Office of fair trading report on UK Pharma prices
Today, the UK’s Office of Fair Trading (OFT) issued its commissioned report of the UK’s pharmaceutical pricing scheme. Before you say, “so what?” consider that UK drug prices are directly referenced by countries representing 25% of the world’s pharmaceutical sales. Still uninterested? Thought not.
You will not be shocked to learn that the OFT believes UK’s current pricing scheme results in government money wasted on drugs. Can you imagine them concluding that the UK is getting exceptional value for the money it’s spending on drugs? I’ve never seen a report from any government’s office concluding that its government was getting a bargain. The UK’s damage according to OFT? About 500 million pounds in 2005, or about 4.5% of what the UK spent on drugs that year.
If you don’t have to read the entire report, consider yourself lucky and just read the Executive Summary, which certainly provides the salient points. For now, though, take look at this snippet from the Executive Summary, which provides the government’s “compelling argument” for price controls on pharmaceuticals:
A major reason for the existence of a UK-wide drug pricing scheme is the difficulty the NHS [UK's National Health Service] has in ensuring drugs are prescribed in a way that delivers value for money. Informational and incentive problems result in a situation in which prescribers are often not sensitive to or even aware of the prices of the drugs they prescribe. This is particularly the case in primary care, which accounts for some 75 per cent of pharmaceutical expenditure in the NHS. Evidence we have collected from a survey of 1000 GPs suggests they have weak knowledge of the prices of some of the most widely-prescribed drugs in the UK.
Moreover, under current arrangements, there are high levels of prescribing for some products that cost much more than available substitutes but deliver very similar benefits to patients. This raises a major question as to whether value for money is being secured. Neither are patients price sensitive: they contribute through prescription charges to less than five per cent of expenditure on prescription pharmaceuticals – a lower rate than in almost all other countries in the world.
These demand side problems provide a compelling argument for some form of pricing scheme.
Let’s review this rationale, in case it wasn’t entirely clear: Doctors don’t know what drugs cost and they are not incentivized to consider costs when prescribing. Patients also don’t know what drugs cost since they pay only about 5% of their actual cost out of pocket. This information asymmetry (an economist’s catchphrase that means exactly what you might think) leads to demand-side imbalances that maintain artifically high drug prices. And the solution to this demand-side imbalance?? Well, it’s price controls, of course. If you’re scratching your head, do not be concerned, it means only that you are a creature of logic. Sadly, it would seem you have few kin among those recommending health policy in this UK office.
