Arrested development: analysing the UK healthcare market

9 December 2013

A growing disease burden, universal healthcare coverage and good access to facilities provide the necessary momentum for the expansion of the UK healthcare market. However, increasing use of generics and government cost-cutting measures aimed at reducing expenditure are restricting growth. GlobalData reports.

Increasing generic substitution and cost-cutting measures adopted by the UK Government and the National Health Service (NHS) have had a negative impact on otherwise healthy growth in the UK healthcare market.

The UK Government introduced price cuts of 3.9% on branded medicines in 2009 and 1.9% in 2010 in order to reduce NHS expenditure, according to the Department of Health (DoH). In 2013, the DoH announced plans to cut drug prices by 10-20% on approximately 10% of branded medicines not covered by the voluntary Pharmaceutical Price Regulation Scheme (PPRS). Generic substitution by pharmacists was implemented by the NHS in 2009 and has restricted the overall value of the pharmaceutical market.

Structural reforms in the healthcare system, sufficient infrastructure, easily accessible healthcare facilities and a straightforward reimbursement process ensure a positive healthcare landscape in the UK. The NHS is one of the world's largest healthcare systems. It is publicly funded and provides healthcare services to the entire population. It underwent several structural changes in April 2013, through which the government created Clinical Commissioning Groups (CCGs) and the executive agency Public Health England (PHE) in order to improve patient access to the healthcare services.

CCGs can commission any service provider, such as NHS hospitals, social enterprises, or private-sector providers that meet NHS standards and costs restrictions. PHE provides services to support public health and works with the local government and NHS to respond to emergencies.

The NHS employs approximately 1.7 million people, including 40,000 general practitioners (GPs), 370,000 nurses, 17,000 ambulance staff, and 105,000 hospital and community health service medical and dental staff. In 2010, the NHS was rated as the best healthcare system in terms of efficiency, effective care and cost, and the second best for patient equality and safety compared to six other countries (Australia, Canada, Germany, the Netherlands, New Zealand and the US).

The government's resourceful healthcare policies and incentives for pharmaceutical R&D programmes are expected to boost the growth of the healthcare market. The government is taking steps to modernise the NHS in order to offer better healthcare services for UK citizens. It has accepted recommendations from the NHS Future Forum for modernisation, including giving more commissioning powers to GPs, and involving doctors and nurses in care commissioning.

In 2013, the government allocated £50 million ($79 million) to adapt wards and care homes for people suffering from dementia and increased funding for dementia research to approximately £66 billion ($105.2 billion) by 2013. The government also planned to fund a £300-million ($478.1 million) programme to build or renovate housing for people with long-term conditions, including dementia.

In 2011, the government established the Cancer Drugs Fund, into which it plans to release £200 million ($320 million) annually until 2013 to improve patient access to cancer drugs.

It has also allotted £800 million ($1.28 billion) to enhance R&D into groundbreaking medicines and treatment from 2011-16.

In 2013, the government planned to reduce corporation tax from 24 to 21% in 2014 and to 20% in 2015 in order to attract foreign investment in the UK.

Prescription drug price trends

In 2011, the average annual change in the price of prescription drugs was 0.2%, down from 0.9% in 2007. In 2005, the PPRS reduced the price of medicines by 7% in order to reduce NHS expenditure on branded medicines. In 2009 and 2010, there were price cuts on medicines covered by PPRS in primary and secondary care of 3.9 and 1.9% respectively. In 2011 and 2012, prices increased by 0.1 and 0.2% respectively.

Pricing policies

The UK Government is planning to implement value-based pricing (VBP) after PPRS - which has been effective since 2009 and expires in 2013. In VBP, the price of a drug is negotiated based on its clinical value.

In 2013, the DoH authorised the National Institute for Health and Care Excellence (NICE) to oversee the benefits drugs bring to patients and wider society. NICE is responsible for assessing new drugs as part of VBP and linking the price of a drug to its value, which will be applicable to new active substances launched after January 2014.

The DoH has launched a consultation to strengthen the statutory pharmaceutical pricing scheme, which covers the prices the NHS pays for branded drugs not covered by the voluntary PPRS. In 2013, the DoH plans to cut drug prices by 10-20% to ensure the NHS gets good value for money. The DoH negotiates with the pharmaceutical industry over the voluntary PPRS, including how the results of a NICE value assessment influence the price paid by the NHS.

Major components of healthcare spending

In 2011-12, PCT expenditure on both primary and secondary care was approximately $144 billion, of which the total expenditure on primary healthcare was roughly $34.5 billion. Prescription costs and pharmaceutical services represented 38 and 9.9% respectively of total expenditure on primary healthcare. In 2011, the UK's total expenditure on secondary healthcare was approximately $110 billion. Expenditure on general and acute services made up 58.5% of total expenditure on secondary healthcare.

Public and private sector share

Total health expenditure is the sum of both the public and private sector's health expenditure. Public sector expenditure consists of recurrent and capital spending from government budgets, external borrowings, grants and social health insurance funds. In 2011, the public healthcare expenditure was £118.3 billion ($189.7 billion), while private healthcare expenditure was £24.5 billion ($39.3 billion), or 1.6% of the UK's GDP.

"The DoH authorised the National Institute for Health and Care Excellence to oversee the benefits drugs bring to patients and wider society."

