Consultation outcome

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

Updated 1 June 2022

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.

High growth in medicines sales in 2021 led to an increase in the calculated payment percentage^{[footnote 1]} in VPAS from 5.1% in 2021 to 19.1% in 2022, however this was reduced by 4.1 percentage points to 15% by a scheme amendment agreed with the Association of the British Pharmaceutical Industry (ABPI). The VPAS payment percentage for 2023 is currently projected to increase to 23.7%, in part because of the deferral from 2022 to 2023 of the income forgone as result of the 4.1 percentage point reduction in the 2022 payment percentage.

In March this year, 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 and the Branded Health Service Medicines (Costs) (Amendment) Regulations 2020. 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 scheme from 10.9% to 14.3% in 2022, and to 24.4% in 2023. Where companies have made payments at the lower rate of 10.9% between January and June 2022, they will pay a higher rate of 17.7% 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 £1 billion and £1.5 billion by 2023 compared leaving the payment percentage unchanged. Our impact assessment estimates a total net present value of the changes of between £4.4 billion and £6.7 billion, largely due to the additional services and treatments that the NHS will be able to provide.

Chapter 2 sets out the government’s consideration of responses received on proposals to change the payment percentages for 2022 and 2023.

Chapter 3 covers responses received on the level of the amended payment percentages and the underlying methodology.

Chapter 4 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 United Kingdom, the consequences for the economy of the United Kingdom, and the consequences for NHS patients.

Chapter 5 considers views expressed on our assessment of the implications for the statutory duties of the Secretary of State for Health.

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 Branded Health Service Medicines (Costs) (Amendment) Regulations 2022 (‘the Amendment Regulations’) and will come into force on 1 July 2022.

Introduction

The voluntary and the statutory schemes for branded medicines pricing limit growth in the cost of branded health service medicines. 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 scheme also takes into account the need to support the development of innovative new products, as well as supporting the UK life sciences industry, the wider economy, and patients.

On 15 March 2022 the government published a consultation on updating the statutory scheme payment percentages for 2022 and 2023. These changes aim 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 £1 billion and £1.5 billion by 2023 compared to leaving the payment percentage unchanged. Our impact assessment estimates a net present social value of these changes of between £4.4 billion and £6.7 billion.

The consultation on these proposals closed on 26 April 2022, with 18 responses received.

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

Question 1: Do you agree or disagree with the proposal to update the payment percentages?

Outline of proposals

The consultation proposed to update the payment percentages for the statutory scheme in 2022 and 2023, to come into force from 1 July 2022.

The changes are proposed in response to greater than forecast medicines sales growth in 2021 which has increased actual and projected VPAS payment percentages in 2022 and 2023. With no changes this would have resulted in statutory scheme payment percentages being set too low to continue to maintain annual sales growth at 1.1%.

By making these changes 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 (15) disagreed with the proposal to update the payment percentages. A minority of respondents (2) agreed with the proposal.

Respondents, including those who disagreed with the proposal, were largely supportive of the principle of maintaining broad commercial equivalence between VPAS and the statutory scheme. Similarly, most agreed that it is necessary to update the statutory scheme payment percentage for 2022. However, several expressed concern that as there is uncertainty about the current projected VPAS payment percentage for 2023, government did not yet have sufficient information to update the statutory scheme payment percentage for that year. Several respondents argued that the VPAS payment percentage for 2023 should be reduced, and that government should delay setting the 2023 payment percentage in the statutory scheme until the 2023 VPAS payment percentage is finalised.

Some concerns were also raised about the level of the proposed payment percentages, with respondents stating that while they accept the principle of broad commercial equivalence, they believe that rates in both schemes are too high which could create risks to supply and/or investment in the UK. Several responses developed this theme in their answers to subsequent questions.

Some respondents stated that other measures to ensure control of medicines spending, such as NICE value assessments, are sufficient to protect NHS budgets, meaning no rise would be 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 attempt to control overall spending on branded medicines was needed.

Government response

Respondents largely accepted the objective of maintaining broad commercial equivalence between VPAS and the statutory scheme. Given current and projected VPAS rates, the government’s position remains that maintaining broad commercial equivalence necessitates updating the statutory scheme rates for 2022 and 2023.

Government does not agree that it is necessary to delay the update to the 2023 rate. Setting statutory scheme payment percentages for future years based on projections is established practice – this approach was taken in the 2018 and 2020 scheme amendments. The 2023 VPAS payment percentage will be set in line with agreed rules in that scheme, meaning current VPAS projections, which are calculated using agreed scheme formulae, remain valid to use for this purpose. Once set, statutory scheme rates are monitored to ensure they remain appropriate, allowing government to respond to any unexpected changes.

