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Health Service Branded Medicines (Control of Prices and Supply of Information) Regulations 2008

My Lords, I thank the noble Earl for introducing this debate on the merits of the regulations, which were laid before the House in July this year. I hope that I might be able to reassure the noble Earl and the pharmaceutical industry with some of my remarks. As noble Lords will be aware, prices paid by the NHS for branded medicines have been controlled indirectly by the pharmaceutical price regulation scheme—PPRS—in its various forms for a little over 50 years. Those schemes are periodically reviewed and renegotiated and the Government are pleased to have reached a deal with the Association of the British Pharmaceutical Industry on the key components of what will become the 2009 PPRS. The headline deal announced in June will ultimately benefit NHS patients, the pharmaceutical industry and the taxpayer. The new voluntary agreement aims to balance the interests of all stakeholders. It will not only achieve value for money for taxpayers, but reward innovation. The Government recognise the benefits of a strong pharmaceutical industry in this country, which can continue to deliver medicines to the NHS on reasonable terms for the benefit of all patients. The new agreement will strongly reflect this view. However, there is, unusually, a gap between the end of the 2005 PPRS and the new agreement. This gap has led to these regulations and a situation in which none of us would have wished to find ourselves. With the understanding of noble Lords, who are already aware of these matters, I shall say a little more about how this gap arose, before moving on to the details of the regulations and answering specific points raised by the noble Earl and the noble Baroness. In February 2007, the Office of Fair Trading published its report on the 2005 PPRS, which indicated that the NHS could obtain better value for money and that the current agreement should be changed—a matter mentioned by the noble Baroness. The Comprehensive Spending Review also highlighted the need for efficiency savings in the NHS. I need not remind noble Lords that the cost of medicines is the second largest item in the NHS budget. Also in 2007, one company appealed against a ruling made under the arbitration arrangements in the 1999 PPRS. This concerned the calculation of savings made through the price cut in the 1999 agreement. The company was successful at appeal. That ruling jeopardised the delivery of the savings envisaged under the PPRS. Significantly, the judge also determined that the 1999 PPRS was, and always had been, a contract. The 2005 PPRS, essentially the same as the 1999 PPRS, was therefore also a contract. These agreements were not negotiated as contracts; they were certainly not written as contracts. The intention was to build on the mutually agreed objectives of the Government and the pharmaceutical industry through the operation of a voluntary scheme in good faith. The objective was regulation with a very light touch indeed. The 2005 PPRS was therefore significantly undermined by the court ruling. The effect was that companies could quite legitimately avoid expectations under the agreement and there was no remedy available to the NHS. Any Government would act to put this right, and the only means available under the terms of the agreement was to give six months’ notice of termination. Therefore, the 2005 PPRS came to an end on 31 August this year. We agreed a four-month non-contractual scheme—the 2008 PPRS—from 1 September to allow further time for the negotiations on the 2009 PPRS to be finalised. This short-term agreement basically freezes prices for four months. The regulations are designed to achieve much the same as the 2008 PPRS—that is, to protect the position of the NHS until alternative arrangements are in place. That seems to me to be the only course of action open to the Government. These regulations can only apply to companies which choose not to join the 2008 PPRS. Whether a company is affected by this legislation is, essentially, a matter for that company. There is nothing new in this. We introduced similar provisions in the control of prices of branded medicines regulations 2000 to stand alongside the 1999 PPRS. We did it then to protect the position of the NHS and to ensure some sense of equity for the members of the 1999 PPRS. It would have been unfair to them to allow others to avoid the requirements of that scheme. Our motives are the same in this case. The noble Earl said that the Government should have given notice and should have extended the old scheme—I think the noble Baroness also raised that matter. Giving six months’ notice was necessary as a result of the High Court ruling that the PPRS was a contract. Previously, it had been possible to terminate PPRS agreements by mutual consent when agreement on a new scheme had been reached, on the assumption that it was a non-contractual scheme, so we were in a new situation. Simply extending the old scheme was not possible once the PPRS had become a contract. As a contract, the Government were required to adhere to the details of the scheme which required six months’ notice—not more and not less. I turn to the question raised by noble Lords about the time allowed in consultation and the shortness of the consultation period. The Cabinet Office’s code of practice on consultation acknowledges that sometimes a consultation period of fewer than 12 weeks is appropriate. In this