Pricing and Reimbursement Mechanism: Factors Governing Pricing Policy of NHS in the UK
Chapter 1: Introduction
In the past few years, various industrialized nations have been faced with increasing expenditure on healthcare services and reforms. As this rise in expenditure is generally exceeding a nation’s economic growth, the governments are turning to different policies intended at controlling both pharmaceutical and healthcare expenditures (Artsand and et. al., 2006). In the last ten years, European nations – specifically those nations hit by financial crisis – have executed a plethora of cost curtailment measures in this sector. Governments are obligated to improve public healthcare systems (by enabling access to required therapies for its nationals), required to control expenditures related to healthcare – because a considerable part of this expenditure is publically financed – and seek to reward pharmaceutical innovation. As clearly evident the above mentioned goals are conflicting and hence, policy decisions can call for a trade off across competing policy goals (Wertheimer, 2003).
The growing focus on cost curtailment methods has given birth to concerns pertaining to pricing and reimbursement in pharmaceutical sector and pharmaceutical innovation sustainability (Artsand and et. al., 2006). The pharmaceutical firms earn back the amount invested in pharmaceutical R&D by means of the profits spawned by the prices of a minority of products which make it from the discovery stage onto the market, as the novel medicines entering the marketplace will see a period of exclusivity because of patent protection (Cameron and et. al., 2012). If these prices are not adequate to earn back the investment amount and produce resources that can be ploughed back for the development of novel medicines; strict reimbursement regulations and price controls carry the potential to adversely affect pharmaceutical innovation because for the producer of a new medicine, reimbursement and coverage are the ways to economic success which is imperative for sustaining the R&D (Smith and Wanke, 1993).
Therefore, in the context of priority medicines, suitable incentives and policies for Research & Development- which are partially produced by pricing and reimbursement policies- are a crucial instrument to meet the pharmacotherapeutic gaps (Scherer, 2000). The main intention of this research work is to discuss the contemporary pricing and reimbursement policies which can align contradicting policy goals – cost curtailment, rewarding innovation, access to novel medicines – plus to determine the priorities for investigation dependent on this discussion (Cameron and et. al., 2012). Various sources have been made use of including grey literature, policy documents, scientific publications, academic journals, books and online sources to write this paper.
The 2004 Priority Medicines Report had a background paper titled “Approach to the Valuation and Pricing of Future Medicines” which mainly sought approaches for middle and low income nations and suggested differential pricing as a plausible way out (Wagner and et. al., 2012). The focus of this dissertation is very specific, as it studies the contemporary pricing and reimbursement policies and practices in the United Kingdom and will throw light on relation between pricing and pharmaceutical innovation, and the factors which govern the pricing of NHS in the UK (Smith and Wanke, 1993). In this paper, recent developments will be presented regarding pricing and reimbursement policies, value assessments, initiatives and processes together with proof of present practices on whether or not they are capable of enhancing innovation will be analyzed (Cameron and et. al., 2012).
This dissertation talks about three key themes. The beginning section of the report discusses about what are the main medicine pricing policies and how these policies impact health goals. The subsequent theme addresses the key factors that determine prices of medicines for NHS in the UK and the final theme of dissertation highlights the pricing and reimbursement system for NHS in the United Kingdom (Smith and Wanke, 1993). This paper concludes with identifying a series of research priorities which can improve the common knowledge of pricing reimbursement policies and the manner in which they can impact health goals.
The present work has both theoretical and practical significance. This study will help the corporate and government houses to identify the factors that may impact the pricing policy of pharmaceutical sector of their respective nation. Further, it will also help them in understanding why it is necessary for the authorities to emphasis on clinical value of drugs and treatment and not only on its brand and how prices can be bring in-line with the clinical value.
From theoretical perception this report will help the student in understanding what factors must be considered while pricing any medical product and why it is important to price the medical product according to its clinical value and not only the brand. Further they will also understand the mechanism of PASs and flexible pricing through which pricing of medical products based on their clinical value can be achieved.
Creating, manufacturing or producing a drug is a complex process as it involves great experience of medical experts to come up with something innovative. In addition to this, these experts have to spend lot of time in research and developmental activities and after that also there is no guarantee that they will come up with a success, and moreover, for this research and development purpose companies have to incur very huge cost and thus requires huge funding (Docherty, Cao and Wang, 2012). Earlier, current cash flow was the only primary source to finance the research and developmental activities. After the approval of budget, management has to decide to proceed with which project (Cameron and et. al., 2012). In every pharmaceutical company, many projects run simultaneously, thus, once the budget is allocated, it is the responsibility of the management to decide which project to delay and which project is to accelerate. In the past, these decisions were purely based on scientific and technological grounds, but due to stricter cost-containment policies, companies are also considering commercial factors among which potential pricing and reimbursement regulation is the most important one (Docherty, Cao and Wang, 2012). Since, the regulatory environment has become stricter and complex, it will have direct consequences on the potential pricing and reimbursement regulation as now to comply with such regulations; they will have to employ more resources and efforts. Thus it can be said that all forms of pricing regulation will result in reducing the value of all projects and further it will also reduce the resources available to the companies for their research and development activities (Cameron and et. al., 2012). In will have direct impact on the launching of the product. The launching of the product will be delayed in those countries which are not willing to pay higher amount against the purchase of that product. Further, companies will also focus on only those countries which are willing to pay high amount and are capable to afford those drugs and products.
Pricing and Reimbursement Regulatory Schemes
While discussing pricing and reimbursement in the medical it is very important to discuss internal reference pricing. Internal reference pricing is defined as reimbursement from the government for a specific drug in reference to a set of comparable drugs. It means, government will reimburse for those drugs which are deemed to have the same or similar therapeutic effect as that of other comparable drugs (Docherty, Cao and Wang, 2012). Therefore, if the internal reference pricing will get stricter, there are higher chances that the pharmaceutical company will invest in research and developmental activities of those drugs where there is a lower probability that a drug will end up being “later in class”. Thus, in the later years of its patent protection, the price of those drugs will be referenced against a generic drug. These products may belong to those projects which have lesser chances of getting success are for those rare diseases which affects very limited number of patients (Stargardt and Schreyögg, 2006). It is due to the reason that the mechanism of action still needs to be validated. Another repercussion of internal reference pricing is that, those pharmaceutical companies that are intended to put money in the development of those drugs that have higher demand in the market may cancel or postpone to invest in such project in the later stages of development, when they find out there are higher chances that its competitors have higher chances to launch similar kind of drug to treat the same therapeutic disease than themselves. Thus, if the firm realizes that it is not proactive in that field, lower its expected returns significantly and therefore the company decides not to invest in such projects (Docherty, Cao and Wang, 2012).
Internal reference pricing has one more consequence, that is, instead of leading to innovation of the products that are differentiated from each other and treats different kind of patients suffering with different diseases, it leads to less innovative activities. There are higher chances that companies do not manufacture differentiated drugs with varying degrees of effectiveness. In other words it can be said that there will be less innovation in the products which are highly demand in the market and more innovation can be seen in those drugs which have very limited demand among the patients in the market (Docherty, Cao and Wang, 2012). Thus, the if prices are set at the levels which are not effective for the pharmaceutical companies, they will be least interested in launching that drug in any of the country as they won’t be able to generate expected returns. Pharmaceutical companies will launch their products in the market only when, the prices set will enable them to make profits after recovering their launching cost, otherwise the company will drop that project and will not launch that product. Even if the company has to launch that product under external price benchmarking, it will launch it only at a late stage in its life cycle. This step is taken by the companies to reduce the benefits that the government health insurer and reap from the drug (Stargardt and Schreyögg, 2006). In addition to this, it also lowers the incentives to the pharmaceutical firm to invest in future Research & Development of that drug and thus they can invest to develop new products. In addition to the above factors, there is one more factor that makes the pharmaceutical innovation further complicated, and this factor is different pricing regulatory schemes in different countries (Littlejohns, Sharma and Jeong, 2012).
Since, at the same time, different countries have different pricing regulation schemes, thus combination of all the pricing regulation schemes make the global pharmaceutical innovation process more complicated. Because of this the pharmaceutical companies have shifted their focus from innovative model to more casual personalized concept which has given rise to tailored drugs. Decreasing returns have forced the companies to come up with tailor made products rather than investing in research and development activities of some innovative product (Littlejohns, Sharma and Jeong, 2012). Since, in large and heterogeneous populations, it has become difficult for the pharmaceutical companies to determine the target group that can be safely and effectively hit, so the firms have decided to shift to personalized concept rather than focusing on innovation model (Windmeijer and et. al., 2006). Personalizing a product for a smaller but homogeneous population provides various therapeutic advantages to the pharmaceutical companies in terms of efficacy and safety as these personalized products treat only a part of the population that is afflicted by a disease or treat rare diseases.
Apart from the pricing regulation, other factor that has affected pharmaceutical innovation is demographic trends; the most influential among all is the rise in the fraction of the world’s population that is old. Nature of disease in this set of population varies significantly, posing challenges for the pharmaceutical companies to address these unmet medical diseases. Further, elderly people are significantly benefiting from the rise in tailored medicines (Littlejohns, Sharma and Jeong, 2012).