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. For example, whereas a NICE recommendation ensures a product meets the threshold for being clinically and cost effective, and NHS England commercial arrangements reduce net-prices allowing in-year reinvestment in better care for patients, the statutory scheme (alongside VPAS) ensures overall spending on branded medicines remains affordable.

The government view on whether payment percentages are set too high is developed in the sections below.

Question 2: Do you agree or disagree with the levels at which we propose to set the statutory scheme payment percentages?

and

Question 3: 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 14.3% in 2022 and at 24.4% in 2023. As the changes would take effect halfway through 2022, companies that made payments in Q1 or Q2 of 2022 at the existing rate of 10.9% would pay at a higher rate of 17.7% in Q3 and Q4 of 2022.

Summary of responses

Most respondents (15) disagreed with the proposals. A minority of respondents (2) agreed with the proposals. 1 respondent did not take a view.

Most respondents supported setting a 14.3% payment percentage in 2022 but opposed setting a 24.4% payment percentage in 2023, arguing that it would be unsustainably high. Several argued that this was the result of the allowed growth rate (1.1%) being set too low, and that this had led to a real terms decline in medicines spending, especially in the context of high inflation.

Many respondents argued that payment percentages at this level would make some medicines unprofitable and that in some instances companies would be forced to withdraw supply or cancel planned product launches. While some respondents acknowledged that possible supply impacts are mitigated against by standard price increase processes, they argued that this alone would be insufficient as price increases can be difficult to secure, especially for products supplied under an existing commercial framework.

One response suggested the government’s 2020 consultation response accepted that supply issues would be an issue if payment percentages were set at around 20%.

Many respondents argued that payment percentages at this level would displace global investment in research and development. They further argued that payment percentages at this level would result in the UK losing out on globally mobile investments, including research and development investments.

A small number of responses suggested that the allowed growth rate should be linked to inflation.

A small number of responses suggested that the statutory scheme payment percentage should not apply to biosimilars as these types of medicines typically have lower profit margins than other branded medicines

Government response

After reviewing the consultation responses, the government has decided to proceed with updating the payment percentage in 2022 from 10.9% to 14.3%. To take into account where companies have made payments at 10.9% under the 2020 amendment to the Regulations in the first 6 months of the year, these companies will have a payment percentage of 17.7% for the rest of the year. The payment percentage for all statutory scheme members will be 24.4% in 2022.

Allowed growth

The proposed increase in the payment percentage in the statutory scheme reflects high sales growth for companies supplying branded medicines to the NHS. As a result, while companies have benefited from sales growth above the allowed rate of 1.1% (2% in VPAS), there has been an additional financial pressure on the NHS.

Sales growth was controlled at 1.1% under the previous voluntary scheme, the Pharmaceutical Pricing Regulation Scheme that ran between 2014 and 2018, and under the statutory scheme from 2018 to present. The Department of Health and Social Care (DHSC or ‘the department’) has seen no strong evidence showing that this has resulted in an inadequate return for industry, although we acknowledge that inflation has been unusually high in 2022 compared to previous years. We will continue to monitor the schemes in the changing economic environment. We do not support linking statutory scheme allowed growth to inflation as this would undermine the objective of safeguarding the NHS budget and would lead to misalignment between the statutory scheme and VPAS.

While it is understandable that industry is concerned about increases to the payment percentages across both schemes, the rates proposed are within the range of reasonable expectations from when the statutory scheme was first established in 2018. The proposed statutory scheme payment percentages in 2022 and 2023 will result in an average rate (19.4%) that is lower than the payment percentage that originally applied to both 2022 and 2023 (20.5%) when the scheme began operating in 2018.

Supply risks

Government considers that, considering the available mitigations, companies should be able to absorb the costs of increased payment percentages (and increased inflation) without substantively risking supply. On-patent products typically have high profit margins and so should remain profitable even with higher payment percentages. 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 a small number of respondents expressed concerns that the price increase process would be insufficient, the department has seen no evidence of issues resulting from the recent increase in the VPAS payment percentage to 15% that we were unable to resolve through standard processes.

Respondents also raised the possibility that higher payments would discourage the launch of new products. However, novel innovative medicines that contain new active substances qualify for an exemption from the VPAS payment percentage for their first 3 years. With the freedom to join VPAS, companies launching such products are unlikely to choose to be statutory scheme members and their launch decisions are unlikely to be influenced by Statutory scheme payment rates. While other new products will be subject to the payment percentage in one of the 2 schemes, the department has seen no evidence of a slowdown in product launches resulting from recent increases to VPAS payment rates and considers the evidence submitted by respondents insufficient to justify a change in policy.