instance, the consultation started later than planned because we wanted to make maximum progress in the PPRS negotiations on the voluntary scheme in an atmosphere which was not affected by proposals for statutory controls. We therefore delayed the consultation until we reached agreement with the industry on the key components of the new PPRS. We were not in a position to announce the agreement with the industry until 18 June. We started the consultation on statutory provisions at the same time. As legislation needed to be in place when the current scheme expired at the end of August, this unfortunately meant that we could only consult for four weeks before laying the regulations that would apply from 1 September. This approach was discussed with the industry in advance. I can understand that the short timescales have made it very difficult for the industry. We appreciate the speed with which it reacted, but, regrettably, we felt that we had no alternative. The noble Earl and the noble Baroness asked why have a single statutory instrument and not two statutory instruments for a two-part consultation; and, why have a 25 September deadline but lay regulations in July? The relationship between the two-part consultation and the regulations—and I am pleased to be able to clarify this—is that the regulations will be implemented in two stages, in the same way that the consultation has been carried out in two phases. The first part of the consultation on implementation of the statutory scheme would have had the effect of freezing the maximum prices of medicines. The consultation also covered ancillary provisions that form an integral part of such controls, including information and enforcement provisions and setting out what will occur for new products. We introduced the statutory scheme in July that implemented such a freeze and the ancillary provisions. The second part of the consultation, which ended on 25 September, was limited to the price cuts and the proposals to link the price of out-of-patent medicines to the reimbursement price of any equivalent generic medicines that would apply from 1 January. Splitting the consultation in this way meant that we were able to run the concurrent consultation on the proposed price cut and measures linking the price of out-of-patent branded medicines to any equivalent generic for more than the usual 12 weeks, as these measures will not take effect until January 2009. That consultation is now closed and the department is considering the responses before reaching a decision on how these issues should be addressed. We will then introduce further regulations that will amend these regulations so that the price cut comes into effect in parallel with the new voluntary scheme due to start in January 2009. I am pleased to assure noble Lords that although the first part of the consultation has closed, we have not ruled out making further changes to address the views that continue to be raised on issues subject to the first part of the consultation, as we appreciate that the time available was very short. To that end, Department of Health officials will be meeting with the Association of the British Pharmaceutical Industry before further regulations are made to ensure that the industry’s views are better understood and taken into account. So the answer to the questions, ““Why not have two statutory instruments and why not withdraw these regulations and replace them with new ones?”” is that there will in effect be two statutory instruments—the latter will amend the former. The later regulations will introduce provisions on the price cut required to mirror the voluntary scheme. If, on reflection, further changes are required to the existing provisions, these can also be introduced through amending regulations. There is no need to repeal the old regulations when the new amending regulations are laid. The noble Earl raised the issue of therapeutic reference pricing and international reference pricing. He is referring to regulation 3, which sets out how the Secretary of State should exercise his powers in relation to new products. The National Health Service Act 2006 includes a power to allow the Secretary of State to control the prices of new products by issuing directions after having consulted the industry body. The provisions in these regulations simply clarify how those powers would be used by setting out criteria which would be applied in reaching these decisions. They must also be seen alongside department guidance on how they will be applied. By including additional provisions in the regulations and additionally making a statement of our intent on how we will apply these regulations, our aim was to give companies greater clarity on how the regulations will be applied. First, I clarify that the regulations will be applied in a way that gives freedom of pricing for new active substances. That means that, for any new active substance, the industry will determine the price at which the product comes on to the market. Secondly, I am pleased to clarify that there is no intention to introduce any form of reference pricing. The regulations set out issues to which the Secretary of State must have regard in setting the maximum price of medicines. The regulations list seven criteria, among other things, which are reasonable for the Secretary of State to take into account; the cost of therapeutically equivalent medicines and the cost of the presentation in other markets, if available elsewhere in the world, are two. However, that does not mean that this is