UK faces £50bn economic hit due to spiralling medicines levy

A year on from the publication of  analysis, which found that excessive double digit UK rebates levied on medicine sales are a false economy which will cost the UK economy £50bn by 2058, a new update by WPI Strategy for the Association of the British Pharmaceutical Industry (ABPI) has re-confirmed the findings.

The initial report by WPI Strategy, ‘False Economy: How NHS medicine procurement threatens the UK’s life sciences growth engine’ argues that unless the UK takes action to reduce the rebate rates levied on branded medicines sales, the UK stands to lose £1.9bn investment in UK research and development spending (R&D) in 2028, with a cumulative £5.7bn of R&D investment lost between 2024-28.

This update has re-evaluated that analysis and found that the negative impact on life sciences R&D reported by companies would have to be greatly overstated for the economic costs of continued super-high Payment Rates not to exceed the benefits. Applying such high rates for 2024-28 is found to be net harmful to the economy If R&D impacts are anywhere above 25% of levels reported by companies. Applying such rates for 2024-33 is net harmful if impacts are anywhere above just 10% of those companies report.

The UK spends considerably less per person on medicines than other comparable countries, using a number of mechanisms to negotiate and control pricing. However, since the pandemic, two of the key medicine price control measures used by the UK have spiralled out of control and risk costing the UK economy far more than they save through lost investment, jobs and tax revenue.

The impact on UK life sciences R&D is projected to result in wider economic and fiscal impacts with a total economic loss of £50bn by 2058. The long-term losses in tax revenue are forecast to be worth £17.9bn. Retaining high rates even longer after 2028, up to 2033, would mean foregoing a further £90bn of GDP and £29.9bn in associated tax revenues up to 2058.

While higher rebate rates do deliver additional revenue for the Department of Health and Social Care (DHSC), analysis from WPI Economics suggests that when rates go too high the net impacts on tax income ultimately cost the Exchequer more than they bring in. When comparing sub-10% payment rates to 20%-30% payment rate, DHSC gains around £12bn in revenue, but the Exchequer loses £17.9bn in other tax revenue, a net loss of £5.9bn to UK taxpayers.

At publication of the initial analysis, Richard Torbett, Chief Executive, ABPI said: “Today’s research shows the false economy of excessive rebate taxes placed on pharmaceutical companies. The life sciences sector invests more than any other in UK R&D and must be at the heart of the Government’s plans for innovation led growth. But we’re increasingly seeing the UK lose out on life science investment at the time we need it the most. This can’t be sustainable and we’re urging the Government to agree an ambitious, new deal with industry that can reverse this decline and puts us on a par with our global competitors.”

For every £100 in GDP, the UK spends 81p on pharmaceuticals, compared to £1.94 spent by Germany, and £1.66 spent by France. The UK also spends a lower proportion of its total health budget on medicines than similar countries, 9% in the UK verses 15% in France, and 17% in Germany.

Between 2019 and 2023, there will have been a 12% real terms decline in medicines spending at a time when the government has provided the NHS with an 8% real-term increase in funding.

Compared to other leading EU countries (Italy, Spain, Germany, France), the UK has experienced the largest decline in its global share of new medicine launches between 2016-2021.

Under the UK’s Voluntary Scheme for Branded Medicines Pricing and Access (VPAS), NHS medicine spending is capped, with the cap rising at a nominal 2% a year, above which the industry returns any overspend. Following the pandemic, demand for branded medicines has risen sharply, driven by clinical decisions and patient need. As a result, manufacturers of branded medicines will be required to return 26.5% of their revenue, almost £3.3bn in sales, to the Government in 2023, up from around £0.6bn in 2021 and £1.8bn in 2022.

This year, the Government also raised the revenue clawback rate paid by companies subject to the Statutory Scheme for branded medicines from 24.4% to 27.5%. The average Statutory Scheme payment rate across the last four years has been 10.6%, meaning the new rate is nearly three times what firms may have anticipated just a few years ago.