development, manufacturing or corporate staffing.

In addition, several respondents linked recent rises in payments to declines in clinical trial activity and the UK’s share of global research and development investment. Some companies who responded also stated they had deferred or withdrawn investments due to higher payments in VPAS.

As with the 2022 consultation, respondents acknowledged that decisions about the location of research and development investment would be multifactorial but argued that the role of boardroom sentiment had been underestimated, and that the proposals would reduce the UK’s share of research and development spend over and above that identified in our impact assessment. Respondents argued it was necessary to ‘signal’ that the UK wished to remain an attractive destination for current or future research and development investment in order to retain planned investments.

Some responses cited DHSC’s 2020 statutory scheme consultation, which they claim acknowledged that if payment percentages are too high this could undermine investment in the UK.

Assessed impact on access and supply

Several responses argued that the impact assessment had underestimated the degree to which the proposals would lead to supply disruption, including an increase in product discontinuations and a reduction in new product launches.

Several respondents also argued, similarly to their responses to the question on the level of the amended payment percentages, that the change would impact on the access to new medicines, as companies would no longer find it profitable to launch new medicines in the UK. As with their responses to that question, some responses cited examples of product launches they stated had been delayed or cancelled due to high payments.

Several respondents also developed their answers to that question, stating that increased payment percentages in both schemes would make it uneconomic for companies to supply certain existing medicines in the UK. As with that question, some respondents suggested that price rises would not be sufficient to mitigate the change or that this was not sustainable longer term, and the impact assessment was incorrect to state that they would.

Scope of the impact assessment

Several respondents also disagreed with the scope of the analysis in the impact assessment, arguing that it was too narrow and did not capture the full impact of the proposed change. Respondents noted the impact assessment evaluated the impact of increasing the payment percentage from 24.4%, but argued that it should instead assess the impact of increasing the payment percentage from the 2022 rate (14.3% in the statutory scheme, 15% in VPAS).

Respondents also noted that the impact assessment uses an estimate of the opportunity cost of £15,000 per QALY, whereas medicines are generally required to demonstrate value at £20,000 to 30,000 per QALY. Some respondents criticised the use of this figure, noting that the NHS does not make other funding decisions based on a £15,000 per QALY ‘rule’, and therefore that the impact assessment had overestimated the opportunity cost of not making the change (and therefore underestimated the benefit of greater spending on medicines in general).

Other issues in the impact assessment

Some respondents also noted that companies may withdraw funding from health system partnerships, such as patient access pathways or clinician education, which may benefit patients and the healthcare system. They argued that the impact assessment has not taken account of such impacts.

Some respondents also queried the way the impact assessment discussed the treatment of sectoral employment, arguing that it incorrectly assumed that there would be no net societal loss as a result of reduced employment itself resulting from the change.

A small number of responses argued, as they did in respect of the 2022 consultation, that the impact assessment gave insufficient consideration to the uneven distribution of impact resulting from increased payment percentages. Some responses stated that it was unfair that while not all companies had benefited from increased sales growth, all would be required to pay the increased payment percentage. However, more responses were concerned that the impact would be felt by medium-sized companies, or those supplying products with low margins and/or high costs, especially biosimilar and blood or plasma derived products.

Government response

Research and development and investment

DHSC’s impact assessment of the consultation proposals set out our assessment that the change will see a global reduction in pharmaceutical revenues of £17 million to 19 million, a relatively small amount in the context of global pharmaceutical revenues. The impact assessment noted that lower revenues will reduce global research and development, in proportion with the proportion of revenues companies typically invest in research and development. However, as the UK makes up only a small proportion of global research and development, the UK share of a decrease will be proportionally small.

Respondents to the consultation argued that this was an underestimate, as a result of additional impact from the ‘signalling effects’ of the change. However, negotiations with industry representatives regarding a successor scheme to the current voluntary scheme, which expires at the end of 2023, will commence shortly. DHSC has been clear that we are open to ideas about how a successor voluntary scheme should operate from 2024 onwards and that it looks forward to working with industry to agree a mutually beneficial scheme that:

• supports better patient outcomes
• ensures the sustainability of NHS spend on branded medicines
• enables a strong UK life sciences industry

The reasons for the change are clearly set out here and in the consultation document and do not relate to the government’s views on future schemes.

