Why does the UK pay less for medicines?

According to the OECD, In 2021 the U.S. spent $1,432/capita on pharmaceuticals compared to only $517/per capita in the UK. The UK’s figure was slightly higher that Poland and Norway, but less than Latvia, the Slovak Republic, Portugal and Romania. How does the UK spend so little on drugs?

Many people focus on the efforts of National Institute for Health and Care Excellence (NICE) and their focus on linking drug prices paid to health value delivered. Typically, however, the value of health in the UK is priced relatively low (only £20,000-£30,000/QALY compared to $100,000 – $150,000 in the US).

However, there is another reason why the UK’s total spend on pharmaceuticals is low: price caps. The UK for many years had Voluntary Scheme for Branded Medicines Pricing and Access (VPAS). Under this scheme, total UK spending on branded drugs was capped. Any additional drug spending on branded drugs beyond this thresholds pharmaceutical firms had to pay back to the UK with rebates.

Last week, however, a new scheme–known as the Voluntary Scheme for Branded Medicines Pricing, Access and Growth (VPAG)–was adopted. The Association of the British Pharmaceutical Industry (ABPI) summarizes the scheme as follows:

The 2023 Voluntary Scheme for Branded Medicines Pricing and Access (VPAG) is a non-contractual agreement, negotiated between DHSC (on behalf of the four nations), NHS England and the ABPI, as the representative body of the pharmaceutical industry in the UK.
This Scheme is available for companies to join from January 2023 until the end of 2028 and agrees that NHS expenditure on branded medicines will stay within an agreed limit, which will increase over time to 4% per annum by 2028. As set out in the Scheme, to do this pharmaceutical companies pay rebates on their sales back to the NHS on all expenditure above the capped limit.

How much does the UK spend on pharmaceuticals? How much money is paid back in rebates? ABPI continues:

Medicines represent the second highest proportion of NHS spend, worth £19.2 billion in England in 2022/23. Fourteen billion pounds of this was branded, with the industry paying the NHS back £2 billion in rebates that year. This agreement, however, sets a yearly cap on the total allowed sales value of branded medicines to the NHS each year. Sales above the cap are paid back to the government via a levy.

The level of annual allowed growth in sales of branded medicines will double from 2% in 2024, to 4% by 2027.

VPAG allows rebates to differ by type of drug with newer branded drugs paying smaller rebates as compared to older drugs. While good for new branded drugs, generic manufacturers worry that this may lead to shortages. The UK government has additional details on the VPAG scheme.

In summary, while NICE does use treatment value to help negotiate drug prices, the VPAS/VPAG enforcement mechanisms places a hard budget cap to keep UK pharmaceutical spending low.