Pharmaceutical price regulation. A study on the impact of the rate-of-return regulation in the UK

Abstract

Objective: This work carries out an empirical evaluation of the impact of the main mechanism for regulating the prices of medicines in the UK [the Pharmaceutical Price Regulation Scheme (PPRS)] on a variety of pharmaceutical price indices. The article also discusses to what extent the rate-of-return (ROR) regulation has encouraged UK-based pharmaceutical firms with patented products to diversify into markets in which products face strong competition.

Design and setting: The article starts with some background on the PPRS and the way firms behave under ROR constraints. The article goes on to explain the cointegration methods used and the results obtained. Finally, it offers some discussion and some conclusions related to the evidence and the incentives of UK pharmaceutical firms under the PPRS constraint.

Main outcome measures and results: The results obtained show that, according to only some cointegration tests carried out, the aggregate price indices of medical preparations and the price index of some therapeutic areas are cointegrated with the time series of ROR caps between 1980 and 1994. Additionally, a 1% change in the ROR cap has produced only a 0.15% change on the aggregate medicine price index.

Conclusions: These results suggest that changes in the ROR cap have had little or no impact on medicine prices and that, at best, the impact of the ROR has also differed significantly across major therapeutic areas. Finally, it is argues that the UK regulation of prices might have encouraged firms to diversify into competitive medicine-regulated markets and into uncontrolled markets.