Please login to the form below

Not currently logged in

Tricky operation

The UK benefits from one of the strongest generic markets in western Europe. Its 76 per cent generic prescribing rate is the envy of other governments

Will a new 'transparent' reimbursement plan work for our strong generics market?

The UK benefits from one of the strongest generic markets in western Europe. Its 76 per cent generic prescribing rate (England, 2003) is the envy of other governments.

Over half of scripts are dispensed as generics, accounting for nearly one quarter (24 per cent) of the drugs bill.

The past few years have, however, been a rollercoaster price ride for those in the generic supply chain. There are hopes that the recent announcement of a new reimbursement scheme will bring much needed transparency and predictability. Yet, could it instead make matters worse?

It used to be as simple as ABC. In the normal course of events, a drug would enter Part VIII of the drug tariff for England and Wales (Part 7 of the Scottish tariff) as a category C line. It would transfer to category A if it became available from many suppliers, or drop into category B with a decline in generic usage.

Tariff rates continue to be used to reimburse pharmacies for the cost of the generics they dispense. For what was previously the most important tariff group (category A), these rates are the weighted average list prices from three manufacturers - currently APS, Alpharma and Ivax - plus two full line wholesalers - UniChem and AAH.

The rates were set and revised through negotiation between the Department of Health and the Pharmaceutical Services Negotiating Committee (on behalf of pharmacy contractors).

Everyone knew that actual purchase prices were lower than the prevailing tariff rates, but a proportion of the difference was recovered from pharmacies via the 'clawback' mechanism following periodic discount inquiries. This approach simplified procedures for the Prescription Pricing Authority and achieved more or less the same result as paying actual acquisition prices for the sector as a whole, while providing pharmacists with an opportunity to subsidise their inadequate professional fees through careful buying.

In essence, the system reflected market conditions and competition, rather than regulating or promoting them.

Note that a product does not actually have to be already available as a generic, or even be off-patent, to be included in Part VIII. It just needs to be prescribed by generic name extensively in order to justify a category C listing (with reimbursement based on the normal trade price for
the brand).

Sustained- or modified-release preparations are not generally included in the tariff. The Department requires these to have brand names (and to be prescribed in this way) - due to the difficulty of demonstrating bioequivalence.

Things changed dramatically in 1999, when tariff price increases for the top 200 generics over the full-year averaged 45 per cent. In the previous year, prices had fallen (as was usual). The tariff simply reflected changes in the market - merely following, and not driving, them. However, price movements with some of the most popular generics were huge (eg, bendrofluazide 2.5mg +988 per cent, frusemide 40mg +711 per cent, ibuprofen 400mg +315 per cent).

Shortages compounded the problem. When a Part VIII generic was temporarily unavailable at the tariff price it was put into category D, allowing reimbursement of the higher priced original brand; note that category D has been replaced by endorsing NCSO [no cheaper stock obtainable] during periods of 'agreed shortages'. A combination of unexpectedly high generic prices and a rise in category D listings pushed prescribing costs up far higher than was predicted.


The Department was furious. The additional cost to the NHS in 1999 was estimated to be £200m. Ignoring the savings market competition had delivered over years, and pre-empting the results of a review of generic supply it had commissioned from OXERA, officials talked of market manipulation, of being `let down' by the generics sector.

A statutory scheme was imposed from August 2000, rolling back maximum supplier prices for most generics to average levels applying in the tariff from November 1998 to January 1999. This scheme has only now been dropped.

Yet, interventionist policies with generics are nothing new. Category S, first introduced in 1983, used prices set largely on an arbitrary basis to offset the high discounts that were becoming available; S generics were dispersed into other categories in 1993.

In part because one major wholesaler delivered price information after a gap of two years, tariff prices for 15 generics were cut by more than 50 per cent in a single step in June 1992 (eg, allopurinol 500mg, 78 per cent), with another 40 seeing a reduction of 20 per cent or more. Four newer generics - doxazosin, lisinopril, omeprazole and simvastatin - were cherry-picked for tariff cuts in December 2003 and again in September 2004.

