The National Health Service is not getting value for the money it spends on drugs, the Office of Fair Trading said in a long-awaited report yesterday.

The study says that £500 million a year is wasted paying for branded drugs and that a different scheme for setting prices would release this money for better healthcare.

It recommends reform of the Pharmaceutical Price Regulation Scheme, which has determined the market in prescription drugs for 50 years. The industry denied that it was charging too much, and asserted that the prices were on a par, or lower, than those in Europe, a claim backed up by the OFT’s own statistics for recent years.

The OFT says that a better system would value drugs by how much benefit they can bring to patients. Instead of allowing companies to set their own prices, subject to a profits ceiling, the new scheme would price each drug on its trial results.

The Association of the British Pharmaceutical Industry said that such drug-by-drug negotiations would delay the introduction of new medicines and be more cumbersome than the present scheme.

The OFT study identified a number of drugs where prices were “significantly out of line with patient benefits”. These include treatments for cholesterol, blood pressure and excess stomach acid.

Some drugs prescribed in large volumes are up to ten times more expensive than substitute treatments that have very similar benefits for patients, the competition watchdog said. The report said: “We have identified hundreds of millions of pounds of expenditure per year that could be used more cost-effectively under value-based pricing, allowing patients greater access to drugs and other healthcare benefits they are currently being denied. In short, the same level of expenditure could be used to produce greater benefits for patients.”

The report recommends that a drug’s effectiveness should be assessed when it is first licensed, and a rapid decision taken about an appropriate maximum price. The industry would have preferred such a judgment to be delayed until experience of the drug in clinical practice had been gained.

Several countries, including Sweden, Australia and Canada, have already introduced successful value-based pricing systems, the OFT says.

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

Richard Barker, director-general of the association, said that the present scheme had done a good job of providing value for money in healthcare. The association backed making the scheme more flexible, but preferred an evolutionary approach. Dr Barker said that the existing scheme was a robust and stable framework that ensured that the NHS did not overpay for medicines but encouraged a strong and competitive industry.

Any changes that are implemented will not take place until after 2010, when the current agreement runs out. It was renegotiated in 2005, when the companies agreed to a 7 per cent price cut.

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