Apart from the pricing and reimbursement regulatory schemes, another factor that influence innovation in the medical industry is economy or the commercial factors. This factor has significant influences on the decision making process in the early stages of the project. Economic value or the future prices of the project play a significant role in deciding whether pharmaceutical companies must advance for innovation or not. The only problem faced by the companies is in implication of these factors as these factors do not affect the project in its earlier stages, but have significant impact at the later stages of the project (Espin and Rovira, 2007). Thus, two mechanisms of pricing and reimbursement regulation that may have effect on the drug innovation are:
- Determination of research and development budget on the basis of the current sales, and impact of pricing and reimbursement regulations on the current sales. Further, resources available to the companies for the drug innovation also have its impact.
- Since, among the two or more drugs, the pricing and reimbursement regulation affects different drugs with different probabilities, thus, impacting the innovation in the products.
Thus, from the above discussion it can be said that pricing and reimbursement regulations influence the innovation in the product (Littlejohns, Sharma and Jeong, 2012). This research report will further investigate how pricing and reimbursement in the medical industry of UK influences the drug or product innovation.
1.2: Aims & Objectives
Aim – The aim of the present report is to critically analyze the factors that govern the pricing policy of NHS in UK.
Objectives – To fulfil the above aim, below mentioned objectives need to be fulfilled:
- To assess the underlying pricing policies of pharmaceutical industry and their impact on health goals
- To examine the overarching factors to determining prices of medicines
- To understand the pricing and reimbursement system of NHS in the UK
In order to carry out research in systematic manner, some research questions have been formulated that will direct the entire process of study. Following are the research questions for present study:
- What are the key pricing policies of pharmaceutical sector in the UK and how they impact health goals?
- What are the factors that determine medicines prices of NHS in the UK?
- How are pricing and reimbursement system organized in NHS UK?
1.3: Structure of the report
The present research paper follows an orderly and systematic process in order to identify answers to research questions. All the chapters of the dissertation are interlinked which further implies that once the first chapter is completed then only next section can be preceded. The structure adopted for this research has been explained below:
Chapter 1: Introduction – The section of the dissertation outlines the brief idea of the subject under consideration. In addition to this, a succinct synopsis of the aims and objectives, focus and purpose as well as potential significance of the research are also presented in this.
Chapter 2: Literature Review – This segment of the report explores varied scholarly articles and research paper produced by other authors on similar topic. However, the work of others researchers may not be exactly on same subject but is in some way related to the present topic. The section particularly talks in detail about the various pricing and reimbursement policies and their impact. Additionally, this chapter would also contribute in identifying the current trends and the future challenges for the pharmaceuticals pricing and reimbursement. Several books, periodicals, academic articles, government and non government reports and other online materials have been reviewed in this section. This section has significant value for the research as it assists the scholar attuned with the opinions and contradicting views of the others and thereby aid in determining the gaps in their work. Moreover, it also provides theoretical support to the study. This has helped in identifying a gap existing in the past studies that pricing in NHS cannot be based solely on the brand of the product, but it should also consider the clinical value of the product.
Chapter 3: Research Methodology – This chapter gives an account of different methods, tools and techniques that have been applied for collating, evaluating and interpreting the data with a view to draw valid and accurate conclusion. It outlines research questions, aims and objectives, methods of data collection, research approach and philosophies, research design and limitations encountered during the research process and ethical issues taken into consideration.
Chapter 4: Data Analysis & Findings – Data analysis chapter of the dissertation is of paramount importance. The data obtained through the primary sources is examined for its validity as well as to derive findings. It fundamentally concerns with analyzing the information collected so that valid inferences can be generated.
Chapter 5: Conclusions & Recommendations – This is the final section of the dissertation recapitulating the main findings generated from the research. As well, it also provides certain recommendations in context with the subject matter.
1.4: Significance of this research
Analyzing the pharmaceutical industry’s performance is a relatively complex task, due to the convergence of contradicting health and social goals as well as goals. Pricing and reimbursement policies plays vital role in influencing the future development in the field of medicines focusing on the unmet medical needs by developing an apposite incentives for innovation. In United Kingdom, negotiations are in process to seek new arrangements for the price setting of new medicines. The pharmaceuticals sector in the country only accounts for small portion in global sale, nevertheless, prices of medicines in UK are important as many European nations reference their prices against prices in the UK.
The current dissertation has both practical as well as academic relevance. Pharmaceuticals strategies and policies usually constitute a set of individual mechanisms or practices that greatly influence each other. These practices could either support one another in achieving the desired objectives or may also produce opposite effect. The current study proves to be of great significance in understanding the pricing and reimbursement policies in pharmaceutical sector as well as their impact on heath goals. This report will aid in understanding how prices of medicines are determined i.e. what factors influence medicine price. In addition to it, this report also reflects pricing and reimbursement system of the NHS in the United Kingdom. Through this study, deep insight into UK’s health system will be comprehended. Finally, this research paper entails to certain recommendations that can be undertaken with a view to develop more profound pricing and reimbursement policies.
Chapter 2: Literature Review
In this section, the international literature on medicines prices and the related pricing policies will be assessed. A wide range of academic literary sources available as well as relevant will be examined. The scope of literature reviews focuses on factors that determine medicine prices. It begins with presenting the detailed introduction of pharmaceuticals market. It follows with the discussion of various medicine-pricing policies and their impact. Finally, the chapter ends with examining determinants of medicine prices.
2.2: Pricing policies and their impact
According to Vogler and et. al. (2008), pricing policies can be defined as “procedures or regulations enforced by government authorities in order to set or limit the amount paid by buyers or the amount received by the sellers. Pricing mechanism which are not influenced or regulated by government and are set by the manufacturers, pharmaceutical wholesalers and retailers are considered as “market-based or free pricing” (Windmeijer and et. al., 2006). It is usually adopted for the OTC medicines, which are not subject to reimbursement in many countries.
Price setting can either be performed by state i.e. price control or by pharmaceutical industry and/or a varied stakeholders within the supply chain which means free pricing. Usually, in EU countries, price control is used for setting price for reimbursable medicines while free pricing is applied for non-reimbursable medicines (Espin and Rovira, 2007). Price controls are exercised as statutory pricing policy where prices for medicines are set by the concerned authorities on regulatory basis or by negotiation between authorities and pharmaceutical companies. In most of the cases, prices for medicines are first set at the ex manufacturer or ex importer level, and then controlled at the wholesale or at retail level (Espin and Rovira, 2007).Nonetheless, the most complicated task in developing price control mechanism is to establish a fair, reasonable an appropriate price or reimbursement limit. Different methodologies and techniques are applied in case of price control. Nations vary in defining a reasonable price, based on number of factors such as budget limits, patterns of use, prescribing behaviour and significance of pharmaceutical industry to economy. Techniques that are employed to calculate reasonable price also differs to great extent (Espin and Rovira, 2007). A very common and widely used policy is known as benchmarking of prices. In this policy, prices are set either on the basis of price of same medicine is other nations i.e. external price referencing or price of similar or identical medicines in same nation i.e. Internal reference pricing (Espin and Rovira, 2007). These are used as benchmark for the setting price of medicines. In Europe, external reference pricing or ERP is predominant policy. For internal reference pricing, generally medicines are grouped on the basis of ATC codes i.e. Anatomical Therapeutic Chemical codes. Apart from these techniques, economic evaluation, cost plus pricing, price negotiation and profit ceilings are also some of the methodologies (Espin and Rovira, 2007).
External price referencing and its impact
External price referencing has been defined as the practice of considering the price of pharmaceuticals good in one or more countries so as to obtain a benchmark or technically a reference price for setting the price of the particular product in given nation. It is also known as comparative pricing and international price benchmarking. This practice is widely used among 24 European Union member states in 2013 and it is also increasingly gaining acceptance worldwide (Cohen, 2007). However, there is great number of differences in the way EPR is designed and applied in these countries. While establishing an external price benchmarking system, three important issues are taken into consideration. Firstly, how many and what comparator nations should be included in country baskets. The second issue considered is the level at which prices will be compared. And final issue concerns with method applied to calculate the benchmark price (Barak and Nandi, 2011).
External price referencing does not target all medicines such as in European nations it is usually implemented to reimbursable or on-patent medicines while off-patent medicines are subject to internal price referencing. It is worth noting that in some of the European nations external price referencing is not the only price policy, but the medicine price in other countries is one of the criteria in process of price setting (Slater, 1997).
Evidence on the impact of external price referencing and its limitations is limited. Most of the previous studies are descriptive, and only few studies have evaluated the impact of these policies. Usually, in most of the literary sources, only the impact on prices has been assessed within the country adopting external price referencing as well as the plausible spill over effects on other nations (Docherty, Cao and Wang, 2012). Håkonsen and et. al. (2009) examined the medicines prices development from year 1994 to 2004 in Norway, the country had introduced external price referencing in year 2000, the author further claimed that constant use of external price referencing and successive price revisions usually led to the considerable reductions in price on many medicines (Hakonsen and et.al., 2009). Windmeijer and et. al. (2006) evaluated the impacts of the implementation of external price referencing on medicine prices in the Netherlands, the study concluded that the external reference pricing resulted in lower prices (Windmeijer and et. al., 2006). Merkur and Mossialos simulated the effects of this pricing practice in Cyprus and inferred that this would lower medicine prices as well as contain costs after determining Cyprus having high price for medicines. Filko and Szilagyiova (2009) declared that in 2009, due to the change in policy of external price referencing in Slovakia, the proportion of expenditure of pharmaceuticals as share of total healthcare spending reduced by approximately twenty-five percent (Filko and Szilagyiova, 2009). The study on 14 European nations revealed that the prices for patented medicines in the countries using external reference pricing are generally lower as compared to nations which did not (Filko and Szilagyiova, 2009). Nonetheless substantial price variations among nations that use EPR were also identified. Stargardt and Schreyögg (2006) examined how the influence of composition of the country basket and price reductions on the price level in other nations (Stargardt and Schreyögg, 2006).