Government does not agree with the characterisation of its 2020 consultation response on the statutory scheme around supply risks from high payment percentages. The 2020 consultation responses stated that a payment percentage of around 20% was not justifiable given the level of sales growth measured at the time. Since 2020, sales growth has increased substantially, making such payment percentages justified. It did not state that any payment percentage around 20% would lead to supply risks.

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 £40 million to £50 million by 2023).

The available evidence and reasoning 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, and that siting of research and development facilities should not be affected by demand or procurement for final products in the local market.

A 2008 report by the OECD^{[footnote 2]} 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. Furthermore, a Pfizer funded report^{[footnote 3]} on the UK life sciences ecosystem acknowledges that workforce and skills, academic and leading-edge science are central in determining competitiveness in the sector.

This is further developed in response to question 4.

Biosimilars

The application of the statutory scheme payment percentage to biosimilars is outside the scope of this consultation. The government does not intend to amend the scheme rules for this category and refers to its analysis from previous consultations.

Question 4: 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? Explain your answer and provide evidence to support further development of our analysis

Summary of responses

The majority (15) of respondents disagreed with the analysis in the impact assessment. The remaining 3 respondents answered that they didn’t know.

Several responses argued that the impact assessment underestimated the degree to which the proposals would decrease industry investment in the UK, particularly in research and development. They cited research which they considered demonstrated a stronger link than acknowledged in the impact assessment between local demand factors (pricing, access and uptake) and investment in research and development, manufacturing, or corporate staffing.

Some respondents developed this point, arguing that the change would result in negative industry sentiment about the UK’s domestic medicine pricing policies, which would in influence decisions to move current or future research and development investment away from the UK. They considered this would reduce the UK’s share of research and development spend over and above the that identified in our impact assessment, although they acknowledged that such decisions are likely to be multifactorial.

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.

A small number of responses argued that the impact assessment gave insufficient consideration to the uneven distribution of impact resulting from increased payment percentages. 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.

Government response

In the consultation, we identified that that reduced pharmaceutical revenues may lead to some reduction in global research and development investment, and that some of this reduction could be felt in the UK. However, this modelled impact (£40 million to £50 million by 2023) is small compared to the modelled savings of £1 billion to £1.5 billion compared to not updating payment rates.

As stated in the initial impact assessment and the government response to questions 2 and 3, the available evidence suggests 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 considered several additional papers referenced in consultation responses.

• Labrie (2020)^{[footnote 4]} finds a correlation between reduced price controls and increased R&D spending but does not set out where that spending takes place. Increased spending on medicines would not necessarily lead to increased investment in the UK specifically
• Koenig and MacGarvie (2011)^{[footnote 5]} find some link between price controls and in-country investment, in particular administrative investment, however the relationship is weak for R&D investment and no relationship is found for manufacturing investment
• London Economics (2017)^{[footnote 6]} find a link between price controls and manufacturing investment, but no link between price controls and R&D investment. The paper states that ‘price regulation variables may not capture the nuances of price regulation in practice and so the quantitative findings should be interpreted judiciously’

While we acknowledge that there is some uncertainty surrounding the relationship between price controls and inward investment and are keen to continue discussions with industry about the available evidence concerning this link, we do not consider that the additional information presented in the consultation responses is sufficient for us to change our position. Based on the available literature, the claimed shift in research and development investment away from the UK is unquantifiable.

Government accepts that higher payment percentages can put pressure on the profitability of lower margin products, but as stated in our impact assessment, the risks presented with respect to supply can be adequately mitigated by standard DHSC and NHS price increase processes.

Regarding concerns that the impact of increased payment percentages would be felt unevenly between companies, the government view is that sales growth 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.

Question 5: 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 (12) disagreed with the conclusions about the impacts of the proposed updates on the duties of the Secretary of State for Health and Social Care. 5 respondents did not give a view. 1 agreed with the conclusions.

The main theme raised in comments was that the Secretary of State’s duty to promote a comprehensive health service would be impacted by the consultation proposals. Respondents argued 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, they anticipated 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 small number of respondents said the updated payment percentages would have negative impacts on duties to promote research. They cited the impact they expected on research and development investment and considered that this would reduce investment in future medicines.

Government response

The department 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 as annex A.

We have set out in our response to questions 2 and 3 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. The financial savings to the NHS as a result of these changes can be reinvested into the health system to provide greater patient benefits.