his sole consideration or, indeed, that he will be setting the price of medicines with reference to international prices or, indeed, therapeutic comparator prices. Indeed, for new active substances, he would not take these criteria into account at all, as freedom of pricing would apply. In this respect, there is no great difference from what occurs already under PPRS for substances. Chapter 12 of the 2008 PPRS sets out what occurs on pricing for new products, and mirrors the arrangements for previous PPRS agreements. It sets out that companies wishing to introduce new products must give the department notice; that the department will confirm where the product is a new active substance; and that, where the product is not a new active substance, the department will confirm whether the price proposed is acceptable, taking into account factors such as the price of other presentations of the same medicine or comparable products, forecast sales and the impact on the NHS drugs bill and exceptional costs. I hope that this helps to reassure the noble Earl of our intent to apply in the regulations in a way that is comparable to the voluntary scheme—although he will appreciate that, while similar, there are in effect important differences in the nature of the voluntary and statutory schemes. The noble Earl said that we were doing damage through this action to UK interests. We recognise the importance of the pharmaceutical industry to the UK, and are committed to working with it to help it maintain its competitive advantage by creating a stable and competitive economic environment favourable to a successful industry that also serves patients’ needs. The Government, NHS and pharmaceutical industry will continue to work together through the ministerial industrial strategy group and the long-term leadership strategy. The new PPRS includes several measures aimed at increasing uptake of innovative medicines, which will support research and development into new medicines. This will ensure that the industry has a fair return on its investments while ensuring that the NHS pays reasonable process. The noble Earl also raised the issue of benefits to reduce profits in the pharmaceutical industry, mentioned in the Explanatory Memorandum. There is a difficult tight-rope to walk. Increased profits mean increased costs to the NHS. This PPRS will deliver a balanced package, creating better value for money for the taxpayer but also promoting uptake and innovation in the pharmaceutical industry for the benefit of patients and the industry itself. The noble Baroness, Lady Barker, raised the issue of the supply problems in January. We have published joint Department of Health/industry best practice guides on medicine shortages that give guidance to companies on what to do in the event of a shortage, and recommend that companies communicate with the Department of Health as soon as possible about impending shortages that are likely to have impact on patient care. The previous PPRS price cuts also took effect from January, and we expect to manage the process in a similar way so as to ensure that the transition is managed as smoothly as possible. The noble Baroness also asked whether we should be doing more, in line with the OFT report, to ensure that the prices of medicines reflect their value. As I am sure that the noble Baroness is aware, the package announced in June did not include an announcement on value. However, negotiations on the new deal continue with a view to discussing how value can be better reflected in the new PPRS. She also asked whether we would be driving away UK industry. Noble Lords may be interested to know that successive attempts—the latest being a study commissioned jointly by UK Trade & Investment and the ABPI—have failed to determine a statistical link between price or sales and investment in a given country. The report concluded that supply-side factors such as flexible labour markets and tax rates are more important determinants in investment location decisions than market conditions. Market conditions tend to be relevant only where other factors are broadly equal. I know that there have been concerns about the speed at which all this has taken place. I repeat that these regulations were made at a time when we could not be certain that there would be an interim voluntary 2008 PPRS in place when the 2005 scheme expired at the end of August, since we had not concluded the negotiations on the interim scheme. Nor could we be certain that all companies would sign up to the voluntary scheme once it was agreed. Our priority, therefore, was to introduce a statutory scheme that would broadly maintain the status quo. This needed to be workable within the context of a regulatory environment, which differs from the voluntary environment. It was only right that the Government took decisive action. Of course, at the same time, we recognise and fully acknowledge the important role that the pharmaceutical industry plays for the UK as a whole and value it for that. We continue to be committed to work with the industry to maintain a stable and competitive environment in the UK. The Health Service Branded Medicines (Control of Prices and Supply of Information) Regulations 2008 are an appropriate and sensible measure on the way to reaching our real goal of a sustainable, long-term voluntary agreement with an important partner in the NHS: the pharmaceutical industry. I hope that the noble Earl feels that I have gone some way to meeting his concerns, and will feel able to withdraw his Motion.