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ARRANGEMENTS FOR THE FUTURE SUPPLY AND REIMBURSEMENT OF GENERIC MEDICINES FOR NHS SCOTLAND

Consultation Document

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Contents

Executive Summary
Section 1: Background and Current Arrangements
Section 2: The Scottish Executive's Proposals
The Context
The Proposals
Incentives for community pharmacists and dispensing doctors
Information to be provided by community pharmacies and dispensing doctors
Option 1- Submission of invoices by a sample of contractors
Option 2- Assessment of margins
Start date of the scheme
Possible alternative course of action
Annex A: List Of Organisations to which this Consultation Document is being sent

CONSULTATION ON THE LONG TERM SUPPLY ARRANGEMENT FOR GENERIC MEDICINES

Executive Summary

This consultation document seeks views on a Scottish Executive proposal to introduce new arrangements for determining the amounts that community pharmacists are reimbursed for dispensing generic medicines.

The supply price of generic medicines is subject to UK control under a Maximum Price Scheme introduced by the Department of Health (DoH) in August 2000. Price control and regulation is a matter that is reserved to the Westminster parliament. However, the arrangements by which community pharmacists are reimbursed for the generic medicines they purchase for NHS dispensings are devolved and, therefore, are for Scottish Ministers to determine.

DoH has recently indicated that it intends to end the Maximum Price Scheme (MPS) in England and from April 2004 introduce new voluntary price control arrangements but for England only. If nothing further was done, the MPS would remain in place for Scotland and the supply price capping arrangements that it contains would continue to be exercisable by DoH on the Scottish Executive's behalf.

However, Scottish Ministers consider that the voluntary scheme being proposed by DoH for England includes a number of features which, if adopted in Scotland, would enable our generics reimbursement arrangements to be aligned more closely to the corresponding market supply prices.

DoH's proposed scheme rests on the use of both reserved and devolved powers. Therefore, it is not possible for the Scottish Executive simply to adopt, subject to consultation, the same scheme for its own ends. For that to happen it would be necessary for DoH to use its reserved powers to obtain and provide the Executive with relevant market supply and price data against which the Scottish reimbursement rates could be determined and set by the Executive using its devolved powers.

The Executive has consulted DoH on the matter and received assurances that, if requested, DoH will extend its information gathering process to include Scottish market data, subject to the generics manufacturers and wholesalers agreeing to make their commercial-in-confidence data available to the Executive. If so, then DoH has agreed that it will share the data with the Executive. Additionally, if requested, DoH would also use its reserved powers for any price regulation action, if that became necessary within the terms of the voluntary scheme.

It is on the above basis that this consultation document rests. Section 1 provides further background on the generic medicines market in Scotland and the current arrangements for determining the reimbursement rates for its community pharmacists. It also summarises previous consultations.

Section 2 outlines the voluntary scheme being proposed by DoH and the way in which the Scottish Executive proposes to both link into those proposed arrangements and build on them for Scottish Drug Tariff purposes.

Comments are, therefore, invited on the proposals detailed from Section 2.11 onwards, which relate to the establishment of revised reimbursement arrangements for community pharmacy contractors in Scotland. Comments should be sent:

by e-mail to

James.White@scotland.gsi.gov.uk
(please entitle your e-mail Generic Consultation)
or by post to
Mr James H White
Primary Care Division
Scottish Executive Health Department
1 East Rear
St Andrew's House
Regent Road
Edinburgh
EH1 3DG

to arrive by Friday, 28 ^th November 2003.

If you are responding on behalf of a group or organisation, then please indicate clearly the group or organisation on whose behalf you are replying.

Please note, unless you specifically request that your comments (or any part of them) be treated as having been made in confidence, your response to this consultation may be made public. Corporate confidentiality clauses automatically attached to e-mails will not be taken into account.

Scottish Executive Health Department
October 2003

Section 1: Background and Current Arrangements

1.1 Generic medicines continue to play an important role in the delivery of clinically sound and cost effective patient care in Scotland. In 2002, over 77% of NHS prescriptions were written generically and generic medicines accounted for over 50% of prescription items dispensed in the community.

1.2 Supplies of generic drugs for dispensing under the NHS are purchased by community pharmacy contractors and dispensing doctors whose costs are reimbursed according to arrangements published in the Part 7 of Scottish Drug Tariff. Part 7 identifies the products that for the purposes of this paper can be regarded as generic drugs. The Part 7 reimbursement prices are set according to a protocol agreed between the Scottish Executive Health Department (SEHD) and the community pharmacists' representative body, the Scottish Pharmaceutical General Council (SPGC).