Despite of the fact revealed from various studies that external reference pricing policy may drive prices of medicines down; it has been criticized on many grounds such as possibility to discourage innovation and also to obstruct patient access. A major criticism against EPR is that it neither reflects the ability to pay nor the willingness-to-pay of a country, while other concepts of pricing such as value-based policy do (Michels, Levin and Schmitz, 2009). However, the extensive use of external price referencing as pricing policy provides a pharmaceutical company with an advantage to first launch its product in ‘free-pricing’ nations such as the United Kingdom, Germany and Denmark, where they are likely to gain high price, and delay in introducing in low-price markets (Motawa, Kaka and Wong, 2008).
It has often been argued that if all the countries in Europe consider external price referencing for price setting and they start referring each other, consequently the level of price will converge across Europe, although, currently price differences continue to exist across Europe. These price variations are probably the result of varied methodologies that are adopted for EPR or external price referencing (Kangis and Geer, 1996). For instance, not all the nations use the same countries basket that are referenced, where countries tend to reference the basket of lowest price country while reference the nations of average price. In context of the price convergence, there is no apparent picture for Europe; recent studies that examine the price convergence in EU revealed no significant decrease in price dispersion within European Union countries. The findings of these studies vary from other previous research that indicated price convergence for newly launched medicines within EU countries (Bajaj, Crabtree and Tucker, 2007).
The price referencing across nations is usually done on the basis of list price of the medicines. Generally in practice, actual price in countries of Europe is relatively less than list price of the medicine mainly due to arrangements between pharmaceuticals industry and payers. Since the nations continue to consider higher list prices instead of actual prices, they might also risk overpayment (Slater, 1998). Moreover, the implementation of rebates and discounts offered by the sector to the public payer with a view to avoid mandatory cuts is the likely to impede transfer of potential savings of price cuts in a nation to the reference countries. A comparative analysis regarding the impact of price cuts in Spain and Greece reflected that the price reductions not necessarily translated into decrease in prices in reference nations as expected (Mortanges, Rietbroek and John, 1996). This could be either due to the confidential rebates and discounts that are not indicated in the list price or due to countries not frequently monitoring the prices of medicines in other nations. This also outlines the difficulties that can be encountered in using the external price referencing (Slater, 1997). Beside identifying and gaining access to the useful sources of data, it is required to understand the different types of pricing used and included in the national database. Moreover, frequent monitoring on the fluctuations in the prices in other nations is also essential. This will make external price referencing both resource as well as time efficient (Mortanges, Rietbroek and John, 1997).
In European countries, external price referencing is still a reality, especially for setting prices for new medicines, and also is widely expected to play a vital role. Despite of this scrutiny, World Bank experts, in 2010, predicted that EPR would soon reach to the end of its cycle, as almost all nation reference each other, price differences between nations will diminish (Mortanges, Rietbroek and John, 1996).
Value-based pricing and its impact
Value-based pricing refers to the practice of setting price of a medicine in accordance to the value it generates. It is an alternative to EPR i.e. external price referencing. Sweden, Australia and Canada have already started applying value-based pricing policy and the UK will implement a new value-based pricing policy in 2014 (Slater, 1996). The value-based pricing system of UK will focus on QALY i.e. quality-adjusted life year benefits in relation to costs, however considerations regarding innovation, rare diseases and burden of illness might also be addressed in decision making. In 2002, Sweden introduced value based pricing system that focus on priority setting by considering need and solidarity, human dignity as well as cost effectiveness and also abolished external price referencing (Littlejohns, Sharma and Jeong, 2012).
Value-based pricing policy that has not yet seen worldwide acceptance presently, much of the evidence in relation with its ability to support policy aims remains theoretical, even though findings based on modelling approaches and economic theory have indicated that this pricing policy could result in both dynamic as well as static efficiency (Docherty, Cao and Wang, 2012).
In value-based pricing, prices for new medicine are set on the basis of value that the medicine offers, this value is usually assessed through HTA (health technology assessment) or economic evaluation. Recently OECD assessed the elements of value-based pricing in various countries, and found out that all countries included have a systematic approach in order to evaluate the added value of pharmaceuticals, but not all necessarily have but not all countries included have fully integrated pharmaceuticals pricing and reimbursement decisions (Littlejohns, Sharma and Jeong, 2012).These countries include Australia, Canada, Belgium, France, Norway, Italy, Sweden, the Netherlands and the United Kingdom). Additionally, in UK, the price is set or negotiated through PPRS and Health Technology Assessment of all pharmaceuticals is not usually performed (Filko and Szilagyiova, 2009). Moreover, majority of the countries studied in research conducted by OECD, it was found that external price referencing is used for setting the price. In value based pricing, when value is evaluated through incremental cost effectiveness of medicine, information on medicine’s incremental health benefits over prevailing treatment alternatives is required with a view to identify the amount of added value of the medicine. In usual cost effective analysis, the ICER is generally expressed as costs per Quality adjusted life cycle gained (Windmeijer and et. al., 2006). Then the decision makers will determine whether ICER can be considered acceptable or not. An explicit willingness to pay (k) is used to determine the price for pharmaceutical products.
One of the major criticisms of this pricing policy is that by utilizing an explicit willingness to pay threshold, manufacturers would certainly have no incentive to set price of their product below the threshold (Hakonsen and et. al., 2009). However it is true, there are numerous reasons why this policy is considered as preferable. For example, as in this mechanism the price the new medicines actually depends on the health gains it generates, this would allow the medicines that yield additional value to capture higher prices. This in turn will further create an incentive for the development of such products that yield more added values (Docherty, Cao and Wang, 2012). A value based pricing policy if consistently and properly applied could result in efficiency in allocation and could engender varied opportunities for the pharmaceutical companies for investing in development of new medicines. Moreover, this mechanism would also create an incentive to firms for making investment in areas of unmet medical needs and also in the areas that have either have no or limited treatment options (Filko and Szilagyiova, 2009).
It has been argued that value based pricing mechanism have myriads of benefits over presently used policies; it is expected that a nation’s willingness to pay for medical care will be based on citizens’ willingness, which is related to the nation’s per capita GDP (Slater, 1997). In simple words, it means that if multiple nations would apply the value based pricing policy, it would allow for variances in the price in accordance with the variations in willingness to pay and ability to pay between the nations (Windmeijer and et. al., 2006).
Data exclusivity and patents create a type of temporary monopoly for a firm, which means that medicine pricing is not influenced by the competitors’ presence. Market exclusivity enables the pharmaceutical company to charge higher prices than the competitor and to generate greater profits in return (Motawa, Kaka and Wong, 2008). However, patents result in higher medicine prices; a firm that intends to maximize its profits would ideally introduce a medicine in nations, where national prices for medical care depends on country’s ability to pay (Hakonsen and et. al., 2009). The concept of optimal pricing by Ramsey states that medicine prices should differ across the markets based on demand elasticity. This means that market that is more price-sensitive should be charged lower prices than the market which is less sensitive. In practice, it means that in the lower income nations, where users are more sensitive to price, medicine prices should be low (Stargardt and Schreyögg, 2006).
When a firm charges different prices to different markets, this is referred as differential pricing or price discrimination. An essential requirement for firm in order to engage in this pricing mechanism is that markets need to be separated sufficiently (Michels, Levin and Schmitz, 2009). This pricing policy is limited with European Union market for two major reasons; firstly, the parallel trade with European Union severely limits the possibilities for using differential pricing. Secondly, the wide spread application of external reference price in Europe is also the major limitation (Michels, Levin and Schmitz, 2009).
2.3 Factors determining medicine prices
Numerous studies have identified the major determinants for the medicine prices. These factors can be categorized in two ways. Firstly, there are the elements of the original selling price set by the manufacturer. This is also known as Base price; it includes manufacturing costs, R&D costs and marketing costs (Docherty, Cao and Wang, 2012). Besides this, there are certain exogenous factors also that affect the base price. These factors include market intelligence, degree of competition, economies of scale and market size. Secondly, medicine prices also involve some expenses that are incurred when product moves from manufacturer’s door to ultimate users. These costs are termed as hidden costs and in certain instances it can be more than base price (Filko and Szilagyiova, 2009). Levison and Laing (2003) classified hidden costs in two sources. The first source include costs which are under the influence of government such as port charges, import tariffs, freight and clearance costs, pharmaceutical board fee, inspection fees, value added tax and other tax etc. The second sources are related with the procurement process. It includes costs incurred in varied operations like procurement, distribution, warehousing etc (Windmeijer and et. al., 2006). Below discussed are some the major determinants of the medicine prices:
The costs of R&D, manufacturing and marketing: One of the key drivers of pharmaceuticals costs is the expensive R&D. Funds invested in the research and development of new medicines covers the major proportion of the costs. Apart from this, marketing costs also makes the major contribution to the base price of medicines (Hakonsen and et. al., 2009). High spending on promotion activities is essential in order to educate the physicians as well as consumers about the medicines.
