The PPRS - new UK medicines pricing system reviewed

Introduced in January this year, the new PPRS pricing scheme represents a major change in how the UK pays for branded medicines.

The Pharmaceutical Price Regulation Scheme (PPRS) has been around since the 1950s, but this new version has evolved greatly from its previous incarnation.

Until January 2014, the PPRS was a 'profit cap and price cut' system which controlled the overall UK drugs bill, and allowed free pricing setting at launch by pharmaceutical companies.

The scheme, overseen by the Department of Health, worked by capping the profits of individual companies, and imposed price reductions across all scheme members whenever a new deal was renegotiated, usually at the end of a pre-determined five year period.

In practical terms, this involved manufacturers paying monthly levies at set national percentages of their UK sales. While the UK pharmaceutical industry was generally satisfied with how the system worked, recent years has seen a growing number of other stakeholders – such as the Office of Fair Trading in 2007 - calling for it to be reformed.

The new scheme was agreed after a protracted period of negotiation between the Department of Health and the UK pharma industry's statutory negotiating body, the ABPI. The new PPRS has a number of novel components introduced alongside key provisions carried over from the previous PPRS.

No Value-Based Pricing

One notable absence in the new scheme is Value-Based Pricing (VBP), which the government had intended to supersede the PPRS from January 2014. The concept of VBP was to integrate health technology assessment (HTA) with price setting. This would involve rewarding the drugs which conferred the greatest health benefits with higher prices, and reduce the prices of those drugs which couldn't prove improved patient outcomes.

But the plans became fraught with technical problems and uncertainty – and vehemently opposed by the pharmaceutical industry. After protracted negotiations, the DoH eventually agreeing to return to the PPRS and simply modify this tried-and-tested model. This means that many of the existing features of the scheme remain, including free price setting at launch.

However, the Department of Health is to be applauded that the significant amount of work done on VBP has not been wasted – as NICE is now looking at how it can integrate the concept of "Value Based Assessment," (VBA) into its appraisals process.

Rebates replace Price Reduction

The 2014 PPRS is different to previous agreements in that it has a completely new cost-saving mechanism: instead of a cross-portfolio list price reduction every five years, the new system involves a cross-industry cap on sales growth. In practical terms, this involves quarterly cash rebates paid to the NHS by each scheme member, initially representing 3.74% of companies' net sales on qualifying products.

Although the calculations are very complicated, the manufacturers will just have a single percentage figure they will need to calculate the size of the rebate each quarter. What will be more complicated is interpreting the exclusions criteria to figure out which drugs are excluded/included for the purposes of the rebate, as there are a number of detailed provisions.

Small firms have been hit hard by a change to the threshold at which they are considered 'small' and exempted from the rebate system. The former PPRS allowed companies with sales of <£5m at the start of the agreement to be exempt from the price reduction for the whole five year period. Furthermore, if a company's sales were say £5.5m, then the reductions would have only been applied to the sales over £5m, in this case just £0.5m. However, under the new PPRS if the company sales exceed £5m in any year of the scheme, then not only will the rebate be triggered, but that rebate will be based on 100% of the sales value, not just the increment above £5m.

Also, drugs excluded from the new rebate arrangements include newly-launching drugs (launched after December 31 2014) according to clause 3.7 in Annexe 7 of the agreement1 . Their sales value will, however, be included in the DoH's calculations for UK sales and growth (which dictates the size of the rebate that PPRS members must pay each quarter). This means that pharma companies with established portfolios will effectively be subsidising companies with more innovative products, by picking up the tab for their contribution to the overall UK pharma market. This does seem somewhat unfair.

Principal Features Carried Over

It is to the DoH's credit that the new PPRS continues to eschew international reference pricing (IRP), a discredited and irresponsible mechanism used in many national drug price-setting processes in Europe. Put simply, it is inappropriate that higher GDP countries lower their prices to those seen in lower GDP countries, because in the long term this means wealthier markets aren't making a fair contribution to international research and development. In contrast, more detailed methods of HTA, such as those in France and the UK, are better able to assess value in the context of price.