1.3 The protocol involves averaging prices of up to three wholesalers for each of the generic drugs in question. At the actual point of reimbursement, a 'clawback' is applied by means of a fixed discount. This is to take account of the price reductions that community pharmacists can obtain through bulk buying and consortium purchasing arrangements. The protocols used to establish Part 7 prices and discount rate are informed by periodic generic drug pricing inquiries undertaken by SEHD. The last generic pricing inquiry in Scotland was undertaken in 2000.

1.4 These arrangements are intended to secure value for money for the NHS whilst allowing community pharmacy contractors sufficient flexibility to play the supply market and thereby maintain a ready availability of drugs in the supply chain and to meet patients' needs.

1.5 However, these arrangements rest on SEHD's ability to adequately monitor the price market through an inquiry process that relies heavily on the submission of price data from the pharmacy contractors themselves. SEHD has no powers to obtain the required market price information from the relevant manufacturers and wholesalers and, similarly, has no powers to control or regulate their prices in any way.

1.6 The power to regulate and control prices on any commodity is reserved to the Westminster parliament. For NHS drugs and appliances, that power rests with the Department of Health (DoH) and the last time it exercised that power was in August 2000 when it introduced the Maximum Price Scheme (MPS) for generic drugs. DoH took this step when the prices of certain generic drugs rose sharply following turbulence in the market in 1999. The MPS effectively capped the market price of the drugs in question. That scheme remains in place today and, in line with EU directives, has been subject to annual review and consultation.

1.7 The last significant consultation process on broader generic drug supply arrangements took place in mid-2001 when DoH published a discussion paper Options for the Future Supply and Reimbursement of generic medicines for the NHS. Whilst this was a DoH led initiative, SEHD coordinated a parallel consultation in Scotland.

1.8 In the event, the consultation resulted in no change to pricing arrangements. The paper did, however, provide a clear indication of the Government's objectives for the system of distributing medicines to the NHS. In summary these were to:

• maintain and improve the current quality of service to patients in both the hospital and the community and, in particular, to maintain a secure and reliable service that meets clinical need;
• reimburse community pharmacy contractors as closely as possible to what they actually pay for the medicines they dispense under the NHS;
• have transparent prices;
• support a competitive pharmaceutical market;
• secure value for money for the NHS;
• ensure any arrangements for the future works well in the light of both the current characteristics of the supply chain and the way it may evolve over the succeeding years; and
• ensure that the cost and complexity of introducing any new arrangements for the supply of generics to the NHS are not disproportionate for public finances and the NHS, or introduce a disproportionate burden on companies.

1.9 Since the 2001 consultation, DoH has had further discussions with the representative bodies for the manufacturers of generic medicines, pharmaceutical wholesalers and community pharmacies in England. In light of those discussions, DoH has again gone out to consultation but this time with a proposal to establish voluntary arrangements to manage the cost of generic drugs, and has clarified that it fully accepts that all sectors of the supply chain for generic medicines should be able to earn a fair return and thereby secure supplies to the NHS. Their proposals apply to England only. The full consultation document can be found at http://www.doh.gov.uk/generics/genericmedicinesconsultation2003.htm.

Section 2: The Scottish Executive's Proposals

The Context

2.1 The Executive has considered whether the scheme being proposed by the Department of Health (DoH) for operation in England would, if replicated, benefit NHS Scotland.

2.2 In summary, the DoH proposal (see Section 1.9) is premised on the objectives in the 2001 consultation. It sets out arrangements whereby manufacturers and wholesalers would voluntarily provide DoH with designated pricing and associated marketing information and, in return and within certain parameters, would have freedom of pricing for their generic medicine products. Additionally, a sample of community pharmacies and dispensing doctors in England would be asked to provide information on the prices they are paying for generics.

2.3 Manufacturers or wholesalers who either do not wish to enter the scheme, or do not comply with the information gathering or price setting protocols of the voluntary arrangements, would be subject to price regulation action under DoH's reserved powers in the Health Act 1999.

2.4 That aside, DoH would then use the information gathered under the voluntary arrangements to calculate the Drug Tariff reimbursement prices for England.

2.5 If the DoH proposals are implemented in England then it would move to end the Maximum Price Scheme (MPS) (see Section 1.6) in England only and introduce the new voluntary price control arrangements from April 2004, again for England only.

2.6 The consequences for the Executive would be that the MPS would remain in place for Scotland and the supply price capping arrangements that it contains would continue to be exercisable by the DoH on the Executive's behalf.

2.7 However, Scottish Ministers consider that the voluntary scheme being proposed by the DoH for operation in England includes a number of features which, if adopted in Scotland, would enable our generics reimbursement arrangements to be aligned more closely to the corresponding market supply prices.

2.8 The DoH's proposed scheme rests on the use of both reserved and devolved powers. Therefore, it is not possible for the Executive simply to adopt, subject to consultation, the same scheme for its own ends. For that to happen it would be necessary for the Department of Health to use its reserved powers to obtain and provide the Executive with relevant market supply and price data against which the Scottish reimbursement rates could be determined and set by the Executive using its devolved powers.