As patents on the molecules had expired over the preceding two years, the launch of their generics and the subsequent aggressive marketing of them could not have been considered in the previous discount inquiry undertaken in October 2000, the Department explained. Generic simvastatin (20mg x 28), previously in the tariff at £24.21, is now reimbursed at £1.48 (-93 per cent) as a result.

Five years ago the Department published a discussion paper offering two new options for generics: reference-based pricing or central competitive tendering. Neither received much support. This was followed two years later by a further consultation document (applicable only to England). New generics, the Department said, could enjoy pricing freedom, subject to the tariff rate being lower than the cost of the original brand or PI versions of it.

Where 'sufficient' generic competition was already established, manufacturers could alter their prices, but if competition was 'limited', or one supplier was dominant, prior approval would be needed for any price increase. To achieve its sought-after market transparency, the Department set out data requirements to be filed by wholesalers and pharmacies.


The end result, just confirmed, is somewhat different. Pricing freedom for generics continues (with the caveat that a new generic is priced less than the brand), but the Department will unilaterally
calculate and revise quarterly reimbursement rates for a new category, M (reflecting average market prices after discount, rather than the category A system of basket prices before discount).

Any manufacturer data gaps will be filled from information obtained from wholesalers. The intention is to apply category M to new generics as patents expire and transfer all existing category A units to it progressively (450 lines were switched in the April tariff).

The requirements placed on suppliers are quite onerous: quarterly information on volumes, net sales values and net acquisition costs of every presentation, plus details of discounts/rebates not
attributable to specific products. Justification of price increases can also be demanded.

Another new development is the linkage of tariff prices to pharmacy remuneration with the new NHS contract. The Department has assured pharmacies that they can retain £500m annually as purchase profit from generics; the additional £300m estimated to be the remaining income from this source will be taken from generic reimbursement and used to finance the new clinical services that pharmacists are being encouraged to offer.

In a separate move, 'standard' branded generics should be reimbursed similarly to other generics and shall not be covered by the PPRS, the Department has proposed. Off-patent originator brands would be unaffected.

In practice, the inevitable delay in correlating reimbursement prices with actual market prices has led to a highly unstable price situation with category M.

Some generics experiencing drastic tariff cuts in April were cut again in July, while others saw prices rise. Amlodipine was put in category M but taken out almost immediately as its purchase price had increased significantly since the original calculation. This one move had a big knock-on effect as the Department sought to recover savings, which were expected from a lower amlodipine tariff price, from other generics.

Several inconsistencies have also emerged. For example, some low strengths of drugs are reimbursed at higher prices than the high strength product. Financial planning for pharmacists has become a virtual impossibility, and stockholdings are being cut.

Without doubt things will settle down, but it is clear that the Department wants to retain complete control. In effect, generic companies have been returned to the profitability cap situation pre-1986, when they were subject to the PPRS. Last year's PPRS agreement, rather pointedly, did not contain the customary 'deregulation if conditions allow' pledge with the pricing of brands.

This reflects Department thinking - if market forces in the competitive generic sector cannot be trusted to regulate a quarter of the drugs bill, how can they be trusted with three-quarters?

The Author

Don Macarthur is a principal at PriceSpective, an industry consultancy specialising in pricing and reimbursement of generics and branded pharmaceuticals

2nd September 2008


Subscribe to our email news alerts


Add my company
COUCH Health

We are a patient engagement agency committed to making clinical study experiences human. By guiding organisations in making everything they...

Latest intelligence

The importance of accelerating clinical trial diversity
Diversity shouldn’t be an afterthought – it’s an investment in the credibility of scientific endeavour...
Digital Opinion Leaders: The Role of Influencers in Medical Communications
There are many informed, knowledgeable HCPs who talk about a disease state online, but not all of them are influencers. This paper explores who digital opinion leaders are and how...
Creating Hope Though Action – World Suicide Prevention Day
At Mednet Group, we believe that actions speak louder than words. That's why we're getting behind this year's Suicide Prevention Day campaign of 'creating hope through action'....