With regard to the link between pricing and investment, the government agrees that investment location decisions are multifactorial, and that boardroom sentiment may play a role in decisions, but still considers that sentiment would not be the primary factor in the location of such investments. Supply factors (for example, the availability of a skilled scientific workforce) are likely to have greater impact than demand-side factors (for example, pricing) in decisions about the location of research and development investments. Most pharmaceutical decision makers will base decisions on economic considerations, and as such, will locate research and development and other investments more on cost and quality than on sentiment.

Commercial factors are more likely to impact decisions on late-stage than early-stage trials, as the location of late-stage trials may be more influenced by considerations about where to launch a new medicine. However, the majority of companies are members of VPAS, which includes strong commercial incentives for the launch of new products in the form of freedom of list pricing and exemptions from payments for innovative medicines containing new active substances, and companies in both schemes benefit from the UK commercial environment, such as the high degree of flexibility in the approach to commercial dealmaking and access to the NHS, which is one of the largest single purchasers of medicines worldwide.

With regard to the research cited by respondents, the cited studies primarily show global effects. While a small number show some effect on investment location, it remains the case that the studies show this is stronger for investment in marketing, commercial or administrative staffing than for investment in research and development, and that other factors tend to have a greater impact on investment location decisions.

Nonetheless, DHSC agrees the evidence on this issue remains uncertain and, in recognition of the consultation responses, we have expanded our review and discussion of the evidence on this issue in our impact assessment and conducted additional sensitivity analysis. The revised impact assessment concludes:

Overall, the literature suggests that price regulation is likely to be one element of investment location decisions. But that these decisions are highly complicated, encompassing a wide range of factors, and furthermore the weight of price regulation in decision making may differ by the type of investment.

As such, our view remains that supply-side factors are of greatest impact compared to demand-side factors in company decisions about where to locate globally mobile investments. We have not therefore changed our position that, given the economic fundamentals, increasing payments in the statutory scheme will not have a large impact on UK investment. We remain open to receiving further evidence on this point.

The government does not agree with the characterisation of its 2020 consultation response on the statutory scheme around the impact of higher payment percentages on research and development investment. While the 2020 consultation response noted that a proportion of the resulting increased revenue may be spent on research and development, a proportion of which would be felt as benefit in the UK, the aim of the 2020 reduction was to set a payment percentage that was justified by the level of sales growth in the scheme. By controlling growth in medicines sales at a certain level, we aim to balance the need to control the cost of medicines to the NHS while providing an adequate return to industry, part of which would be invested in research and development.

Assessed impact on access and supply

In addition to the points made in our response to the question on the level of the amended payment percentages (above), with regard to the estimation of the impact on access to new medicines in the impact assessment, the change applies to the statutory scheme membership only and therefore affects only a minority of companies. The majority of companies are members of VPAS, which includes strong commercial incentives for the launch of new products.

The government’s overall view of the impact of increased payment percentages on the supply of existing medicine across both schemes is given above. Regarding the position of the impact assessment on this issue, it is reasonable for respondents to be concerned about the timeliness and availability of price increases but DHSC has taken steps to assure industry that price rises will be granted in a timely manner where they are warranted.

Only a small number of companies are statutory scheme members and the scope for products to be affected by the change is therefore also small. As such, any impacts should be capable of being addressed through the existing mitigations.

Scope of the impact assessment

The government does not agree that the change should be assessed against the baseline of the 2022 payment percentage. The baseline payment percentage for 2023 is 24.4%, as set following consultation in 2022. Assessing the increasing payment percentage against a baseline of 24.4% is consistent with the approach mandated by HM Treasury’s Green Book. More detail on this approach is set out in the revised impact assessment.

Figure of £15,000 for the cost of a QALY delivered elsewhere in the NHS

DHSC does not agree with criticism of the estimate of the opportunity cost per QALY used in the impact assessment. The £15,000 per QALY estimate is based on an observational study conducted by the University of York. Multiple follow-up studies have continued to support these findings. The methodology is set out within academic journals and has been subject to peer review.

Although the NHS does not adopt a formal decision rule for commissioning new services, the study found that at the margin each £15,000 spent in the NHS would deliver one QALY. DHSC remains confident in its use of this figure as an estimate of the opportunity cost per QALY in the NHS. Further discussion is included in Annex D of the impact assessment.