Degree of competition: The level and the intensity of market competition can strongly influence the medicine prices. A major determinant of the degree of competition in pharmaceutical market concerns with the national policies adopted with respect to the patents (Stargardt and Schreyögg, 2006). Patents represents an exclusive rights granted by the government to the licensee for the specified period of time so as to reward innovation. In the nations where medicines are subject to the patents, the products can be relatively expensive than its equivalents available in other nations (Michels, Levin and Schmitz, 2009). The entry of the generic medicines to the market also impacts the medicine prices. It is evident from the studies that prices for the generic medicines fall with an increase in competitors and this generic competition further induces substantial reduction in generic-brand price ratio (Stargardt and Schreyögg, 2006).
Pharmaceuticals market intelligence: It refers to the ability of purchaser to access authoritative information on prices of medicines internationally (Docherty, Cao and Wang, 2012). If an improved market intelligence, a company will be in better position to negotiate with suppliers and thus will be able to determine the reasonable price for medicine. Because of the significance of market intelligence, a series of initiatives have been taken with a view to share medicine price information (Filko and Szilagyiova, 2009).
Market size and economies of scale: Economies of scale have significant potential to bring about cost reductions. They tend to reduce depreciation costs of machinery and fixed assets as well as management costs. Whether, these reductions in costs lead to price reduction depend on the competition level. Bulk purchase has proved to be an effective means to cost reduction (Windmeijer and et. al., 2006).
2.4: Medicine pricing and reimbursement system in UK
Under the current healthcare system in UK, prices of medicines are governed by PPRS, a process which has run since year 1957. However pharmaceutical firms have relative freedom on setting prices of latest launched/branded medicines, the PPRS does regulate the profits that company is allowed to make on sales to National Health Services.
In UK, National Health Services is the major buyer of pharmaceutical products. Currently, prices for prescription medicines are set through discussions between government and drug manufacturers (Kangis and Geer, 1996). Pricing for on-patent or branded medicines and generic medicines i.e. copies of off-patent drugs differs. However, branded drugs are expensive, generic drugs are relatively cheap. Prices of medicines therefore not necessarily based on their brand, but should also consider their clinical value. For this purpose, the two new mechanisms namely PASs and flexible pricing would provide a means to ensure that drugs prices represent its clinical value (Hakonsen and et. al., 2009).
In recent years, R&D of pharmaceuticals has slowed down and has inclined towards smaller markets such as drugs used to meet individual’s needs or conditions affecting less people. In many instances, drugs that are more complex are developed which are tailored to treat populations of patients with particular diseases (Michels, Levin and Schmitz, 2009). Such drugs incur high costs in R&D and thereby lead to high prices of drugs.
2.4.1: Overview of NHS
UK’s NHS was established in year 1948 to meet the clinical needs of people. Access to National Health Services are based on individual’s clinical needs instead to ability to pay and thus its services are free of charge to people who are resident in UK (Motawa, Kaka and Wong, 2008). However, there are certain exceptions to this; there are capped charges for some optical and dentistry services etc. NHS faces certain difficulty on how to allocate resources optimally so that patients have access to treatment, which may be expensive (Stargardt and Schreyögg, 2006).
National Health services is funded mainly by taxation and is controlled by DOH i.e. Department of Health. Medicines and other supplies constitute around 20 percent of annual budget of National Health Services (Hakonsen and et. al., 2009). UK is one of the few markets where pharmaceuticals manufacturers are free to price new active substances. Nonetheless, Government runs a voluntary Pharmaceutical Price Regulation Scheme under which on-patent or branded medicines are indirectly controlled by regulation of the profits that companies made on their sales to NHS (Michels, Levin and Schmitz, 2009).
The National Institute for Health and Clinical Excellence, referred as NICE is responsible for recommending NHS on use of existing and new branded as well as unbranded medicines procedures, and treatment in terms of cost and impact of each intervention on health. It usually uses a measure known as Quality adjusted life year (QALY), which is equivalent of one year in perfect health (Motawa, Kaka and Wong, 2008).
Generally, NICE considers a treatment to be cost-effective when it costs less than GBP 20,000 per QALY; those costing between GBP 20,000 to GBP 30,000 are subject to argument while treatments costing over GBP 30,000 are very rarely authorized only. At present, around 40 percent of new medicines in UK market are assessed by NICE (Motawa, Kaka and Wong, 2008).
Recently, NICE introduced “end-of-life” criteria in order to increase flexibility when evaluating certain new innovative drugs as R&D costs for such drugs are higher, which target a small size of the population. It is legally statutory for NHS to fund medicines that is recommended by NICE; however, a negative evaluation does not prohibit the trust from funding any treatment or drugs (Kangis and Geer, 1996). Thus, if use of particular treatment or drug is not recommended by NICE, NHS can still make its decision on whether to fund it or not. The organization does not negotiate medicine prices; this decision lies in domain of DOH. Decisions regarding drug pricing and reimbursement are settled differently by varied authorized bodies depending on whether the drug is branded or unbranded; however NICE may recommend and review any medicine (Kangis and Geer, 1996).
Branded Medicines: On-patent medicine or branded medicines constitute around 80 percent of NHS annual drug costs (Motawa, Kaka and Wong, 2008). The pricing of these drugs are indirectly controlled by the PPRS. PPRS is non-statutory, voluntary agreement made between branded pharmaceutical industry and DOH, represented by ABPI (Association of the British Pharmaceutical Industry) (Michels, Levin and Schmitz, 2009). There are reserve statutory powers behind the scheme that may be applied to control the medicines prices. The scheme includes two key methods for controlling medicine prices namely price control and price cuts. (Slater, 1997)
Unbranded medicines: These are also known as generic medicines; they are not covered by PPRS. Proprietary medicines and generic medicines are reimbursed under the Drug Tariff. Through this, DOH reimburses pharmaceutical cists the cost of dispensing the listed drugs, which accounts for around 80 percent of total costs of medicines (Bajaj, Crabtree and Tucker, 2007). Pricing of generic drugs is not “fixed by law” per se in UK, although, the basic NHS reimbursement prices of generic medicines are set out under Drug Tariff. Considering the constantly changing prices in market, there is an agreed mechanism to increase and decrease the medicines reimbursement prices at regular intervals (Littlejohns, Sharma and Jeong, 2012).
The prices of branded medicines that are supplied to NHS are presently controlled by PPRS i.e. Pharmaceuticals Price Regulation Scheme (a voluntary agreement between pharmaceutical industry and Department of Health) (Slater, 1997). This in turn regulates the profits that healthcare firms can make from NHS. There are two main elements of PPRS to control drug prices: price cuts and price controls.
Price Cuts: In each PPRS, price cuts are negotiated usually for older medicines. Price cuts are negotiated for all medicines, regardless of whether they are considered as cost effective by NICE. The current PPRS provides price cut of 5% over its five years (Littlejohns, Sharma and Jeong, 2012).
Price control: They are imposed after allowances for Research and development expenditure. This allows the companies to adjust pries of new medicines within its range, providing its total profits do not exceed the cap (Slater, 1997). The scheme requires firms with annual sales of around GBP35 million to submit data on sales, assets, costs and profitability, as well as to repay the excess amount where profits exceed threshold. Companies are also requiring having DOH approval for prices increases, which is only provided only when the reasons meet the criteria for increases as agreed by the scheme. The ABPI argues that price cuts have lowered the profitability levels of companies (Motawa, Kaka and Wong, 2008).
One of the major impacts of PPRS is that United Kingdom has a national list of medicine prices that are widely used by other nations as benchmark for setting their own prices. OFT (Office of Fair Trading) estimated that near about 25 percent of world’s total pharmaceuticals sales reference United Kingdom price to some extent (Kangis and Geer, 1996). Therefore, UK companies are particularly cautious regarding any agreement that reduces drug list prices as this can impact on profits made on sales somewhere else in world.
New mechanism in PPRS aimed at attaining the combined goals; firstly, allowing the patients access to innovative medicines and secondly, ensuring value of money for National Health Services as well as fair return on investment for industry (Bajaj, Crabtree and Tucker, 2007). Below mentioned are some of new mechanisms in 2009 PPRS:
Flexible pricing: Under this provision, companies were allowed to modify the prices of medicines after it has been marketed. Firms can apply for change in price if evidence becomes available regarding effectiveness of medicines when utilized for existing purpose as well as when evidence becomes available for effectiveness of medicines for new indication (Littlejohns, Sharma and Jeong, 2012). In each case, NICE by using standard methodology, undertakes review to evaluate whether the drug reflects value for money to NHS at projected new price.
Patient Access Scheme: New mechanism of PPRS laid greater emphasis on implementation PAS i.e. Patient Access Scheme by pharmaceutical firms in order to improve the cost effectiveness of medicines. Under this, there are two categories namely financially based and outcome-based (Littlejohns, Sharma and Jeong, 2012).
