Regulating drug prices: where do we go from here?

Nicholas Bloom and John van Reenen

Fiscal Studies, 1998, vol. 19, issue 3, 321-342

Abstract: This paper examines the arguments for changing the ways that UK drug prices are regulated. In the UK, NHS pharmaceutical expenditures on branded drugs, currently worth about £3 billion a year, have been regulated by the Pharmaceutical Price Regulation Scheme (PPRS) since 1978. We argue that, in publicly funded healthcare systems, pharmaceutical price regulation is necessitated by a tendency towards excessive government expenditure because of over-prescription and the monopoly power of firms with on-patent drugs. We briefly explain the operation of the PPRS, which is based on rate-of-return regulation, and discuss its merits and drawbacks. We then consider five alternative pricing systems: free pricing, therapeutic benefit pricing, international reference pricing, therapeutic reference pricing and RPI - X price regulation. However, we reject all these alternatives in favour of a reformed PPRS. We suggest three potential reforms of the PPRS: an RPI - X cost allowance if feasible or a widening of the rate-of-return bands otherwise; the introduction of a marketing innovation allowance; and greater regulatory transparency.

JEL-codes: D4 L5 L6 (search for similar items in EconPapers)
Date: 1998
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Citations: View citations in EconPapers (4)

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