2.9 The Executive has, therefore, consulted the DoH on the matter and received assurances that, if requested, DoH will extend its information gathering process to include Scottish market data, subject to the generics manufacturers and wholesalers agreeing to make their commercial-in-confidence data available to the Executive. If so, then DoH has agreed that it will share the data with the Executive. Additionally, if requested, DoH would also use its reserved powers for any price regulation action, if that became necessary within the terms of the voluntary scheme.

2.10 Therefore, the proposal below, and which this consultation paper covers, is about the way in which the Executive might use the duly sought manufacturer/wholesaler price and market information to calculate future Part 7 reimbursement rates.

The Proposals

2.11 The proposed scheme would apply to the vast majority of products listed in Part 7 of the Scottish Drug Tariff. The intention is that the reimbursement price of each medicine as identified by indication, strength and pack size, would be related to the selling price ('ex-factory') of the manufacturers for that medicine. Information derived from manufacturers would be used to calculate the volume weighted average price.

2.12 At the start of the new arrangements it would be necessary to convert the existing Part 7 prices to the new basis. To achieve this, reimbursement prices would be recalibrated, so that the relativities in the new Part 7 take account of the net, weighted-average prices charged by the relevant manufacturers. For example, if the average ex-factory price of one medicine is 25% more than another, then the reimbursement price would, in principle, also be 25% higher.

2.13 The Executive believes that a formula as simple as this would aid the transparency of the new system. Nevertheless, it is acknowledged that this could give rise to some significant price changes compared to those derived from the present arrangements. To reduce such changes to an acceptable level, and to minimise the degree of turbulence in the market, the Executive has concluded that it may be necessary to phase in prices calculated under the new voluntary scheme over a period of time. This could be achieved by setting parameters above and below which the reimbursement prices of individual medicines would not be allowed to rise or fall at one time.

The Executive would welcome views on:

• The proposed arrangements for converting existing Tariff prices to a new basis.
• Whether the new arrangements for calculating reimbursement price should be introduced at once or phased in over a period of months?
• If it is decided to phase in the introduction of the new arrangements, what would be the acceptable limit of price change at one time and how many months should be allowed for the introduction of the new arrangements?
• What circumstances may suggest that prices in the Scottish Drug Tariff should differ from prices in the Drug Tariffs derived in other administrations as a consequence of the proposed voluntary scheme.

2.14 It is envisaged that the existing arrangements, whereby individual contractors who, as a consequence of shortages in the market, cannot achieve the Part 7 reimbursement prices may be reimbursed the actual costs of purchasing alternative proprietary products, will continue.

2.15 The prescribing and dispensing of generic drugs by dispensing doctors in Scotland is at 63% below the comparative rate of generic prescribing for drugs dispensed by community pharmacies 78%. The Executive would like to use this opportunity to find ways to encourage dispensing doctors to increase the cost effectiveness of their prescribing in the area of generics.

• Therefore, the Executive also seeks views on what reimbursement arrangements for dispensing doctors might be appropriate to encourage this.

Incentives for community pharmacists and dispensing doctors

2.16 Two key objectives for any drug pricing arrangements are to improve value for money for NHS Scotland and to maintain a secure and reliable service that meets clinical need. It is believed that these can best be achieved through an efficient competitive market for generic medicines.

2.17 To support this, the Executive recognises that the new arrangements for the reimbursement of generic medicines should include incentives for community pharmacies and dispensing doctors to enable them to benefit from procurement decisions which benefit NHS Scotland. The Executive is considering ways by which this could be achieved. For example, following a change in the price by the manufacturers for a specific medicine the change in the reimbursement could be:

• delayed for a specific period after the change has been derived from the information submitted by the manufacturer; and/or
• less than that change.
• The Executive would welcome views on the above aspects of implementing changes in reimbursement.

Information to be provided by community pharmacies and dispensing doctors

2.18 To complete the picture of market intelligence, the Executive will need to receive information that enables it to estimate the overall margin achieved by community pharmacies and dispensing doctors between the cost of procurement from wholesalers, or in some cases manufacturers, and the actual sums reimbursed for generic medicines.

2.19 The Executive considers that the current process of occasional and irregular pricing enquiries conducted is not adequate for this purpose. Therefore, it proposes to introduce an amended process that will provide a more accurate and up to date picture of community pharmacy margins on generic drug purchases, which is also sensitive to the size of contractor and to any special circumstances related to providing pharmaceutical services in Scotland.