This approach of pricing links the medicine prices to cost effectiveness based on certain clinical evidence; it is the principle behind the patient access schemes that Department of Health introduced in 2009 (Slater, 1997). The study published by OFT in 2007 found that some branded medicines prescribed in large volume were 10 times more expensive than available substitute that provide similar clinical benefits. It further argues that where medicine prices are above clinical value, NHS is not making optimal use of its funds. OFT suggested NHS to purchase drugs on value based pricing scheme. This mechanism replaces price control and profit elements of PPRS, while allowing setting and negotiating prices based on clinical value (Motawa, Kaka and Wong, 2008). Some heath care professionals state that this mechanism would aid to focus innovation as well as investment on patients needs. Other health economists commend that flexible pricing as right step but criticize the fact that it does not cover all generic and branded drugs, and lack information on how to implement in practice (Kangis and Geer, 1996).
Department of Business, Innovation and skills (BIS) emphasized that encouraging price cuts for branded drugs and generic substitution in 2009 PPRS ensures value for money for NHS (Slater, 1997). It also asserted that the two new mechanisms namely PASs and flexible pricing would provide a means to ensure that drugs prices represent its clinical value. As well, the BIS suggested that by providing freedom of pricing new medicine, the scheme would facilitate innovation and will create a stable environment for sector (Bajaj, Crabtree and Tucker, 2007).
There are no fixed costs for Patient Access Schemes. Some provide simple discounts that are applied at point of sale. Those involving rebates or capping are more complex. Whilst NICE does not generally negotiate prices, Patent Access Schemes are worked into their calculations regarding cost effectiveness (Slater, 1997). Moving to value based pricing system would involve set up costs. The OFT states that while set up costs would be initially high, but it would provide long term value to National Health Services (Littlejohns, Sharma and Jeong, 2012). Some pharmaceutical companies such as AstraZeneca and GSK are open to policy of value based pricing, however argues that prices reflect various factors including costs incurred in R&D. Medicines for rare diseases and for personalised treatments incur high R&D costs. The Government is yet to declare details of how it will employ policy of value based pricing (Slater, 1997).
The OFT suggested several methods to implement value based pricing. With one among them, all medicines that are currently available on NHS would have be assessed by NICE and its equivalent in the delegated administrations (All Wales Medicine Strategy and the Scottish Medical Consortium) (Littlejohns, Sharma and Jeong, 2012). The OFT further recommended that separate pricing unit in Department of Health should be set up. NICE procedures and quality of decision-making are globally regarded as gold standard for HTA i.e. Health Technology assessments. NICE conducts continual development with a view to improve its processes (Slater, 1997).
2.5: Challenges in evaluating the Value of Medicines
There are two elements that are usually considered while assessing the value of drugs. Authorized bodies evaluate the safety and efficacy (effectiveness in providing the desired outcome) of new drugs, while on the other hand, NICE measures cost effectiveness and clinical value of new drugs. Cost effectiveness can be evaluated only once a medicine has been licensed and in clinical use (Kangis and Geer, 1996). This apparently takes long time in assessing the value of new drugs. NICE can perform an evaluation at launch of medicine based on estimate taken from pre launch trails along with modelling. Data from industry is not always relevant for analyses. Department of Health implemented PASs in order to make treatment more cost effective (Bajaj, Crabtree and Tucker, 2007).
Variety of pricing and reimbursement policies have been applied in country during year 1990s and 2000s, particularly in response to growing pharmaceutical expenditure. Such policies included internal reference pricing, external referencing pricing and use of Health Technology Assessment as well as economic evaluation in reimbursement decisions. However, concerns over rewarding innovation, sustainability of health costs continue to exist, leading the questions whether existing policies are effective in attaining the desired goals (Barak and Nandi, 2011). The pharmaceutical market in United Kingdom only accounts for small percentage of global sales, but its prices are considered by many countries as reference price. At present in UK, innovative new medicines are subject to NICE review as well as voluntary submission to PPRS (Barak and Nandi, 2011). However, soon the PPRS is to be replaced by value-based pricing that according to Department of Health will provide incentives for innovative pharmaceuticals products. Prices for medicines are influenced by several factors such as costs incurred in manufacturing, Research and Development and marketing, Degree of competition in pharmaceutical market, market size and economies of scale and market intelligence (Barak and Nandi, 2011). After exploring the wide array of literary sources, certain gaps in the existing literature have been identified. After reviewing the current pricing system of UK, it has been identified that price of an individual medicine as such bear no relationship to the benefits that product brings to patients and economy as whole. Therefore such pricing mechanism is required that combines the two antagonising process i.e. manufacturing, pricing and selling a new medicine versus evaluation of benefit and consequent uptake of new drugs for NHS patients. In sum, it can be said that apart from considering the aforementioned four factors for pricing, clinical value should also be taken into account while pricing the medical product. The study revealed that value based pricing is better way of pricing new drug which reflects the value it secure to patients as well as healthcare system
Chapter 3: Research Methodology
This part of this research indicates the methods and process which have been used while constructing this report. It will give proper understanding of the different aspects of the research and helps in gaining the more details about the research process. All the tactics which are used in the report have been explained in articulate manner in this part of the study (Bell, 2010). The thorough analysis of the research methodology is sufficient enough to gain the knowledge of this research or study. The following paragraphs of this research include the summary of all the trajectories which have been followed during the research (Bell, 2010).
The expediency of this chapter increases because of its applications and becomes more effective for the theoretical or practical aspects. Research methodology provides the authentic information about the research and proves the feasibility of several sources. It is very important to contrast for any researcher as it enlightens the limitations and the potential of the research (Bsait, 2010). The objective and the aim behind the construction of this report are also explained through this chapter. The mindset of researches reflects through the continuing chapter and it is also noticeable that it could be termed as the most important part any research. Research philosophy and the research design are defined in comprehensible manner in the later part of this study (Bsait, 2010).
Currently this report indicates towards the condition of Pharmaceuticals Company due to the excessive and reliable innovation. On the one hand innovation in the medical practices have bring revolution the field of medical assistance but other side it has created some sort of problems in front of the pharmaceuticals companies and government. Government and medical companies are facing some problems while deciding the price of the products and it is created lot of issues for the industry (Daff, 2011). The present work is focusing on the pricing and reimbursement policies which are undertaken by the pharmaceutical industry of UK. Apart from this it is also displayed in this report that how innovation is affecting the research and development of the drug’s manufacturer companies and what are the factors that govern the pricing of the NHS in the UK. Overall this report is constructed with a view to define the pharmaceutical industry of UK in different manner (Creswell, 2009).
3.2: Aims and objectives of the research
Aim – The aim of the present report is to critically analyze the factors that govern the pricing policy of NHS in UK.
Objectives – To fulfil the above aim, below mentioned objectives need to be fulfilled:
- To assess the underlying pricing policies of pharmaceutical industry and their impact on health goals
- To examine the overarching factors to determining prices of medicines
- To understand the pricing and reimbursement system of NHS in the UK
3.3: Research Philosophy
With the help of research philosophy one can easily understands about the nature of the research process. The word philosophy here is related with the models and theories or rules whatever has been applied in order to conduct this research report. This part of the chapter is crucial with a view of getting the fair idea about the research. Therefore it is essential to give special consideration to the research philosophy (Dey, 2002). Generally research philosophy is of two types: positivism and Interpretivism. Bothe these types of research philosophy techniques are different in nature and their applicability is also totally different. It is vital to assess the right kind of philosophy in order to provide the real knowledge regarding the current study. Any confusion or wrong applicability could be termed as the blunder for research process as it will convey the wrong idea to the group of people (Dey, 2002).
Positivism also known as scientific theory is applied where the sample size is huge in number and when there is only one possible solution for any problem. It comes into existence when researcher applies the statistical techniques to maintain the authenticity of bulky sample size. There is no place of any kind of assumptions and beliefs while applying the positivism approach of philosophy. The practicality of data is major identity of this approach (Flick, 2009).
On the contrary interpretivism approach is applied when the sample size is smaller in nature and there is no need of practical approach. It states that the other environmental factors can put its impact on the subject matter. It emphases on the fact, that different individuals of a society can have different perceptions on same problem. Complexities of business world have taken into special considerations in this approach of research philosophy (Goulding, 2005). Apart from this there are several others approaches or techniques of study but none of them can be applied directly or independently due to diverse environmental factors. Researchers have to have make alignment between the various techniques just to avoid confusion and while constructing the report. In the present scenario interpretivism theory of research has been applied because there may be many factors, based on the perception of the researcher, which may control the pricing of the medical products in NHS (Goulding, 2005).
3.4: Research Design
The selection of the appropriate research design is necessary and could be considered as the most crucial decision while constructing the report. Designing of the research depends on the aims and objective of any research. It provides complete guidance and roadmap to the researcher which is needed to be followed in a very stringent manner (Hjørland, 2005). The pertinence and the determining of the data depend upon the research design stage. Basically it has three forms descriptive, casual and exploratory research design. All these three types of research design techniques are reliable and feasible. To show the cause and effect relationship the researchers used causal research design. It is less popular as compare to the descriptive and exploratory research design (Hjørland, 2005).