Other impacts

Companies invest in initiatives when doing so will deliver return on investment. When net product revenues fall there may be a reduction in such investments. However, as partnerships focus on novel products with high profit margins, the marginal decrease in investments will likely be small.

Regarding concerns that the impact of increased payment percentages would be felt unevenly between companies, the government’s view is that sales growth in 2022, like that in 2021, was broad-based and most companies will have benefited from increased sales. Some distributional effect between companies is inherent to both schemes and is necessary in order to ensure that the schemes reward companies for bringing new innovative products to market.

With regard to responses that were concerned about disproportionate impacts on medium-sized companies, medium-sized companies enjoy benefits in VPAS and had the opportunity to join that scheme.

With regard to suppliers of blood and biosimilar products, we refer to our response to this issue under the question on proposals to change the payment percentage.

Our assessment of the implications for the statutory duties of the Secretary of State for Health

Do you agree or disagree with our initial conclusions about the impacts that the proposed updates to the statutory scheme payment percentages will have on the statutory duties of the Secretary of State?

Summary of responses

The majority of respondents to the consultation (26) disagreed with the conclusions about the impacts of the proposed updates on the duties of the Secretary of State for Health and Social Care. Five respondents did not know and one agreed with the conclusions.

The main theme raised in comments was that the updated payment percentages would have negative impacts on duties to promote research. Several respondents drew on their answers to other questions, in which they anticipated impacts on research and development investment and considered that this would reduce investment in future medicines, negatively impacting on Secretary of State’s duties regarding research.

Several respondents also argued that the Secretary of State’s duty to promote a comprehensive health service would be impacted by the consultation proposals. Respondents argued, as they did in previous consultations, that the updated payment percentages would mean companies would withdraw the supply of unprofitable medicines or hold off launching new medicines, reducing patients’ access to medicines. This would in turn result in a less comprehensive health service and damage the objectives of securing improvements in physical and mental health and in prevention, diagnosis and treatment.

Some respondents thought that the updated payment percentages would also have negative impacts on the Secretary of State’s duty to have regard to the need to reduce health inequalities. Respondents argued that medicines could have an important role in reducing health inequalities as, in their view, the updates would have a negative impact on access to medicines. They explained that they expected this reduction in access would fall mostly on patients in the lowest socio-economic groups, further exacerbating heath inequalities.

Finally, a very small number of respondents suggested that, as they anticipated the change would reduce patients’ access to medicines, this would have an effect on other equality duties, since some medicines might be supplied in connection with a protected characteristic, such as a disability.

Government response

DHSC is confident that the consultation proposals advance the Secretary of State’s statutory duties, including the duty to promote a comprehensive health service. A full assessment is provided at Annex A.

As set out above, DHSC remains confident that the impact on research and development is proportionate. While we recognise there is some uncertainty in the evidence, our view remains that supply-side factors are of greatest impact compared to demand-side factors in company decisions about where to locate globally mobile investments. DHSC remains confident that duties related to research will not be significantly impacted by the change to the statutory scheme.

We have set out in our response to the questions on the level of the amended payment percentages and the underlying methodology that we do not expect a negative impact on the supply of medicines in the UK as a result of the change, and that effective mitigations are already in place should individual medicines become uneconomical to supply without such mitigations. These are expected to be effective in maintaining patients’ access to medicines and therefore a comprehensive health service, as well as being consistent with the duty to reduce health inequalities.

The consultation responses have not led the government to change its assessment that updating the payment percentages in the scheme will help to ensure that NHS spending on medicines continues to be affordable, allowing continued NHS investment in uptake of the most clinically and cost-effective medicines to the benefit of patients as well as investment in other patient services. As well as the financial savings to the NHS as a result of these changes, which can be reinvested into the health system to provide greater patient benefits, the changes ensure the continued functioning of the medicines pricing schemes in line with their stated objectives through to the end of 2023.

In the previous questions we have set out the possible impacts of the consultation proposals on research and development investment in the UK. We have not seen evidence to change our view that supply-side factors, such as availability of scientific labour, are of greatest significance in the decision to locate research and development activity. We therefore do not agree that the updates are likely to result in significant impacts to research and development investment in the UK.