Market drivers and barriers


Increasing demand for healthcare services: In 2012, life expectancy at birth in the UK was 78.9 years for males and 82.8 years for females. This is expected to have increased to 80.8 years for males and 84.5 years for females by 2020, creating demand for healthcare services and driving market growth.
Robust healthcare system: The NHS is the one of the world's largest healthcare systems and provides a wide range of healthcare services to the entire population, such as routine treatments for long-term conditions, transplants, emergency treatment, antenatal screening and end-of-life care. It employs more than 1.7 million people, including general practitioners (GPs), nurses, providers of hospital and community health services, and medical and dental staff. The reimbursement system and healthcare infrastructure that is able to serve the entire population increases patient access to healthcare services.
Changing demographics: The UK is currently facing an increasingly large elderly population, which accounted for 16.9% of the total population in 2012. By 2020, it is estimated that it will to account for 18.4% of the total population. The elderly population consumes more medication than the younger population, and is more prone to chronic diseases, thus increasing the demand for high-quality healthcare and driving market growth.
High healthcare expenditure: In 2007, healthcare expenditure in the UK accounted for 8.5% of GDP, which increased to 9.3% in 2012. The country's robust social healthcare system is supported by universal insurance coverage, which means that out-of-pocket (OOP) expenditure remained at just 9% of total healthcare expenditure in 2012. The growing elderly population combined with the high healthcare expenditure is fuelling the growth of the healthcare market.


Price cuts: Price cuts have led to a decline in the value of the pharmaceutical market in the UK. It fell to £14.7 billion in 2012 from £16.6 billion in 2008 due to cuts on branded medicines of 3.9% in 2009 and 1.9% in 2010 in order to reduce NHS expenditure. In June 2013, the DoH announced plans to cut drug prices by 10-20% on branded medicines, which are not covered in the voluntary PPRS. These price cuts will adversely affect the revenues of manufacturers of branded medicines in the UK.
Generic substitution: According to the PPRS 2009 agreement, generic substitution was introduced in the UK in 2009. In 2011, in England, 642.8 million prescription items were dispensed generically, up from 531.8 million in 2008. Generics are priced lower than patented drugs, which saw a decrease in the overall value of the UK pharmaceutical market.
Slow economic growth: GDP increased by 0.3% in Q1 2013 compared with Q1 2012. In the UK, capital investment declined by 0.8% between 2010 and 2012 to 14.3% of GDP, less than in other EU countries such as France and Germany with 19.9 and 17.2% of GDP respectively. The global economic slowdown, the eurozone crisis and the government's deficit reduction programme have all hindered economic recovery, resulting in a decline in foreign direct investment.

Opportunities and challenges


Tax reforms: The government has eased taxes in an attempt to attract foreign direct investment. Corporation tax will be reduced from 24% to 21% by 2014, and to 20% by 2015. This will encourage foreign pharmaceutical companies to invest in the UK, increasing R&D as well as the production of the pharmaceuticals, resulting in an overall increase in the value of the pharmaceutical market.
Investment in R&D: The growth of pharmaceutical industry depends mainly on the success of R&D for new molecules and products that are already marketed. The pharmaceutical sector has the highest R&D expenditure of all the industrial sectors in the UK, estimated at $8.1 billion in 2012, up from $6.9 billion in 2009. Government funding for pharmaceutical R&D accounted for 9% of overall funding in 2010, up from 1% in 2009. This will help the UK's already world-class healthcare industry to remain at the forefront of innovation.
Increasing collaboration in pharmaceutical and biotechnology sectors: In June 2013, UK-based GSK and Singapore-based A*STAR's ICES signed a five-year strategic agreement to develop new evidence-based formulations, in particular for emerging markets. In 2013, GSK, Pfizer and Siemens joined an R&D consortium with A*STAR ICES. In 2013, the British Biotechnology and Biological Sciences Research Council and the Brazilian National Council for Scientific and Technological Development signed an agreement to implement a new cooperation programme to extend long-term collaboration between the countries. All of these collaborations will improve the UK's healthcare R&D.
Emerging generic drug market: The government is promoting the use of generic drugs as a way of reducing the healthcare burden. Generic substitution by pharmacists was implemented by the NHS in 2009. In 2011, approximately 68.9% of all prescription items were dispensed as generic medicines, representing 29.8% of the total cost. A high number of drugs will lose their patents in the 2012-13 period, which will boost the production of generic drugs. The introduction of generic substitution has increased the value of the generic market and will be an opportunity for emerging markets to invest.


Introduction of value-based pricing (VBP): The government plans to introduce VBP in place of PPRS from 2014. Under VBP, prices will be negotiated with companies based on the clinical value of the drug. Pharmaceutical companies will lose the freedom to set an initial price for their new active substances, which will negatively impact on foreign pharmaceutical companies wanting to invest in the UK.
Eurozone crisis: The ongoing eurozone crisis linked to sovereign debt is slowing exports, half of which traditionally go to other EU countries. This may cause financial conditions to deteriorate further, reducing credit and wealth. The unemployment rate increased 5.6% in 2008 to 8% in 2012. The high unemployment rate and eurozone crisis affects the confidence of investors, discouraging investment and depressing private consumption.
Increase in government debt: General government net debt was approximately 82.8% of GDP in 2012 and is expected to reach 93.2% by 2020. Gross debt reached approximately 90% of GDP at the end of 2012. The increased government debt and net borrowing will become burden to the economy and lead to a reduction in the government public spending. The increasing gross debt and high borrowing will negatively impact the growth of the economy.

Figure 2. Healthcare expenditure, UK, public-private share (%), 2007–12. Source: GlobalData; ONS, 2013f
Figure 1. Price of prescription drugs, UK, change in average price of prescription drugs (%), 2007–11. Source: GlobalData; PMPRB, 2011

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