Descriptive research design is effective when the data type is more complex in nature and demands huge understanding. There is no possibility of establishing the cause and effect relationship in mentioned research technique. It is a statistical tool and could be termed as analytical research method. Analysis is the core principle of this research design and is not sufficient to know the real cause for any problem. Besides this there is one another form of research design which is needed to be taken into special account just because of its applicability and its suitability (Hoy, 2009). Exploratory research design could be preferred when it is all about analyzing the secondary data or gaining the knowledge from existing literature or research. When it comes to providing the information or using the qualitative data researcher generally prefers exploratory research design (Jonas, 2007). To assess the accurate solutions of any problem it can be used as it facilitates together the deep knowledge about any topic or any matter. .In current report exploratory research techniques have been used to identify the results of mentioned topics. As the report is exploratory in nature so it is more knowledgeable and important with a view of getting the reliable data. Various literature and articles have been used in order to find the real data d the outcomes of the research. All the literary sources were authentic in nature and have been used in appropriate manner (Jonas, 2007).
3.5: Research Approach
There are basically two types of research approach which could be applied in any research report. Both research approaches have their own importance and implications. It helps in bringing the efficiency in the work done by the researcher (Merriam, 2009). Further it shows the direction of the researcher; the way and methods which have been applied in this research report. Inductive and deductive these are two types of research report which any report can consist of. Inductive research report is useful when there is need of drawing the specific conclusion out of the specific matter. Further the result of the study can be applied to the whole society or could be used for the benefits of the society. On the contrary deductive approach is helpful when there is need of concluding the general conclusion and it is a top bottom approach. The data can be of quantitative in nature in this approach (Merriam, 2009).
Here in the current scenario the deductive research approach have been used due to its applications and its suitability for this study. Firstly the knowledge of pricing and reimbursement policy has explained in this report then it has applied on the context of UK’S pharmaceuticals industry. Another reason of using this approach is that the general matter has taken by the researcher followed by specific conclusion (Merriam, 2009).
3.6: Research Type
The categorization of research type could be done on the basis of nature of data. It is also noticeable that data defines the research type. Basically there are three types of research types qualitative, quantitative and case study research approach. Qualitative research approach is used when the data is theoretical in nature and it is based on the assumptions. Thematic analysis is the base of qualitative approach and moreover it helps solving the data when it is not numeric. Here researcher prepares various themes and arranges them into order and then conclusions can draw on the different basis (Muijis, 2010).Quantitative analysis is more complex in nature as it involves various types of calculations and comparison of numbers on the basis of different aspects. Correlation, regression and use of statistical tools are the speciality of quantitative research type. The use of software is essential to work on quantitative approach. It provides more firmness to the data and the reliability of results can be trusted without any hesitation. Both qualitative and quantitative research types are the effective techniques to get into the root cause of any issue or crisis (Pennink and Jonker, 2010). On the other side case study is moreover deals with the study which is focused on one study and conclusions are drawn on the basis of one assumption only. It could be termed as the analysis of specific matter only. It could be applied when the information is very low and there is no need of gathering more number of sources to find out any results. Here in this research report qualitative research type has been used due to the nature of research. As it is the best one to get the desired results. The application of this research type is suitable in this research report (Pennink and Jonker, 2010).
3.7: Data collection method
The magnitude of data in every research report is very high. It is essential to understand that data collection is very complex job and needed to perform in better manner. The reliability of the research report is dependent on the accuracy and appropriateness of data. Data can be collected in two ways either through primary sources or another one is related with the analysis of secondary data (Rasinger, 2008). Primary data is the fresh data, in this a set of questionnaire released in the market and on the basis of people answer or response researcher conclude the result with the help of various statistical tools and techniques. Further it is the collected with the help of interviews, surveys and group communication. Observation is also another technique of primary data collection method (Rasinger, 2008).
Secondary research conducted on the basis of available sources lies under the secondary data collection method. The findings of various authors and researches becomes the basis of the another research paper. In this current report the same technique has been using to collect the data. In order to gather the right amount of information various research reports has been observed with utmost sincerity and in much focused approach (Pennink and Jonker, 2010). All the research topics and online content has some sort of relevance with the discussed topic and the integrity of data has taken into special considerations. The findings and the possible results has been explained in very articulate manner along with the keen observation of the various research topics (Vicky, 2013).
3.8: Data analysis
It is a technique to analysis the data through various techniques and obtaining the various significant aspects. Data analysis is one of the major step in complete research report and special emphasize must be given to this part of research methodology. The main purpose of data analysis is to collect the valid and credible results which could be helpful for other researchers and other society people. On the basis of responses obtained, this report has been analyzed through qualitative thematic technique. As all the data is secondary thus it is best technique to carry out in this research report. There is no use of any type of statistical tools and there is no evidence of using the quantitative data analysis technique (Vicky, 2013).
3.9: Research reliability and validity
It is essential for every research to be valid and reliable. Collection of data, data analysis, using the data and most importantly the outcomes of research report must be able to give justice with the report. Validity and reliability of the report can be maintained only if it has followed ethical considerations. Adherence to these ethics provides firmness to the research report. The present research report is sufficient enough to use for future reference. Other research scholars can refer this research report in order to gain better understanding about this report (Vicky, 2013). Further the reliability of data can be proved through the sources which have been used in this report. Each and every section of this report is constructed with utmost sincerity and with the disciplined approach. The focus of this study was revolving around the objectives of this research. Apart from this special emphasize has given to the different aspects of the research. It has been tried that this research must contain all the knowledge and information which could be useful for the society (Vicky, 2013). All the facts and figures have taken from the reliable sources. There is no evidence of any type of invalid data throughout this report. Special focus has been given to the other researches as well. Their credibility is also important to maintain the integrity of this research. It is the most crucial element which is related with the each and every section of this study. Here in this report the use of this part increases because of the nature of this research report. As the outcomes of this research report is totally focused on the secondary data so it was more important to have the validity of data. It is a qualitative research method which demands high level of accuracy and appropriateness and it is well maintained in this study (Rasinger, 2008).
3.10: Research limitations
There are certain limitations which we have faced while conducting the research. As it is totally new type of research and still need to be explored in well way. There is no high level of research has done on this topic. It was not easy to collect all the data and arranging the data as per our requirements (Rasinger, 2008). It is universal that no research can be free from any type of limitations and researcher has to face some sort of challenges which can reduce their morale and the level of study as well. Researchers or authors have to prepare their research plan in order to get rid of these issues and it will enable them to overcome those challenges (Rasinger, 2008). The major limitations of this research are as follows:
Time consuming process: as mentioned earlier that the data was not easily available thus the exploration of data takes more time. It has converted into the time consuming process in order to collect the data from various online sources (Jonas, 2007).
Analysis of data: once the data was found then the analysis of data was the major problem which gained special attention. The arrangement of data and the proper analysis technique is very important for the construction of meaningful report. Here in this report it was the major challenge which has been faced (Jonas, 2007).
3.11: Ethical considerations
Transparency of the research: it has taken into special consideration that the transparency of the report must be protected and there must not be any hidden facts in the report. The transparency of the report is necessary in order to gain the trust of the scholars and society people. All the people must get correct and accurate information regarding the research (Goulding, 2005). Another side of this factor is that it is essential to disclose that what type of research methods has been used in the report. Any type of wrong activity must be avoided and not taken into the practices. The haziness and vagueness can destroy the essence of the research thus the researcher is supposed to clear his aim and objective while constructing the report (Goulding, 2005).
No manipulation: as it is the secondary research so it is necessary to taken care of that whatever has been stated by the researchers or other authors must be stated in the same manner. Any type of manipulation in their results and outcomes could be treated as against the ethical values (Flick, 2009). If any researcher manipulates the research findings and present them according to his convenience or just to present the wrong details then it will be consider as misappropriate activity (Flick, 2009).
Plagiarism free: the authenticity of data is needed to be maintained else it could be considered as the fraudulent activity. In the present report, this point has taken into special account that the data of any other researcher have been used for the reference only. There is no similarity in the two research report or there is no copied content in this research report. All the information has collected through reliable sources and the data and findings of this report is authentic in nature. Further all the data is properly referenced and have been cited in well manner. There is no scope or any evidence of any plagiarism content (Flick, 2009).
Permission seeking: as this study is completely based on the secondary data but still there was need to take consent of some authors just to refer there content or the use of this report. We have followed the complete procedure to get command on their data. Their permission has been taken as it was helpful in increasing the insight about that knowledge (Goulding, 2005).
Chapter 4: Data Analysis and Findings
The penultimate chapter of any work is the analysis of the collected data. In this section the researcher appraises, understand and present the collected data in presentable manner so that anybody can interpret the final results. After analyzing and interpreting the collected data only the research can reach to some valid and authentic conclusion. Therefore, in the field of academic research, data analysis chapter has got lot of importance. Finally, all the recommendations on the area are also based on this section only. Thus, it is essential for the researcher to include this chapter in the research report.
For this work, since the researcher needs to understand the pricing and reimbursement mechanism in the UK pharmaceutical industry, thus the data collected is only from the secondary sources and will be analyzed qualitatively. There are two approaches for analyzing the data first is qualitative approach and another is quantitative approach. In qualitative approach the best tools is the thematic analysis in which various themes are formed by the scholar for interpreting the collected data (Sobh and Perry, 2006). On the other hand, in quantitative approach of data analysis, researcher can apply various tools such as SPSS, excel for calculating various statistical characteristics of the collected data. In this work, the researcher has made use of thematic analysis for analyzing the collected secondary data.