We also set out in the consultation that ensuring the continued effective functioning of the branded medicines pricing schemes is consistent with the Secretary of State’s duties on research. The schemes control growth in medicines sales at sustainable levels allowing the NHS to invest in innovative products, clinical research and in process innovation in the longer term.

Annex A: statutory duties

In considering this matter, ministers must comply with their duties under the NHS Act 2006, the Public Sector Equality Duty and the Family Test.

Duties under the NHS Act 2006

1. To promote a comprehensive health service (section 1 NHS Act 2006)

The Secretary of State is required to continue the promotion in England of a comprehensive health service designed to secure improvement in:

• the physical and mental health of the people of England
• the prevention, diagnosis and treatment for physical and mental illness

The consultation proposals were designed to ensure that growth continues to be controlled at a rate of 1.1% per year and that the statutory scheme remains broadly commercially equivalent to VPAS. This will ensure the ongoing affordability of NHS medicines spending and supports the ability of the NHS to continue investing in patient access to medicines.

Under the revised payment percentages, DHSC will receive higher statutory scheme payments than currently set out in the 2018 regulations. Payments will be apportioned to the NHS across the UK and can be used in the best interests of patients.

Furthermore, the updates to the payment percentages will ensure the continued stability of the schemes. This is critical to ensuring that both schemes can continue to fulfil their broader objectives of controlling costs while supporting the life sciences sector, patient access and the wider economy.

In contrast, if DHSC was to proceed with the ‘do nothing’ option and the statutory scheme had a payment percentage of 24.4%, we consider that this would destabilise the schemes by allowing growth to exceed 1.1% within the statutory scheme and undermining the principle of broad commercial equivalence. It is therefore important that the payment percentage is updated to reflect increased growth.

We note that several respondents argued that higher payments would result in companies withdrawing supply of unprofitable medicines or holding off launching new medicines, reducing patients’ access to medicines, impacting negatively on this duty. However, the vast majority of companies supplying medicines to the NHS will be members of VPAS and therefore unaffected by the proposals in the consultation. The small number of companies affected by the change are able to access mitigations should individual medicines become unprofitable. These mitigations are already set out in the schemes. These are expected to be effective in maintaining patients’ access to medicines and therefore a comprehensive health service.

Updating the payment percentage will therefore help to ensure the effective running of the scheme and therefore supports the Secretary of State’s duty to promote a comprehensive health service.

2. To act with a view to securing continuous improvement in the quality of services (section 1A of the NHS Act 2006)

The Secretary of State is required to exercise his NHS functions with a view to securing continuous improvement in the quality of services provided to individuals.

As above, updating the payment percentage will ensure continued effective operation of and confidence in the schemes. This will help to ensure sales growth continues to be controlled, allowing the NHS to budget effectively and make decisions in the best interests of patients about the provision of services, including ensuring a quality service.

In discharging this duty, the Secretary of State must have regard to the NICE quality standards which define quality and quality improvement for particular kinds of care and treatment. As set out above, a decision to update the payment percentage helps to ensure the effective operation of the schemes and ensures NHS costs are controlled. This supports the Secretary of State to meet duties in securing continuous improvement in the quality of services, in line with the NICE quality standards.

3. To have regard to the NHS Constitution

Regard must be given to the values, principles, pledges and rights in the NHS Constitution. We have considered this duty and believe that it is not negatively affected by the proposed approach. In addition, we have considered certain elements of the NHS Constitution when considering other duties. In particular:

• principle 1: to provide a comprehensive health service available to all
• principle 4: relating to the role of patients
• principle 6: value for money in so far as this relates to the government and NHS spend on branded medicines

We have considered this duty in the context of the constitution’s pledges to, and the rights of, NHS patients.

We note that some of the consultation responses argued that this duty would be affected, as the increased rate would reduce patients’ access to NICE-approved medicines. However, we do not agree that the proposal would have such an effect, for the reasons set out above: a decision to update the payment percentage helps to ensure the effective operation of the schemes and ensures NHS costs are controlled. This supports the Secretary of State to deliver on the duty to promote a more comprehensive health service, supports the NHS in providing services to patients, and ensures continued value for money on branded medicines spend.