2.20 The Executive is considering two options and would welcome views on them both.

Option 1- Submission of invoices by a sample of contractors

2.21 Assessment of margins earned on generic medicines would be determined from a statistically valid sample of pharmacies that would provide the Executive (or an agreed third party) with either copies of, or access to, their invoices, credit notes and statements, including benefits from promotional offers, on an agreed basis but probably quarterly. The medicine description, volume and price data would be recorded to create a database on generic medicine prices and volumes. Data would be segmented to allow differentiation between:

• independent pharmacies - those with less than 5 outlets;
• small chains - those with between 5 and 50 outlets; and
• large or integrated chains - those with more than 50 outlets and/or those with associated wholesaling operations.

2.22 This method would, in theory, provide a clear picture of margins on generic medicines, although there may be compliance costs for sampled contractors.

Option 2- Assessment of margins

2.23 This option would assess the margin earned on generic medicines dispensed. It could be based on data from the following sources:

• figures for the total turnover of a sample of pharmacies (reimbursement and remuneration income from NHS business plus sales revenue from non-NHS business) and the total margin earned by each business;
• Practitioner Services Division of the Common Services Agency would provide data for each pharmacy reimbursement and remuneration paid that related to NHS business.

2.24 From these two sources it would be possible to determine how much of each pharmacy's total turnover was attributable to NHS and non-NHS business. Statistical analysis would then be used to estimate the percentage margin earned on NHS turnover and non-NHS turnover that, on average, best reflects the total margin earned on the business as a whole. This would then be refined to ascertain that part which related to generic prescriptions.

2.25 This method would be relatively simple to operate and require minimal compliance costs. A sample of pharmacies would be required to submit annual figures for their total turnover and total margin, which the Executive believes could be obtained fairly easily from annual accounts. Careful testing would be required to demonstrate that this method provided a reasonable estimate of the amount of margin earned. A system would be put in place to ensure that no individual pharmacy could be identified.

2.26 With either option, application of a voluntary scheme for Scotland could, depending on the final arrangements for gathering information from community pharmacies or integrated companies who are surveyed as wholesalers as part of the proposed DoH scheme, present opportunities to rationalise the information gathering process and reduce the overall burden on community pharmacist contractors.

• The Executive would welcome views on the relative merits of the two options outlined above, and any suggestions for possible alternatives.

Start date of the scheme

2.27 Any new arrangements for gathering information from community pharmacists and dispensing doctors and setting Part 7 prices would operate from after consultation by the Executive with the relevant representative bodies.

Provision for review of the scheme

2.28 The scheme would continue to operate subject to six months notice given by either the Executive or the body it recognises as being representative of community pharmacists in Scotland.

2.29 Either the Executive or the relevant representative body would be able to request a review of the scheme with respect to the establishment of Drug Tariff Part 7 prices, and the information to be provided by community pharmacists and dispensing doctors, no earlier than 12 months into scheme and at annual intervals thereafter, or in the event of any significant changes to the voluntary scheme operated by the DoH that impact on Scotland.

2.30 Following such a review the terms of the arrangements could be varied after consultation with the relevant representative bodies by the Executive.

• We would welcome comments on the proposals to review the scheme.

Possible alternative course of action

2.31 The foregoing proposals rest on the premise that a voluntary scheme, along the lines of the current consultation by the DoH, will be introduced in England.

2.32 In the event that the voluntary scheme proposed by the DoH does not go ahead in the form foreseen, or its introduction is delayed beyond April 2004, the Executive proposes the following contingency arrangements.

2.33 The Executive would seek to ensure that reimbursement prices are set to reflect the costs borne by contractors by:

• instigating a full community pharmacy generic pricing inquiry early in 2004 in order to recalibrate the current discount clawback arrangements. This would identify buying prices and other inducements available to community pharmacist contractors and integrated wholesaling and community pharmacy companies, which include community pharmacy contractors in Scotland;
• as soon as possible, introducing a new price setting protocol based on representative prices duly certified by the supplier concerned as prices available to customers in Scotland;
• thereafter, conducting annual pricing inquiries to revalidate the protocol; and
• where information becomes available, that the full benefits of reduced prices are not being realised by NHS Scotland (e.g. as proprietary products lose licence protection and generic copies become available) by reserving the right to set short term reimbursement prices in the light of evidence available.
• The Executive seeks views on these contingency proposals or suggestions other alternative arrangements for setting Part 7 prices in the event that the voluntary arrangements proposed by DoH for England are not implemented.

Scottish Executive Health Department
October 2003

ANNEX A: List Of Organisations to which this Consultation Document is being sent

Association of the British Pharmaceutical Industry
British Association of European Pharmaceutical Distributors
British Association of Generic Distributors
British Association of Pharmaceutical Wholesalers
British Generic Manufacturers Association
Common Services Agency
Company Chemist Association
Guild of Healthcare Pharmacists
National Pharmaceutical Association
NHS Boards
Royal Pharmaceutical Society in Scotland
Scottish General Practitioners' Committee - British Medical Association
Scottish Pharmaceutical Federation
Scottish Pharmaceutical General Council
Scottish Trust Chief Pharmacists Association