4.2: Thematic Analysis
Thematic analysis is the most common form of qualitative approach of data analysis. In this various patterns are plotted by the researcher on the basis of the collected information and then conclusion is made on the basis of the plots. Various steps involved in thematic analysis are:
- Managing data for evaluation
- Assessing main points by categorizing the data
- Classification of data
- Plotting various themes (Hartman and Conklin, 2012).
- Illuminating the themes
Theme 1: Government runs a voluntary Pharmaceutical Price Regulation Scheme (PPRS)
The pharmaceuticalmarket of the United Kingdom is among the few markets where the manufacturers of the pharmaceutical products have complete freedom of pricing for a new active substance. In the annual budget of NHS, which comes under public section, only 20 per cent budget is allocated to the drugs and other supplies. Remaining 80 per cent of the drugs spending is done by the government through a Pharmaceutical Price Regulation Scheme (PPRS). In this scheme, prices of on patent medicines or branded medicines are indirectly regulated by the NHS according to the profit generated by the pharmaceutical companies in the United Kingdom. The existing Pharmaceutical Price Regulation Scheme is valid till December 2013 and then a new value based medicine pricing system will be implemented by the government which is presently in development stage.
Theme 2: Both branded and unbranded medicines are reimbursed in the United Kingdom
In the United Kingdom, the National Institute for Health and Clinical Excellence (NICE) is responsible and makes recommendations on the use of both branded and unbranded medicines. In addition to this, it also defines the terms of treatments and procedures that impact the cost of health. The organization has developed a measure known as quality-adjusted life year (QALY) which defines prefect health. One quality-adjusted life year reflects a year in perfect health. NICE has set some standards regarding the treatment, that is, if the cost of treatment is less than £20000 per QALY, it is considered cost effective. If the cost is between £20000 and £30000 per QALY, it is subject to debate and finally, if the cost crosses £30000 per QALY, such treatments are rarely authorized. In present scenario, NICE evaluates around 40 per cent of the drugs in the market of the United Kingdom.
Theme 3:“End of Life” criteria enhanced the assessment process
Recently end of life criteria is introduced by the NICE to evaluate the assessment process of the new drug. This criterion provide greater flexibility in evaluating the innovative medicines and gives proper consideration to them as R&D cost incur on them are higher. Further, such drugs are used by comparative smaller population. Thus, there is no economic value threshold set for the end of life. It is the legal duty of NHS to fund the drugs which are recommended by the NICE, but in some cases, when NICE does not recommends the drug, then also NHS can fund the treatment or medicines. In some specific cases, if the drugs prescribed by the clinicians are not recommended by the NICE but is used for the treatment, such drugs can also be funded.
Theme 4: Branded and unbranded pharmaceutical products have different pricing and reimbursement decisions
Branded medicines are those which have proprietary name on them, whereas, unbranded medicines are those which does not carry any proprietary name. Around 80 per cent of the medicines in the pharmaceutical market of the United Kingdom are branded and are indirectly controlled by the Pharmaceutical Price Regulation Scheme (PPRS). PPRS is a non statutory and voluntary agreement between the branded pharmaceutical industry and the department of health (DoH) and represents Association of the British Pharmaceutical Industry (ABPI). The current pricing and reimbursement scheme was designed in 2009 for five years. Apart from Pharmaceutical Price Regulation Scheme there are some reserve statutory powers that also governs the medicine prices in the United Kingdom. On the other hand, unbranded medicines are not governed by the Pharmaceutical Price Regulation Scheme; rather they are reimbursed under Drug Tariff. The cost of the listed medicine is reimbursed by department of health to the pharmaceuticalists. Such drugs, although accounts for only 20 per cent of the cost of the medicines, but in terms of volume, they accounts for around 80 per cent of the total medicines in the pharmaceutical market of the United Kingdom.
Theme 5: Profit control and price cuts are two methods developed by PPRS for controlling drug price
The Pharmaceutical Price Regulation Scheme has imposed a cap after allowing the company for research and development expenditure. The cap is up to 29.4 per cent. Thus, a portfolio is defined by the Pharmaceutical Price Regulation Scheme within which any company can decide the price of its new drug. The companies have to make sure that overall profit does not exceed the imposed cap. Those companies which makes annual NHS sales of over GBP35 million have to report their annual data on cost, sales, profit and assets under this scheme. In addition to this, if the company wants to increase the prices of its medicines, it has to take prior permission from the department of health. The company will get approval only when they are relevant to the scheme. In the views of Association of the British Pharmaceutical Industry (ABPI), companies profit levels have gone down in the recent years and the main reason behind this is the price cuts and moreover, the price cuts mechanism is preferred for controlling the prices of drugs as it eliminates the burdensome process of payment of excess of profits.
Whether the drugs are deemed cost effective or not by the NICE, price cuts are negotiated across all the medicines. Presently there is 5 per cent price cut on the overall price of the medicines and this is going to remain over for next five years. Due to the establishment of the PPRS, there is a national list of drug price in the United Kingdom. This list is used by many of the other countries also for setting prices in their pharmaceutical market. In addition to this, this list is referred by the Office of Fair Trading also which estimates around one fourth of the world pharmaceutical sales. Thus, if there is any reduction in the price list of the United Kingdom, it will have direct impact on the countries which follow its pricing list and it will impact their pricing and sales. OFT conducted a research in 2007 and concluded that there are some drugs which are s much as 10 time more costly than their alternative medicines. This shows that the mechanism of regulating price and reimbursement in the United Kingdom is not working properly. The existing system will expire in 2013 and from 1st January 2014 there will be a new system that will price the drugs on the basis of their effectiveness based on the clinical evidence and will bring some innovation.
Theme 6: There is no direct price control on the pharmaceutical products in the United Kingdom
In the United Kingdom is no direct price control on the pharmaceutical products, only those pharmaceutical products which are reimburse by the NHS are subjected under the price control. In addition to this, in case of branded medicines, there is indirect control of PPPRS or the department of health (DoH) under drug traffic. Drug Traffic also regulates the prices of non branded drugs.
Theme 7: There are various pricing procedures to determine the pricing for pharmaceutical products in the United Kingdom
UK has biggest pharmaceutical industry thus the need of pricing strategy becomes more for the country. Currently country is having different criteria for the price selection. If government and DOH is unable to set the price or not able to create any pact then the companies can set own price and may refer this issue to PPRS procedure. Apart from this all the products are needed to be set on the discussed parameters and must compliance all the parameters set by regulatory bodies. In upcoming year the companies can set their price according to their cost. New value based pricing system will be implemented and special ingredients products will be having same pricing procedure. Value based pricing strategy could be the effective one as it will be beneficial to both company and common people. The new rules for the pricing policies are as follows:
New active substances: new products that have permission by the EU or UK and have proper licensing from any recognized incumbency or authority may be priced at the judgment of the company and there is no need of any sort of negotiations. This new law has given power to the companies regarding the pricing decisions. There are certain conditions which make this structure more complex and tough.
New products: here the definition of new product doesn’t involve the new active ingredients in the product; it is just related with new product range only. There is need of undertaking some factors which could be crucial while deciding the price of the product. If DOH is not able to set the agreed price then they need to look upon the various other factors in order to set the price, such other factors are as follows:
- The need of product in case of medical
- Any uniqueness while deciding the cost of product.
- Sales predictability and the price of comparable products
Theme 8: Patient co payment system is used by the government for controlling public expenditure on pharmaceutical products
There is no set pricing measures for the reimbursement policy in UK Though it is required to have such kind of system or policy. There is an arrangement of the one-off risk sharing system by NHS. As mentioned above that from 2014 the pricing will be done on the basis of value based pricing strategy. It will provide benefits to the branded and unbranded medicines as this rule is applicable for both categories. Currently government is operating the patient co-payment system and it is applied in England only. It will provide special benefits to the children and pregnant women and those who are suffering from any peculiar disease. Their treatment will be done free of cost and there will be no charge from those segment of patients. Further the prescription charge has also finished in UK territory and it is directly affecting to the common people.
Theme 9: Price of generic products are not fixed by the law in the United Kingdom
UK government has legal impact on the pricing of the generic products. They are free from the eyes of law and legal actions can bound the pricing of the generic products. Generic products are very important with a view of treatment and cure and there must be some policy regarding the pricing of generic products. However NHS has set out the prices in part viii of the drug tariff. But it is not effective and not able to put its control at a very large scale. The pricing of the products are changing continuously and so there is set methods to deal with the high rate of fluctuation in the price. Earlier the UK government has stated some plans regarding the pricing of generic products but later they withdraw their plans and continue with the simple method. They give their own reasons but that could be the effective one if have implemented at that time. However most of the medical students are taught they need to prescribe generic products and it must remain common among the medical professionals. International non-proprietary name (INN) is the major term in UK’s pharmaceuticals industry. It has been declared that 80 percent of the prescribed items come under the INN and it is the shocking result. This figure was declared in 2008 but now the scenario has changed. Medical practices are also changing continuously. Now lots of efforts taking place in order to direct patients towards the cheaper and reasonable generic products. Even new patients are also diverting for the same.
