The right prescription?

Anyone will tell you that good drugs don't come cheap. But when the NHS is paying for those drugs while trying to reconcile a pounds 300m deficit in its finances, and when pharmaceutical stocks have risen by 35 per cent since January, it would seem odd if ministers didn't ask a few questions.

One may be about to. Baroness Jay, the health minister, is responsible for the Pharmaceutical Price Regulation Scheme (PPRS), the mechanism by which the Department of Health carries out its dual role as both sponsor of the pharmaceutical industry and main buyer of its products. This scheme comes to the end of its current five-year term in October.

Part of her brief is to ensure that the prices the NHS pays are reasonable while not destabilising an industry that brought in a pounds 2.25bn balance of trade surplus last year and indirectly employs a quarter of a million people. The Department of Health last week confirmed that talks with industry on the PPRS have started.

At the same time, Baroness Jay has indicated that she is prepared to take a much tougher line with pharmaceutical companies over their dealings with the NHS. Three weeks ago her office announced it would be "clamping down" and imposing fines of up to pounds 5,000 on companies trying to "exert improper influence" on prescribers through their marketing activities.

The DoH already has the power to do this, and the idea of a pounds 5,000 fine may not sound particularly menacing to multinational players. But according to some industry commentators, the message that she is getting tough on the industry - underlined by her press office - may signal a more aggressive overall stance, particularly as the PPRS agreement is about to expire.

Moreover, Baroness Jay is part of a government that has already shown its muscle with regulated industries. But, unlike the utilities, the way forward in pharmaceuticals is unlikely to be as simple as a windfall tax.

Few people understand the value - and the cost - of medicines. Most patients don't know the savings to be made by being kept out of hospital, nor the potential cost of drugs that make one feel better but can be considered unnecessary. As biotechnology opens up a stream of genuinely innovative medicines, some of which may have been developed relatively cheaply, how is their value to be determined?

At present, the PPRS controls profits rather than prices through a complex series of targets and allowances. It does this by the Department of Health setting, in confidence, a target profit level with each company. This lies within a range currently set at 17-21 per cent of capital employed in serving the NHS market. If a company's profits are more than 25 per cent above this agreed level, the company either pays a refund or reduces its prices. If they fall more than 25 per cent below the target, the company is allowed to raise prices.

Within this system, companies can claim various allowances to reduce their headline profit to the target level. They can negotiate an individual Research and Development allowance, for example, worth anything up to 22.5 per cent of their sales to the NHS, and a promotional allowance of around 9 per cent of sales. This year the NHS expects to spend pounds 6bn on drugs. This means that the promotion allowances alone amount to pounds 540m, almost double the entire NHS deficit.

As the 1994 Health Select Committee pointed out in what was the first comprehensive review of the PPRS, the government has absolutely no say in what is researched nor how a drug is promoted. Indeed, the committee was deeply critical of what they saw as a system skewed towards industry. It recommended introducing greater transparency, monitoring research to ensure it was appropriate for NHS needs and investigating replacing the PPRS with a National Prescribing List.

It also highlighted the fact that a system based on profit means that other initiatives to reduce drug costs do not necessarily translate into NHS savings. If profits fall, companies simply apply for a price increase. This point was taken up by health economists at York University, Dr Alan Maynard and Karen Bloor, who also argued for a National Prescribing List in a British Medical Journal editorial last month.

A National Prescribing List is also the favoured course of clinical pharmacologist Dr Joe Collier, editor of the Drug and Therapeutics Bulletin, the one publication circulated by the Department of Health to all prescribers. Dr Collier, who advised the 1994 Health Select Committee, believes changes are not only needed, but that this government is well placed to implement them.

Similar questions are being asked by the Association of the British Pharmaceutical Industry (ABPI) which has set up a task force to review how the industry is regulated and come up with a collective stance. At one extreme, there are people like Vincent Lawton, chairman of the ABPI task force and managing director of US giant Merck, Sharpe & Dohme.

He told a seminar organised by the Social Market Foundation recently that the PPRS was old-fashioned, promoting old-fashioned results. "Our future," he said, "lies in our capacity to extend the boundaries of medicine and science."

Others like Jay Leschly, chief executive of SmithKline Beecham, take a more pragmatic approach, saying that if a free market is impossible, "the best of the other evils is the PPRS". In a statement, Glaxo Wellcome also endorsed its support of the PPRS. The effect of the scheme on company profitability will differ from company to company, depending on how they are structured, according to the ABPI's Richard Ley.

It should be noted that in global terms the NHS is tiny. It only accounts for around 3 per cent of global sales, compared to 31 per cent for North America and 21 per cent in Japan.

But, says a senior industry analyst who asked not to be named, "Britain is used as a base by a lot of companies because there is a good return here. The PPRS has been very effective, but the world has moved on. The trick is to re-tune it so as not to get the mismatch in pricing that can occur whilst not losing the research".

And that is the crux of the problem facing Baroness Jay, equating the changing needs of industry for a good return on their investment in Britain with the changing needs of the NHS. The world has moved on in two ways for industry. The first is the increasing pressure on countries to keep their drug bills down. Britain's prices, set within the unique PPRS, can have a rippling effect if they get into other countries' price reference systems.

The second is the increase in calls for a level playing field in attracting research and the recognition that drug costs are only one factor in keeping the drugs bill down.

Any tinkering would be resisted by the industry, Dr Collier believes, but not half as strenuously as the prospect of a National Prescribing List. When this was first mooted in 1994, many applauded it as a compromise in enabling new products to come on to the market while at the same time imposing five-yearly reviews on their cost-effectiveness.

At present a new drug only needs to prove it is effective and safe to get a licence, not that it is cost-effective. "This would give every drug a five-year chance to prove itself whilst also keeping drug costs down," says the Royal College of General Practitioners' Prescribing Fellow, Dr Ross Taylor. "If companies can't show it is as good as or better than existing drugs, it goes."

Companies aren't impressed. Dr Richard Tiner, a GP when the Limited List was introduced in the 1980s and now medical director of the ABPI, believes fewer products would be produced, research would go overseas and patients would suffer.

Dr Collier takes issue. "If the Department of Health were to lose its role as sponsor of the industry, other departments may have to step in. But patient health will definitely improve because the money would be spent on research that is more directly related to NHS needs. I would like to see a working party set up to investigate these ideas further. I believe it is our future."

Rumour has it that when the National Audit Office was commissioned to prepare the way for just that by the Health Select Committee, it stumbled at the first hurdle. It was unable to establish whether the PPRS should be replaced, it is said, because the company information was confidential.

Dr Collier believes this government has the political will to see such a radical change through. "It would require at least eight years if you started today," he says. "This Government has the time and, I think, the courage."