4. To have regard to the need to reduce health inequalities (section 1C NHS Act 2006)

With their functions in relation to the NHS, the Secretary of State must have regard to reducing inequalities between the people of England with respect to the benefits that they can obtain from the NHS. It is important to emphasise that this duty is separate from the public sector equality duty. Impacts need therefore to be considered in terms of other socio-economic factors such as income, social deprivation and rural isolation.

We do not envisage any negative impacts on health inequalities as a result of the proposal. Ensuring the continued sustainability of NHS medicines spending is critical to enabling the NHS to provide widespread access to medicines and respond to health inequalities.

As with previous consultations on the scheme, several of the respondents who anticipated impacts on current and future access to medicines as a result of the change also gave their view that this could exacerbate health inequalities. We have set out our view above that, since the change does not affect the vast majority of companies supplying medicines to the NHS, and as existing mitigations are expected to be effective in maintaining access to medicine, we do not anticipate negative impacts on health inequalities from this change.

5. To promote autonomy (section 1D NHS Act 2006)

The Secretary of State must have regard to securing, so far as is consistent with the interests of the NHS:

• that any other person exercising NHS functions or providing services for its purpose is free to exercise those functions or provide those services in the manner that it considers most appropriate
• that unnecessary burdens are not imposed on any such person

The proposed updates to the statutory scheme do not impact on the freedom of NHS bodies or providers to provide NHS services as they see fit.

6. To promote research (section 1E NHS Act 2006)

In exercising his functions in relation to the NHS, the Secretary of State must promote:

• research on matters relevant to the NHS
• the use in the NHS of evidence obtained from research

We consider that the proposed approach, which will reduce statutory scheme member company revenues compared to the counterfactual where no update is made, may lead to some reduction in research and development investment of which a proportion would be felt in the UK. DHSC considers that research and development investments lead to ‘spillover’ effects - for example, through the generation of knowledge and human capital - which generate net societal benefits, compared to other companies spending their capital on other things. In addition, research and development investment could lead to improved medicines in the future that would be of benefit to patients and the health service.

This point was raised by several respondents to the consultation, who argued further that the signalling effect of an increased payment percentage in the statutory scheme would lead to reduced life sciences investment in the UK, and a corollary impact on this duty.

As set out in the main body of the consultation, the government agrees that investment location decisions are complex and multifactorial, and there remains some uncertainty about the evidence in either direction. However, we remain of the view that supply-side factors (for example, workforce) will have greater impact than demand-side factors (for example, pricing). Boardroom sentiment may affect decisions at the margins, but most investors are rational decision makers and locate research and development more on cost and quality than on sentiment, though commercial factors are more likely to impact decisions on late-stage than early-stage trials.

Given the large number of consultation responses that argued that there may be potential impacts on this duty, we have undertaken further review of the evidence and additional sensitivity analysis of our findings.

By updating the scheme to keep NHS spending on medicines at 1.1% per year we are ensuring the long-term sustainability of NHS medicines spend and the use of medicines in the UK. Sustainable growth in sales allows the NHS to invest in innovative products, in clinical research and in process innovation.

We consider that growth of 1.1% per year in the statutory scheme and 2% in the voluntary scheme continues to strike an appropriate balance between the scheme objectives of supporting the pharmaceutical industry, supporting patients, and controlling costs.

7. To secure education and training (section 1F NHS Act 2006)

The Secretary of State must exercise his NHS (and other) functions to secure an effective system for the planning and delivery of education and training for the persons employed, or considering becoming employed, in the NHS or connected activities.

Some respondents to the consultation noted that the pharmaceuticals companies may withdraw funding from partnerships or other initiatives that benefit the NHS, including educational activities, as a result of reduction in revenue. However, since the change affects only the small number of companies who are members of the statutory scheme we do not anticipate significant impact as a result of this change. The system of education and training for NHS staff is not reliant on discretionary contributions made by suppliers of medicines and is not intended to be. Moreover, by ensuring that both schemes continue to fulfil their objectives of controlling costs, we are avoiding unfunded cost pressures arising in the NHS that would affect its ability to provide education and training for NHS employees.

We have considered this duty in relation to the measures and do not consider it to be affected.

8. To review treatment of providers (section 1G of the NHS Act 2006)

The Secretary of State is required to keep under review any matter which might affect the ability of healthcare providers to provide NHS services or the reward available to them for doing so.