Theme 10: There is no difference between reimbursement of pharmaceutical products prescribed by physician in private practice and those prescribed in hospitals
It is very important aspects to discuss. It must be cleared with a view of gaining the deep knowledge about the pricing and reimbursement policies. It gives firmness to this study. There is no difference in the payment system and prescription charge methods. The products which are offered in the private products are same as offer in the hospitals. NHS patients have faced no difference on the ground of reimbursement of pharmaceuticals products. They need not to pay nay charge under any circumstances.
Theme 11: Pharmaceutical product used as indicator can also be reimbursed
The indicator products do not lies under the category of drug tariff. The local authorities have the power to decide that which product needs to be reimbursed whether it is general or specific case. However, it is bit controversial and under the shadows of trust and validity.it is common that one hospital prescribed the same product for treatment purpose and other hospital deny to prescribe such product or drug. However all the practices are for the benefits of NHS as it will help in saving the money for longer period of time along with the promotion of good practices in the pharmaceuticals industry.
Theme 12: Clinical value is the most important factor to be considered while pricing the medical product
Among all the factors identified the most significant factor that must be considered by the NHS while pricing its medical product is their clinical value. Factors such as costs of R&D, manufacturing and marketing, degree of competition, pharmaceuticals market intelligence and market size and economies of scale are important to be considered while pricing the medical product, but among all the factors, it is important to give emphasis on the value based approach. That is, more weight age must be given on benefits provided by tag medicines.
Chapter 5: Conclusion & Recommendation
This section of dissertation presents the main findings gathered by examining the data collected from different sources. This chapter is the most critical section of entire research study, as it defines the validity and accuracy of research conducted. In this section, inferences drawn from undertaking the qualitative analysis of secondary data has been furnished.
Pricing policies defines the procedures or regulations that are enforced by government authorities in order to set or limit the amount paid by buyers or the amount received by the sellers for pharmaceutical product. Pricing mechanism that are not governed or regulated by government and thus are set by the manufacturers, pharmaceutical wholesalers and retailers are considered as “market-based or free pricing”. As evident from literature review, this system is usually adopted for the OTC medicines that are not subject to reimbursement in various countries
Pricing and reimbursement polices certainly play a vital role in stimulating the growth and future development of medicines, thereby addressing the unmet medical needs. Varied literary sources indicated that price setting can either be performed by state or by pharmaceutical industry and/or varied stakeholders within the supply chain. This means that price control or free pricing can be applied for pricing the pharmaceutical products. In European Union countries, price control is widely used for setting price for reimbursable medicines. While on other hand for non-reimbursable medicines free pricing technique is mostly used. Under price control policy, prices for medicines are set by the concerned authorities on regulatory basis or by negotiation between authorities and pharmaceutical companies. However, the most complicated task in developing price control mechanism is to establish a fair, reasonable and appropriate price or reimbursement limit. Different studies conducted in context with pricing and reimbursement policies revealed that to great extent nations vary in defining a reasonable price, based on number of factors such as budget limits, patterns of use, prescribing behaviour and significance of pharmaceutical industry to economy. In addition to this, present study also identified certain key determinants that influence medicine prices. These include factors such as costs incurred in manufacturing, Research and Development and marketing, Degree of competition in pharmaceutical market, market size and economies of scale and market intelligence. Techniques employed to calculate reasonable price also differs to great extent. Benchmarking of prices is the commonly used pricing policy. Under this, prices are set either through external reference pricing or internal reference pricing. In Europe, external reference pricing is predominant policy, however, it does not target all medicines such as in European nations it is usually implemented to reimbursable or on-patent or branded medicines while off patent or unbranded medicines are subject to internal price referencing. In some of the European nations external price referencing is not the only price policy, but the medicine price in other nations is one of the criteria in process of price setting. This policy has been criticized on various grounds; some studies concluded that ERP policy may drive prices of medicines down, discourage innovation and also can obstruct patient access. As well, some studied declared that EPR neither reflects the ability to pay nor the willingness-to-pay of a country, while other concepts of pricing such as value-based policy do. In UK will implement a new value-based pricing policy.
In United Kingdom, prices for prescription medicines are set through discussions between government and drug manufacturers. Pricing for on-patent or branded medicines and generic medicines are set differently. However, branded drugs are expensive, generic drugs are relatively cheap. Prices of medicines therefore not necessarily based on their brand, but should also consider their clinical value. This can be achieved through PASs and flexible pricing method.
The National Institute for Health and Clinical Excellence is responsible for reviewing and recommending NHS on use of existing and new branded and unbranded medicines procedures, and treatment in terms of cost and impact of each intervention on health. It is legally mandatory for NHS to fund medicines that are recommended by NICE, however, a negative evaluation does not prohibit the trust from funding any treatment or drugs. Decisions regarding medicine pricing and reimbursement are settled differently by varied licensed bodies depending on whether the drug is branded or unbranded; however NICE may recommend and review any medicine. Currently, pricing of on-patent drugs are indirectly controlled by the PPRS. The scheme includes two key methods for controlling medicine prices: price control and price cuts. Unbranded medicines are not covered under PPRS and thus are reimbursed under the Drug Tariff. The study found that UK’s list of medicine prices are used by most of nations as benchmark for setting their own prices. New mechanism namely PASs and flexible pricing has been introduced in PPRS that attempt to attain key health goals such as allowing the patients access to innovative medicines, ensuring value of money for National Health Services and fair return on investment for industry. Nevertheless, current PPRS mechanism is due to expire in year 2013 and therefore the Government is planning to employ a new value based pricing system. This approach of pricing links the medicine prices to cost effectiveness based on certain clinical evidence. OFT also suggested NHS to purchase drugs on value based pricing. This will also enable the trust to make optimal use of funds. This mechanism replaces price control and profit elements of PPRS, while allowing setting and negotiating prices based on clinical value. This further will facilitate innovation as well as investment on patient health needs.
From the study, it has been identified that evaluating value of pharmaceutical products is complicated task. There are varied challenges witnessed while assessing the value of drugs. As well, the process of evaluating the medicine value is lengthy and time-consuming process. The studies shows that costs of R&D, manufacturing and marketing, degree of competition, pharmaceuticals market intelligence and market size and economies of scale are some of the important factors that governs the prices of medical products for the NHS in the UK, but among all the products, the most significant factor is the clinical value of the medical product. It is essential to consider the benefits provided by the medicine while it’s pricing rather focusing on just its brand.
Taking into consideration the ongoing issues and challenges experiencing improved access to reasonable and affordable medicines for people in UK, the pricing and reimbursement policy needs to be extended and strengthened in scope with the serious involvement of all stakeholders. The policy should be based on important medical concept and must be integrated into health policies and strategies in balanced and comprehensive way. In addition to this, the policy should be aimed at providing the medicines of high quality standard that ensures their timely access, affordability and appropriate use. Sustainable financing system is also required to promote and develop a viable pharmaceutical industry.
As, it has been identified from the present research that most of the pharmaceutical related policies and practices occurs at prices that are usually accessed by public and thus lack certain level of transparency needed. While the current pricing policies attempts to set prices for locally manufactured medicine at wholesale level, transparency in assessment of value of medicines needs to be developed along with publication and justification of decision. Thus, it is recommended that in addition to costs of R&D, manufacturing and marketing, degree of competition, pharmaceuticals market intelligence and market size and economies of scale, NHS and other pharmaceutical companies operating in the United Kingdom must focus on therapeutic innovation, greater burden of illness and wider societal benefits while pricing the medical products. This can be achieved through PASs and flexible pricing.
5.3 Recommendations for further research
The present study is entirely based on data collected from varied secondary sources. No primary research has been conducted which in turn might have impacted the quality of research and hence the research findings. In view of that, it is recommended for future research to undertake interviews with pharmaceutical industry experts. This would aid in gaining the deep insight into various factors that influence prices of medicines. Interview with policy makers and planners of pharmaceutical industry would also significantly contribute in understanding the current practices and policies regarding the pricing and reimbursement system of the country.
The entire journey of research process was a great learning experience for me. It provided me an opportunity to practically apply my theoretical knowledge on research methodologies. In addition to this, it also enhanced my knowledge regarding pricing and reimbursement mechanism existing in the Pharmaceutical industry of the United Kingdom. I learned that it is essential to apply appropriate strategies for conducting a research work successfully. If adequate strategies are not applier, the researcher may not be able to complete the work successfully as it will raise question on the validity and reliability of the final result. Throughout the process, the most challenging task for me was to collect the data, but I put my best efforts for collecting most authentic data as final results depends significantly on the accumulated data. Thus, my overall experience about this work is quite positive and it will motivate me in conducting more research works in future. Finally, from my work I concluded that in UK, National Health Services is the major buyer of pharmaceutical products. Currently, prices for prescription medicines are set through discussions between government and drug manufacturers. Pricing for on-patent or branded medicines and generic medicines i.e. copies of off-patent drugs differs. However, branded drugs are expensive, generic drugs are relatively cheap. Prices of medicines therefore not necessarily based on their brand, but should also consider their clinical value. PASs and flexible pricing can help significantly in achieving this.
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