The NHS is paying pharmaceutical companies up to ten times too much for some drugs, the Office of Fair Trading (OFT) said today.

In a long-awaited study , the OFT said the purchasing system by which the health service buys drugs, the Pharmaceutical Price Regulation Scheme (PPRS), should be radically overhauled to give the NHS better value for money.

The health service spends about £8 billion a year on buying branded prescription medicines, but the OFT’s landmark study identifies a number of drugs where prices are "significantly out of line with patient benefits". These include treatments for cholesterol, blood pressure and stomach acid.

In addition, the competition watchdog adds that some drugs currently prescribed in large volumes are up to ten times more expensive than substitute treatments that deliver similar benefits to patients.

The OFT recommends that the current pricing scheme, where companies are free to set their own prices within broad profit constraints, is replaced with a "patient-focused value-based pricing scheme" in which the prices that the NHS pays reflect the benefits drugs bring to patients. It estimates that the move would release about £500 million which could be used more effectively, giving patients better access to medicines and other treatments which they may currently be denied.

Value-based pricing would give companies stronger incentives to invest in drugs for those medical conditions where there is greatest need, the watchdog said.

John Fingleton, chief executive of the OFT, said: "Focusing prices on the needs of patients rather than on the costs of drug companies would be good for both patients and business.

"It would allow more patients better access to more effective treatments and it would focus drug company innovation and investment on the areas where patients need it the most, creating more valuable drugs in the future."

The Department of Trade and Industry and the Department of Health now have 120 days to respond to the OFT's recommendations.

The study, which follows an 18-month investigation, is a damning indictment of the PPRS scheme. In its current form, the scheme limits the profits companies can make from drugs but does not fix prices altogether. This has allowed companies to set prices that are, on average, slightly higher than those in countries such as France and Germany.

Pharmaceuticals defend the PPRS because it provides stability to a vital British industry. By organising deals that are renegotiated every five years, they claim the PPRS develops a sound platform on which companies can plan to introduce products with confidence that they will be required in the long term. Nor are price cuts ruled out. The most recent PPRS negotiation produced a cut of 7 per cent across the board so while all other costs in the NHS went up, drug prices fell.

Defending the PPRS, the pharmaceutical industry claimed this morning that the NHS medicines bill was growing because of increasing need, not price.

Nigel Brooksby, president of the Association of the British Pharmaceutical Industry (ABPI), said: "The price of medicines in real terms has declined by 21 per cent in the last ten years." He insisted the industry was "not being rash" or irresponsible with the cost of medicines.

Dr Richard Barker, director-general of the ABPI, told BBC Radio 4's Today programme that the organisation would study the report before drawing any firm conclusions.

"We certainly do not object to the NHS having value for money in everything it does," he said.

He said the PPRS was a robust and stable framework which ensured the NHS did not overpay for medicines while ensuring a strong and competitive industry.

"We have to do everything we can to keep research and development here," he added.

A parliamentary health expert also cautioned against adopting a scheme that could damage the pharmaceutical industry.

Kevin Barron, the chairman of the House of Commons Health Select Committee, told the Today programme: "Manufacturing pharmaceuticals in this country is still a very strong area of our economy. We should make sure we don’t throw the baby out with the bath water."

Commenting on the OFT's report, a Department for Health spokesman said it would "study its recommendations carefully".

"It is important that we have fair prices, which give value for money to the taxpayer," he said.

"However, we recognise the importance of the pharmaceutical industry to healthcare and the development of medical advances and it is in all of our interests to encourage research and reward innovation."

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