As pharmacies in England deal with yet another substantial ‘margin recovery’ exercise, will new regulations proposed by the Department of Health see an end to such financial disruption?

 

 

Category M is that unpredictable section of the Drug Tariff that can play havoc with a pharmacy’s cash flow – and nowhere is this more evident than in the 12-month ‘margin recovery exercise’ that started in August. The aim is to recoup £15 million a month for 12 months from community pharmacies in England for the Exchequer.

The damage will be evident when the November schedule of payments comes through. Average item values are expected to drop by around 17-18p from current Tariff prices, although the impact on any individual pharmacy may differ from this according to its dispensing mix, warns PSNC.

The reductions correct overpayments of retained margin for both 2015-16 and 2016-17 and, as is carefully noted in PSNC’s August newsletter¹, the margin analysis is based on data from the independent sector.

Commenting on the adjustment, PSNC chief executive Sue Sharpe pointed out that over many years “we have seen that price volatility operates to preclude the real possibility of delivery of the exact agreed sum of margin in a year”. PSNC also remains concerned about fair access to margin and local manipulation of the market, she said.

Price hikes

It is not only pharmacy contractors who have been looking to squeeze a bit of extra revenue out of generic products – some suppliers have been accused by the Competition and Markets Authority (CMA) of breaking competition law.

Over the past 12 months Actavis UK², Pfizer and Flynn Pharma³ have found themselves on the wrong end of a CMA investigation for pushing up prices to an unreasonable extent (see panel). The companies are said to have exploited a loophole that means ‘de-branded’ (generic) drugs are not subject to price regulation.

All this plays to sensitivities about the drugs bill. The NHS in England spends approximately £16 billion a year on medicines, a figure that has grown by 12 per cent over the past two years, compared to an overall growth rate of just over 6 per cent for NHS spending, says the Department of Health (DH).

Generic medicines make up over three in every four items dispensed in English community pharmacies.⁴ NHS data show that the average branded medicine costs £20.63, whereas the average generic medicine costs £4.17 – and the latter includes fees paid by the DH to pharmacies for dispensing the medicine.

While the price of branded medicines is managed through a statutory scheme and the voluntary Pharmaceutical Price Regulation Scheme (PPRS), the generics market has no such restrictions. For a Government which seeks to manage its drugs bill and reimburse pharmacy contractors a fair amount for the cost of medicines they dispense, the pricing of generics has long been seen as a problem.

Prices – to the Government – are opaque; they can change dramatically over short periods of time and, as the CMA has found, can be pushed up unreasonably if a supplier has a dominant position in the market.

 

Sweeping powers

To address these issues and to tighten still further its control over the cost of medicines to the NHS, the Government enacted the Health Service Medical Supplies (Costs) Act 2017⁵ in May. This gives the DH sweeping powers to collect information about the price of medical supplies and related products.

In late August, with the ink barely dry on the Statute Book, the DH published draft regulations and opened a consultation⁶ on proposed legal requirements that will apply to everyone in the supply chain, from manufacturers to pharmacies, to provide information related to the sales and purchases of health service products.

The information provided will, the DH says, “facilitate the determination of remuneration/payment of community pharmacies and GP practices, help ensure the availability and value-for-money of health service products, and support the cost control provisions in the NHS Act 2006”. The consultation runs until November 14.

The proposed new regulations will require:
• Manufacturers, importers and wholesalers to provide quarterly information about sales and purchases of generic medicines and special medicinal products
• All those in the supply chain (from manufacturer/importer to pharmacies and others supplying patients) to record and keep information on their sales and purchases of medicines and medical supplies, and provide it on request. Primary care suppliers are exempt in Scotland, Wales and Northern Ireland
• Marketing authorisation holders/manufacturers/importers to notify the Government about any discontinuation and supply shortages of medicines, and all manufacturers, importers and wholesalers to provide volume information when supply shortages of medicines arise.

The DH recognises that this will significantly increase the number of companies providing information and is exploring a web-based solution for information provision.

The new powers could, for example, be used to obtain invoices from pharmacies for the margins survey.⁷ The DH acknowledges that the draft regulations give it a stronger legal basis for requiring and enforcing the provision of such information, which might irritate those contractors who decline to take part in the survey. The use of any information for the margin survey would be subject to the normal negotiating arrangements with the PSNC, it adds.

