Supply Side
Rip-Off Pricing on Generic Drugs – a Failure of Public Procurement?

The Times last week featured an investigation the paper undertook to look at firms manufacturing generic drugs. These firms – not the household name companies – tend to buy the rights to long-established, off-patent drugs from large pharmaceutical firms. They look for those “generics” that don’t have real competition in the market, and because of the weakness of the National Health Service (NHS) pharmaceutical procurement process, they are then able to charge pretty much what they like for these drugs.

In numerous cases the producer has raised the price many times over recent years. As the Times reported, “the price of 32 drugs have risen by more than 1,000 percent over the past five years”. So a drug that cost £9.57 a packet five years ago in one case now costs £353.06! The price of Welldorm, an insomnia drug, rose from “£12.10 a pack to £138.56 between late 2014 and this month, an increase of more than 1,000 per cent”.

Amongst the excuses for this given by the firms involved is that they spend “significant money on ensuring that the medicines are in line with the latest regulatory, medical and technical standards”.  Yes, of course that requires the price to go up thirty-fold. Meanwhile, private equity firm Cinven has “made about £1.5 billion from buying and selling generic drug companies that exploit NHS rules to impose huge increases in the price…”

So we have simple, naked exploitative capitalism at its best, as the private equity firms as well as the founders and owners of the manufacturing firms have made hundreds of millions out of the cash-strapped NHS. However, this is not exactly a new issue – we found this report from the late-lamented Independent newspaper in 1999 bemoaning “rip-offs on generic drug pricing”!

There is now talk of investigation by the Competition and Markets Authority; but really, why has the Department of Health (DoH), which is responsible for drug procurement for the NHS, not done something about this already? It is easy to blame the suppliers – and in part we would. But if the mechanisms allow them to increase the prices in this way, without any apparent challenge from the DoH, we have to ask whether this is fundamentally a huge failure of public procurement? This is how the prices are agreed, according to the Times.

The drugs move from Category C, where manufacturers face a profit cap, to Category A, for which the Department of Health sets a reimbursement price based on cost information from two wholesalers, AAH and Alliance Healthcare, and from two major manufacturers, Teva and Actavis, if they make the drug. Yet with the medicines examined by The Times, the companies are often the sole or dominant supplier for the two wholesalers, effectively leaving them free to set their own prices before the wholesalers add their profit margins”.

Now you don’t need to be the world’s smartest procurement executive to see the flaws in that process. So why has it not been addressed? We’re cautious about allocating criticism here – last time we criticised the NHS Business Services Authority, for instance, we were rightly kicked by an old friend who worked there, as we had our facts wrong. And in the Times report, the NHS was quick to blame the Department of Health; there is clearly some protecting of reputation going on here. So we’re not going to pin the blame on anyone, although it looks like the Commercial Medicines Unit (CMU) may be responsible for this area. But it would be interesting to hear from Pat Mills (the DoH Commercial Director) in terms of why this has been allowed to continue for so long – until a newspaper gets involved, when suddenly it becomes a big priority.

Two other thoughts. In the UK Ministry of Defence, there is a Single Source Regulations Office (SSRO) specifically targeted with addressing spend where competition is not possible or desirable.

The SSRO regulates the UK government’s procurement of ‘single source’, or non-competitive, military goods, works and services. It is the independent statutory regulator of single source defence procurement … Our principal statutory aims are to ensure that good value for money is obtained for the UK taxpayer in expenditure on qualifying defence contracts, and that single source suppliers are paid a fair and reasonable price under those contracts”.

Basically, the SSRO determines the appropriate profit margin where there is no market competition to achieve that goal. It is not perfect – suppliers will at times try to “game” the system of course, but it seems to avoid the worst sort of behaviour like that we are seeing in the drugs world. So perhaps the NHS needs something similar for this generic pharma market?

Secondly, we wonder how other countries handle this issue? It must have parallels in other countries, particularly those with some sort of government-funded health system. If they haven’t done so already, the NHS / DoH might want to do a quick scan around Europe as a starting point.

First Voice

  1. Final Furlong says:

    Peter, you need to focus the ‘equivalent’ mechanism to the MOD one, specifically…

    The drugs manufacturer exploited a ‘gap’ between the DH MPI team and the DH CMU team (the latter reports into the former). Once you have read (and understood) the PPRS mechanism, you will understand how this happened (and why it could very easily happen again).