The DoH has also resisted the trend seen in many other countries where processes for drug pricing and value assessment (reimbursability) are effectively one and the same, carried out by the same governmental body. It is clear that the long term policy is to maintain NICE as a secondary stage to PPRS in terms of establishing (net) drug price levels in the UK. This two-stage approach is not without problems, but it is clearly here to stay.

Patient Access Schemes and Discount Arrangements

Patient Access Schemes, which effectively offer price discounts, have become increasingly common in recent years, mostly coming after NICE rejects a drug in its initial appraisal.

The very detailed section in the new PPRS on Patient Access Schemes (PAS) implies a clear expectation that manufacturers will frequently have to provide a discount, because NICE will reject drugs which exceed its cost per QALY threshold of £20,000-30,000.

My view is that a fairer solution would be a relaxation of the QALY threshold, which is generally out of line with how other health systems assess value. This would eliminate the need to run PAS programmes, which are often complex and costly to administer.

A major factor relating to PAS is the confidentiality of the discount level. The main rationale for such schemes is to maintain a higher list price than transaction price (so that the manufacturer agrees a price that NICE is prepared to recommend, while at the same time not damaging prices abroad through IRP to the 'low' net UK prices). However this will only work if the referencing countries use NHS list prices (as printed in the BNF and elsewhere) and not the post-PAS transaction prices. However, it is not clear just how confidential the PAS scheme details will now be.

If other European countries which reference the UK can easily access the PAS scheme details and modify down the UK price in their reference baskets accordingly, then the 'game' is effectively up, and one of the main reasons for the PAS is removed. This would compel manufacturers to think harder about the benefits of launching new drugs in the UK, and compel NICE to reconsider the level of price for which it is prepared to grant reimbursement.

Recognising and Rewarding Innovation

One of the stated tenets of the new PPRS is to support R&D innovation through the IHW (Innovation, Health and Wealth) initiative, referred to in clause 4.11 of the new PPRS. However NICE's use of a cost per QALY threshold of £20,000-30,000 has been seen to run counter to this ambition. With VBA, which may incorporate an innovation consideration, NICE may be able to adhere to the principals of IHW, but with its standard appraisal approach, many observers have suggested that R&D innovation is not adequately dealt with.

Opportunity for UK Price Increases

Flexible Pricing, a provision of the PPRS which allows a manufacturer to increase prices, has been greeted with collective cynicism, partly because no increases have been granted so far (despite the same provision being available in the past). The industry is very sceptical that price increases would be granted if strong data becomes available at some time after launch. Furthermore, pharma companies are unlikely to sanction a 'low' UK launch price in anticipation of a price increase based, for example, on expected outputs from ongoing clinical studies.

Also related to price increases, clause 5.23 in the new PPRS suggests that if a drug is granted a new indication, it could have a higher price than its established price. The regulation states that under such circumstances, the manufacturer would need to offer a discount for any subsequent sales of the drug for the original indication so its purchase price remains the same. Needless to say, and especially with single branding, from a pharmacy and administrative perspective this would raise enormous processing issues.

Reporting Procedures

The threshold at which a company needs to supply an Annual Financial Return (AFR) has been reduced from £50m to £35m, and the DoH will only be asking 20% of such companies to complete a full AFR, so the administrative burden of producing these very detailed reports will be considerably lessened.

Statutory vs Voluntary Scheme

As before, there is also a statutory scheme for pricing run in parallel with the PPRS. Instead of the rebate process, the DoH will manage cost containment through a 15% reduction of list price on companies with sales >£5m. It is a single reduction to cover the five year period. Previously, the scheme was mainly used by smaller companies with a mostly hospital drug portfolio where there would be a certain amount of discounting negotiation downstream from the list price. The DoH is now looking at changing the statutory scheme to a reduction in the net sales price, so if this were to happen, it is likely that more companies would move into the voluntary scheme.

References

1: The Pharmaceutical Price Regulation Scheme 2014

About the author:

Adam Barak is founder and Managing Director of PharmaPrice International Ltd (PPi), www.pharmaprice.net, a UK-based consultancy group with offices in 25 countries and which specialises in providing payers and the pharmaceutical industry with guidance and support for international pricing, reimbursement and market access. He is the former Head of European Pricing at GlaxoWellcome.

For a longer version of this article, visit pharmaprice.net

The full 2014 PPRS agreement can be found here

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