OFT's value-based pricing scheme is well-founded, but could increase overall NHS drug spend

Public release date: 29-May-2007
http://www.eurekalert.org/pub_releas...-ovp052507.php

A report by the Office of Fair Trading [United Kingdom] has recommended that pricing of drugs is based not on how much the drug costs to develop, but on the benefit that the drug can bring. After examining the proposals for a paper publishing today in the journal Health Economics, Professor Karl Claxton believes that such Value-Based Payments (VBP) make sense. He is, however, worried that the current plan is overly generous toward pharmaceutical companies and could lead to a rise in the NHS’s total drug bill.

In most markets consumers are used to the idea of paying a high price for goods that give a lot of benefit, and a low price for those that perform less well. The consumer is unconcerned about the cost to the company for developing the item. Up until now, this has not been the case for the drug industry. Here prices have been set by the pharmaceutical price regulation scheme (PPRS) which tries to balance the cost to the NHS and profits for the pharmaceutical industry. In effect a lot of the calculation is based on the costs of development and production costs.

"Under the new scheme the NHS will only take on technologies if they are cost-effective – that means the health benefits of using the technology must be greater than health displaced elsewhere in the NHS (due to the additional cost of the technology)," says Professor Claxton, who works in the Department of Economics and Related Studies and Centre for Health Economics at the University of York. This, he believes, will provide a powerful incentive for companies to concentrate on cost-effective delivery when they develop new therapies.

Such a radical shake-up is bound to worry people within the industry, but Claxton believes that most fears are unfounded. Some industry observers, for example, are worried that the result will simply be less revenue for their products. But Claxton believes that while some individual products may earn companies less, the overall spend will either remain fairly constant or could increase. An increase in overall costs would, however, worry the Treasury.

Claxton’s proposal is that there should be an agreement to monitor total NHS spend, and link this monitoring to a rebate agreement in which any underspend created by the new system is shared by the industry. Equally, higher than expected spend would lead to a transfer from industry to the NHS. "This would reassure the Treasury and Department of Health that the introduction of VBP will not lead to uncontrolled rises in spending, and industry that there will not be dramatic cuts," says Claxton.

"The OFT report provides a clear and coherent rationale for a move to VBP… The OFT has put down an important marker which will inevitably shape the scope of future policy debates about value, guidance, price and innovation," says Claxton.

Does this mean persons with diabetes, with low income, will end up paying more for insulin, which they depend on to live, while persons , with low income, receiving l-dopa will pay less for their drug because if only prolongs their lives?

Sounds to me like the governments that regulate their pharmaceutical companies are trying to regulate ours as well. Maybe if our government would step up and do their job, it woudn't be necessary.

Vicky

This article is very important. Karl Claxton , a professor who operates on theories in a classroom, not experience in the outside world, who wants to change the pricing of pharmaceutical products. With no proof, he makes the statement, "In most markets consumers are used to the idea of paying a high price for goods that give alot of benefit, and a low price for those that perform less well. The consumer is less concerned about the cost to the company for developing the item."

Is that a fact? In my class of Macroeconomics we were told that supply and demand determined the price. Not the efficiency or value of the product. Remember the children dolls that came with the certificate of adoption? How they ran out of them at Christmas time and parents were paying very high prices for what was essentially a product that was useless but every child had to have? (Cabbage Patch dolls?)

When Sega comes out with a new Play Station, it is priced outrageously high until the market eventually becomes glutted with the product and the price comes down?

How about a newly released popular movie, say, "Pirates of the Carribean." After enough people have seen it, the price for the tickets lower until so many people have seen it that they re-release movie as a DVD to make a second round of profit.

None of the above products are necessary to our survival. These examples prove Mr. Claxton's theory to be true for non-free enterprise companies, but not for the United States. I won't judge Me Claxton as evil. He simply lives in an economy where the government has tight reigns on the the pharmaceutical industry. The reason for his proposal is because the United States government allows our pharmaceutical companies to police themselves and allow them to opporate not as a free enterprise industry, but as a closed industry by permitting no open patents and no competition from other countries through imports. Thus the pharmaceutical companies in strongly policed governments are getting angrier and angrier scratching out a living as the watch the US Drug industry making money hand over fist. They are tired of being accused on not doing their share of research when their first priority is to help the people, not make profit. They have no profit for research.

People this is a wake up call. Professor Claxton is offering an unreasonable solution to a problem, because our government is unwilling to cut the ties of the lobbiests who fund so many of their pet projects, even those having absolutely nothing to do with pharmaceuticals. This announcement is a last plea from outside countries who cannot afford to pay the cost of our exported pharmaceutical products and are desparatly looking for a fair way to meet their citizens needs and not import as many American made drugs.

Vicky