We do not consider this duty to be affected.

Public sector equality duty

This duty comprises 3 equality objectives, each of which needs to be considered separately. Ministers must have regard to the need to:

• eliminate discrimination, harassment, victimisation and any other conduct that is prohibited by or under the Equality Act 2010
• advance equality of opportunity between persons who share a relevant protected characteristic and persons who do not share it
• foster good relations between persons who share a relevant protected characteristic and persons who do not share it

The protected characteristics covered by this duty are age, disability, gender reassignment, pregnancy and maternity, race, religion or belief, sex and sexual orientation.

Following the consultation, we do not believe there will be any disproportionate negative impact on the 3 objectives by the proposals to amend the payment percentages.

Our reasoning is similar to previous consultation, that, by updating the payment percentages, we are ensuring the good operation of the schemes, so NHS medicines spend within the statutory scheme continues to be maintained at 1.1% per year and VPAS continues to be effective. This means the NHS will continue to use those funds in the best interest of patients, including those with protected characteristics. It also avoids indirect impacts on persons who share protected characteristics should loss of income under the scheme result in reduced spending elsewhere in the NHS.

As noted above, several responses to the consultation anticipated impacts on current and future access to medicines as a result of the change and gave their view that this could exacerbate health inequalities, a separate duty but one that intersects with the public sector equality duty. Respondents argued that the change would result in inequitable access to medicines, and that this would result in particular impacts on those who shared protected characteristics (one respondent, for example, argued that individuals with disabilities may be likely to make greater use of medicines and that they would therefore be impacted disproportionately by the change).

Some also argued that increased medicine spend would have a positive impact on this duty as it would improve access to medicines.

As set out above, we do not consider this to be the case given the small number of companies affected by the change and availability of mitigations. Overall spend on medicines is beyond the scope of this consultation, but it does not follow that increased spending on medicines will have a positive impact on this duty if it displaces spending on services that offer similar, or greater benefits.

The Family Test

The Secretary of State must consider, where sensible and proportionate, and apply the Family Test, when making policy. The Family Test questions are:

• what kind of impact might the policy have on family formation?
• what kind of impact will the policy have on families going through key transitions such as becoming parents, getting married, fostering or adopting, bereavement, redundancy, new caring responsibilities or the onset of a long-term health condition?
• what impacts will the policy have on all family members’ ability to play a full role in family life, including with respect to parenting and other caring responsibilities?
• how does the policy impact families before, during and after couple separation?
• how does the policy impact on those families most at risk of deterioration of relationship quality and breakdown?

We have considered the Family Test and believe the recommended updates will not have a negative impact in relation to any of the relevant questions.

Amending the payment percentage will ensure that the statutory scheme continues to function, and control allowed sales growth at 1.1%, with payments received allocated to the NHS. This will help support family members who require medicines and their carers to play a full role in family life through access to medicines and any services required through the NHS.

Conclusion on statutory duties

Consequently, we think that our proposal to amend the payment percentages for the statutory scheme will result in a positive impact on the Secretary of State’s ability to deliver on the relevant statutory duties.

In particular, making these amendments will help to ensure the Secretary of State continues to promote a comprehensive health service as the statutory scheme will continue to operate effectively, ensuring long-term sustainability in NHS spending on medicines that allows effective allocation of resources across the health service.

As detailed above, we believe that a number of duties are unaffected by the proposal, in particular reviewing treatment of providers and promoting autonomy and securing education and training.

1. OECD. ‘Pharmaceutical Pricing Policies in a Global Market’, OECD Health Policy Studies, OECD Publishing (2008). ↩

2.  Mujaheed Shaikh, Pietro Del Giudice and Dimitrios Kourouklis. Revisiting the relationship between price regulation and pharmaceutical R&D investment. Applied Health Economics and Health Policy, volume 19, pages 217 to 229 (2021). ↩

3. Biomed Alliance, EuropaBio and Johnson & Johnson. Attracting life science investments in Europe (PDF, 5.49 MB) (2021). ↩

4. Charles River Associates for the European Federation of Pharmaceutical Industries and Associations (EFPIA). Factors affecting the location of biopharmaceutical investments and implications for European policy priorities (2022). ↩