In questions 2, 3 and 4 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 of physical and mental illness

Amending the statutory scheme payment percentages for 2022 and 2023 will ensure 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 medicines to the NHS, thus enhancing the sustainability of NHS medicines spending and supporting the ability of the NHS to continue investing in patient access to medicines.

Under the revised payment percentages, the department will receive higher statutory scheme payments than currently set out in the Regulations, while future VPAS revenues will be protected saving the NHS between £1 billion and £1.5 billion compared to keeping the rates unchanged. Payments will be apportioned to the NHS across the UK to be used in in the best interest of patients. Our impact assessment shows a total net present value of the changes of £4.4 billion to £6.7 billon, largely due to the additional services and treatments that the NHS will be able to provide.

Some responses to the consultation argued that higher payments would see companies withdraw the supply of unprofitable medicines or hold off launching new medicines, reducing patients’ access to medicines and impacting negatively on this duty. However, the department has identified effective mitigations that will ensure continued supply of individual medicines that would otherwise have been uneconomical to supply. These mitigations, such as access to price increases where appropriate, will ensure we continue to maintain patients’ access to medicines and therefore a comprehensive health service.

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 10.9% in 2022 and 2023, we consider that this would destabilise the schemes by allowing growth to exceed 1.1% within the statutory scheme and allowing VPAS member companies to avoid making payments on their 2023 commitments.

Updating the payment percentages will therefore help 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 percentages 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 interest 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 Secretary of State to meet duties in securing continuous improvement in quality of services, in line with the NICE quality standards.

3. To have regard to the NHS Constitution (section 1B NHS Act 2006)

Regard must necessarily be had 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 also considered this duty in the context of the Constitution’s pledges to, and the rights of, NHS patients.

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 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.

By contrast, failing to update payment percentages would lead to a very significant reduction in VPAS revenues to the NHS, which would mean branded medicines provided poorer value for money, and would divert funds from other cost-effective healthcare spending.

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 public sector equality duty. Socio-economic 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.

Some of the respondents to the consultation 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. As described above, risks to supply are not anticipated as a result of this change and existing mitigations are expected to be effective in maintaining access to medicine and therefore ensuring there are no negative impacts on health inequalities.

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. Effective controls on branded medicines spending support prescriber freedom to prescribe NICE recommended medicines as needed by their patients without regard to cost.

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 pharmaceutical 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. The department considers that research and development investments leads 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 in other areas. 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.

Similar points were also raised by respondents to the consultation. Additionally, consultation respondents argued that lower UK spending on medicines could disincentivise industry investment in the UK compared to other markets. While we acknowledge that there is some uncertainty surrounding the relationship between price controls and inward investment and are keen to continue discussions with industry about the available evidence concerning the link between price controls and inward investment, we do not consider that the additional information presented in the consultation responses is sufficient for us to change our position that the larger driver of investment decisions is supply side factors.

By updating the scheme to keep NHS spending growth on medicines to 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 VPAS strikes an appropriate balance between the scheme objectives of supporting the pharmaceutical industry, supporting patients, and controlling costs.

Furthermore, the savings to the NHS that result from these amendments will support NHS research spending, as a proportion of the savings to the NHS will be reinvested in research relative to the total proportion to the NHS budget spent on research.

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.

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

This is because, 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, a small number of 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. However, as we expect existing processes to be effective in mitigating impacts on patients’ access to medicines from the change, we do not anticipate impacts on this duty as a result.

The family test

The Secretary of State must, where sensible and proportionate, 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 percentages 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, promoting autonomy and securing education and training.

1. In VPAS and the statutory scheme the ‘payment percentage’ is the percentage of eligible medicine sales that companies pay back to DHSC. Payment percentages in the statutory scheme are set in regulations at the level calculated to keep growth within the allowed level each year. ↩

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

3. Pfizer & PwC, ‘Driving global gompetitiveness of the UK’s life sciences ecosystem for the benefit of UK patients, the economy and the NHS’, 2017 ↩

4. Labrie, Y (2020) ‘Is there any evidence that regulating pharmaceutical prices negatively affects R&D or access to new medicines? A systematic literature review’ Canadian Health Policy, June 2020 ↩

5. Koenig, P and MacGarvie, M ‘Regulatory policy and the location of bio-pharmaceutical foreign direct investment in Europe’ Journal of Health Economics, 2011, vol. 30, issue 5, 950-965 ↩

6. London Economics (2017) ‘Quantifying the factors which influence life science companies’ decision to invest in R&D and manufacturing in a specific country when capital is internationally mobile’, report for the Department for Business, Energy and Industrial Strategy ↩