Posts Tagged NHS

US and UK Drugs — cost control solutions


The per capita annual drug cost in the US is about $900 and in the UK about $200.  How can this be?  Drug companies are multinational so we all purchase from the same sources.

There are 2 types of drugs in all countries:

  1. Generic drugs:  no basic research cost, multiple manufacturers and generally low cost.   80% utilization but only accounts for about 20% of national drug costs.
  2. Brand name drugs:  still protected by patent, price includes significant research cost, one manufacturer and generally high cost.  20% utilization but accounts for about 80% of national drug costs.

The formulary:  this is the list of drugs provided by a pharmacy or hospital.  Although there are thousands of drugs manufactured only a small group are included in a given formulary.  A formulary usually includes the least expensive drugs and avoids drugs with duplicate actions.  Brand name drugs cause problems since they may be a one of a kind without alternatives.

Prescriber intent: prescribers anywhere usually try to minimize drug costs for the patient by prescribing the lowest cost drugs that treat the medical problem adequately.  Unfortunately,  US doctors often don’t know which drug is most cost effective and succumb to the advertising of  manufacturers.

How it works in the US:

Hospitals must include drugs in the price of hospitalization so hospitals have a restricted formulary  constructed to minimize cost.  Outpatients are different, insurance companies that pay for drugs usually expect the patient to pay a percentage of the price:  1) generic drugs — small copay  2) moderate price drugs — medium copay  3) expensive drugs — high copay (or no coverage at all).

How it works in the UK:

The NHS sets the price it will pay pharmacies for generic drugs and purchases generics in bulk for hospitals.  The UK has forced a “voluntary” agreement on brand name drug manufactures that limits the profit they may make — sometimes called a “cost-plus” arrangement.  Pharmacies and hospitals obtain brand name drugs under this national agreement.  The National Institute of Health and Care Excellence (NICE) investigates the cost-effectiveness of drugs and provides that information to prescribers.

Conclusion:    Most advanced countries like the UK limit drug company profits or simply set prices for drugs.  People in other countries enjoy lower drug costs than in the US.  Multinational drug companies make large profits in the US because of the lack of a national strategy.  And, the US supports the research of many drugs with grants to Universities from taxpayers.  The drug companies which are restricted in other countries extract a high profit from US patients and benefit from  government research.

Solution:  Restrict drug company profits in the US similar to other countries.   Mandate the FDA to provide cost-effectiveness data on drugs and devices.  Develop a national formulary for Medicare and all other government programs.

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Twice the Quality at Half the Price — the NHS in the UK


How do the Brits do it?  They made a healthcare system with twice the quality at half the price compared to the US (according to the Commonwealth Fund cost per person per year US $7960 UK $3487, developed country quality rank UK #2 US #7).  Simply, they do it by having original ideas and a willingness to adopt good ideas from other countries.

The National Health Service (NHS) of the UK was born in the aftermath of WWII.  Taxes pay for the system, which is free to citizens at the point of care.  Internally, the system is based on capitation — doctors and hospitals are paid by the size of the population they serve.   The system grew to be one of the highest quality and least expensive systems in the world.  In the 90’s it was bogged down by waiting lines and old facilities until a modernization push got it back on track around 2000.

The DRG example:  In 1983  Medicare adopted a way to pay hospitals with a single payment for each case based on the diagnosis of the patient.  This revolutionary idea was called the diagnosis related group or DRG.  NHS experts embraced the Medicare cost saving idea and renamed it the HRG (health resource group) and started using it in about 2003.  Consequently, by adopting what works, the UK has strikingly transformed the financial workings of the NHS.

The NHS noticed cost variations between providers and solved the problem with “Best Practice Tariffs”.  That means if the provider follows a well established guideline they get a full payment, if not, the payment is lower.  In the US we call that concept “value based purchasing” (VBP) but the US only has a few pilot projects and only dreams about making VBP happen on a large scale.

The UK decided they wanted better results.  The reform was called Payment by Results (PbR) and implemented in 2013.  The results they expected were high quality, adequate volume of services,  and cost efficiency.  The NHS basically tweaked the capitation formula with incentives for the desired results.

The US Affordable Care Act (Obama Care)  encourages the aggregation of doctors and hospitals in an economic model called an Accountable Care Organization (ACO).   The US thinks it invented the idea behind the “Accountable Care Organization”.  Actually, the concept is just a spin-off from the Primary Care Trusts and Hospital Trusts in the UK which have been functioning for over 60 years.  Think:  “Trust”=”ACO”.

The recent “Perspective” in the New England Journal of Medicine (NEJM 668;16 April 18, 2013, page 1465-1468) describes the recent IOM report requested by Congress.  The authors lament the “Geographic Variation in Medicare Services“.   The NHS is well known for controlling health care costs.  Looking across the pond to the UK,  here are some references that might be helpful to them:

  1. A simple guide to Payment by Results
  2. A person based formula for allocating commissioning funds to general practices in England: development of a statistical model
  3. Payment by Results: time for a rethink?
  4. Regional variation in the productivity of the English National Health Service.

Some understanding about how the NHS works would also be helpful.  The following diagram is an overview of how the NHS controls cost associated with hospitals and doctors.   They also have a good system for dealing with drugs and devices — a good topic for a future blog.

(figure revised 7/11/13)

High level NHS flow diagram (5)

Other charts of organization can be found at Nuffield Trust – New Structure of the NHS slideshowNHS website – new structure, and History of the NHS.

In the UK 90% of health care is controlled by the government and 10% by the private sector.  The UK Parliament sets a budget for health care which is administered by the Department of Health.  Based on the funds allocated in the budget the Department of Health makes a national price list for services (unlike the US where there is no cap on expenditure) .

The “SUS” approves payments to providers based on the national price list (national tariff) and adds the features of PbR (payment by results).   The commissioners are the paymasters and transfer funds to the providers.  The providers keep track of actual costs and must provide cost data to the Department of Health (unlike the US where real costs are proprietary information and hospitals use the  infamous “chargemaster“).

The US could learn a lot from other countries.  The NHS in the UK seems very willing to share what they have learned over the years — and it is in English.   The old saying  “America and England are two countries separated by a common language” is especially true for health care.

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