The British Generic Manufacturers Association (BGMA) has already welcomed the new Act because, “it ensures that the Department has the powers to properly implement its pricing agreement (Scheme M) with us”.⁸

Under Scheme M9 (agreed between the DH and the BGMA in 2005 after the last major rumpus about the true cost of generics), BGMA members voluntarily provide data every quarter showing the volumes of each generic medicine sold into primary care and the net revenue gained. Category M prices in the Drug Tariff are based on a calculation that incorporates the volume-weighted, average price charged by manufacturers, which is ‘topped up’ to provide for a pharmacy margin of £800 million per year.

The rub with Scheme M is that not all generic suppliers are BGMA members, so the price data collected by the DH is incomplete, and the ‘up-to-date lists of trade prices’ which companies are required to submit rarely apply universally to all contractors.

However, the Act’s powers extend the Scheme M agreement, says the BGMA, empowering the DH to collect data from all manufacturers, not just BGMA members. This should, in theory, improve the accuracy of reimbursement prices and diminish the pain of margin recovery exercises.

As a pharmacy contractor, whether this is a good or bad thing depends on how well you have managed your generic buying. In the consultation document on the new regulations, the DH says it could, subject to consultation with the PSNC, use the information to consider basing more reimbursement prices on actual sales and purchase information including, for example, imported special medicinal products.

 

Category A affected too?

Since the Act allows the DH to collect data for all medicines, those listed under Category A in the Drug Tariff could also be affected. The DH currently uses a weighted average from the published price lists of AAH, Alliance Healthcare (Distribution), Teva and Actavis to set Category A reimbursement prices.

The BGMA argues that this means reimbursement prices are artificially inflated and do not reflect actual market prices charged by manufacturers. So could prices in Category A of the Tariff also be adjusted down?

To allow for the £800 million pharmacy margin, Category M reimbursement prices are set at around twice the market price, says the BGMA. The difference between market prices and Category A reimbursement prices is likely to be higher, it says.⁸

One area where pharmacies may benefit is where products are in short supply. Guidelines for notification of medicines shortages have been agreed with manufacturers, but the DH says it is only notified about half of the shortages that impact on patient care. In many instances the Department only finds out about supply shortages from other parts of the supply chain when there is already an impact on patients and the costs of medicines.

As part of the consultation the DH is asking whether it is timely to move to a regulatory basis for notification of medicines shortages. In circumstances where a medicine is in short supply or not available to pharmacies at the price listed in part VIII of the Drug Tariff, the Department is also proposing to introduce a requirement on manufacturers, wholesalers and importers to provide information within 24 hours about available volumes and prices of generic medicines and specials.

PSNC was unable to comment on the proposals as PM went to press as it had not had time to properly work through the consultation documents.

Unwarranted prices

For unbranded generic medicines the Government relies on competition to keep prices down. The DH accepts this generally works well although, as mentioned earlier, “there have been instances where companies have increased the prices of unbranded generic medicines to what appear to be unwarranted levels where there are no competitor products to keep prices down”.

The 2017 Act provides the Secretary of State with the powers to limit the price of any medicine. It ensures that, even when the manufacturer is in the voluntary PPRS scheme but the medicine in question is not, the Secretary of State can limit the price. This means that the Government now has the power to set the prices of unbranded generic medicines of those companies that are in the PPRS for their branded products.

Although the regulations are only at the consultative stage, and could change before the final version emerges, it is clear the DH is intent on replacing the voluntary schemes that currently provide it with price information on generics and specials with regulatory ones. Time, perhaps, for pharmacy contractors to stop chasing margin in Part VIII of the Tariff and focus on other areas of the business where they can exercise more control?

 

<sup>References
1. August Category M adjustments. Community Pharmacy News (PSNC) August 2017
2. gov.uk/cma-cases/pharmaceutical-sector-anti-competitive-practices# history
3. gov.uk/cma-cases/investigation-into-the-supply-of-pharmaceutical-products
4. NHS Digital: Prescriptions Dispensed in the Community, Statistics for England - 2006-2016. Published June 2017
5. legislation.gov.uk/ukpga/2017/23/introduction/enacted?view=interweave
6. gov.uk/government/consultations/information-about-health-service-products-proposed-requirements
7. psnc.org.uk/funding-and-statistics/pharmacy-funding/margins-survey/
8. britishgenerics.co.uk/view-news/bill-provides-department-with-powers-to-implement-pricing-agreement-with-bgma
9. New long-term arrangements for reimbursement of generic medicines – Scheme M. Department of Health, June 2005: webarchive.nationalarchives.gov.uk/20130123204648/dh.gov.uk/en/ Publicationsandstatistics/Publications/Publications PolicyAndGuidance/DH_4114369)
10. gov.uk/government/consultations/statutory-scheme-to-control-cost-of-branded-medicines-consultation</sup>

The Act provides the Secretary of State with the powers to limit the price of any medicine