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Opinion: Funding model needs immediate radical change

There’s no point tinkering. Pharmacy needs a radically different funding model that reduces prescription volume and margin as its main funding drivers. The current system is broken beyond repair, says Mark Lyonette, previously chief executive at the NPA.

I’ve repeatedly been made aware of the ongoing major concerns around a community pharmacy contractual framework funding model that simply rewards the volume of prescriptions dispensed and the margin on supply. 

In the case of the latter, by the admission of DHSC officials, the distribution of margin has always assumed that an average pharmacy receives the average amount of margin. However, there are winners and losers within the system at both individual product level and de facto at individual pharmacy level.

Dispensing at a loss has therefore always been an accepted fact of life within this funding model, as has the often-mistaken belief among many contractors that they have been successful in ‘beating the system’ and securing margin income that is either at or above what they could be expected to earn if they merely received their pro rata share of the £800m margin pot. 

Beyond their control

It seems odd to me that very little consideration has ever been given to the statistical fact that significant numbers of contractors must therefore receive below average margin and so are victims of chronic underfunding.

Until comparatively recently, with the cash cushion of extra margin earned on drugs coming off patent, relatively stable and falling generics prices, and ample stock availability, the vast bulk of pharmacy contractors could be forgiven for believing that they were actually above average, and that this system was therefore serving them well. This has always been the prevailing view of PSNC/CPE.

We now have the exact opposite – rising generics prices, chronic ongoing shortages, the so-called patent expiry cliff has come and gone, and any loopholes have been plugged. We also have the cash flow impact of a margin survey system which still takes at least six months to give any indication of margin earned against a backdrop of rapidly rising drug prices. The price concession system is merely tinkering and goes nowhere near far enough in addressing many of the underlying problems with medicines reimbursement.

“No amount of tinkering will fix an arcane funding model that no longer works for everyone”

In addition, there is the increasingly frequent backdrop of PCN and ICB pharmacy teams, under pressure from local NHS finance departments, busily undermining with the help of financial incentives the entire margin delivery system by supporting the routine prescribing of branded generic medications, for example. 

This not only disrupts the funding mechanism that contributes to the financial viability of community pharmacies but can also push up the overall cost of medicines to the NHS – a classic case of robbing Peter to pay Paul, which makes a complete mockery of the averaging system so lovingly curated by officials at DHSC. 

And all this is set against the wider financial context of flat core global sum funding for almost a decade, preceded by an initial 6 per cent cash cut to the global sum and spiralling costs since then, which have been completely ignored by the Government. 

Fatal flaw

Perhaps my most startling discovery during my time at the NPA was the realisation that the whole margin funding system has a key fatal flaw that CPE, DHSC and NHSE are aware of, but which patients, ministers, MPs and contractors alike seem completely oblivious to. 

There has never been any attempt to correlate the margin survey and Drug Tariff price setting mechanism, which is meant to accurately quantify and control retained margin earned with the actual NHS margin funding received by individual pharmacies across the whole cohort of contractors from which the pharmacies selected to provide margin survey data are drawn.  

In other words, DHSC, CPE and NHSE don’t have the faintest idea who the actual winners and losers from the system are, or the extent to which the viability of the losers is being increasingly compromised by the toxic combination of circumstances I have already described.

“Everyone is fighting each other for a bigger slice of the pharmacy funding cake”

The statistically minded among you might be surprised to hear that no one really knows what the actual margin received distribution curve or data spread looks like for all the pharmacies which can be selected to provide survey data. 

Nor does anyone know the confidence intervals for the survey analysis, how many pharmacies are below average in terms of margin received and by how far they are below that average. Neither does anyone know how the recent changes I have described have affected this distribution and the ensuing differences between the average and the biggest losers.   

Radically different approach 

We need a radically different approach to pharmacy’s contractual framework in England, as no amount of tinkering by DHSC, NHSE and CPE will fix an arcane funding model which no longer works for everyone.

It is worth noting that it is not possible for an organisation like CPE, which operates only by consensus, to properly consider or develop the necessary radical changes to a contractual model that may still work for many of its larger members, either because they operate a vertically integrated model or have the buying power and benefit of a large estate which can even out the funding swings and roundabouts. 

In this regard CPE, with the explicit or implicit support of DHSC and NHSE, will always seek to maintain the status quo to protect such vested interests, while justifying this on some specious argument about sectoral unity even if this means the eventual demise of large numbers of smaller independent community pharmacies.

My experience has shown me that those players who often and vociferously mention the importance of sector unity are usually those with the greatest vested interest to protect by maintaining the status quo. This is presumably because the loss of smaller operators and resultant market consolidation would provide even greater buying power and operating margin for those remaining larger contractors. 

This is the ‘last man standing’ effect – not surprising when one also considers that the margin survey currently only assesses smaller contractors with no more than five pharmacies.

What is required is a radically different model that includes an advanced tier of the contractual framework for those pharmacies willing and able to deliver it, and which reduces prescription volume and margin as funding drivers to the absolute minimum. Such an approach has the potential to come up with a more appropriate framework that supports the widespread future deployment of independent prescribing by community pharmacists.

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