Price Controls Create Drug Shortages in Britain

In February, the Financial Times reported that, Britain’s Royal Surrey Hospital made £300,000 in profits last year by buying £4,600,000 of prescription drugs at prices arranged by the British government [gated, but registration is free] and then exporting them to foreign buyers. European Union laws make this practice perfectly legal, and the recent weakness of the pound against the Euro means that a drug sold at negotiated prices in England can fetch much more in Germany.

One in 10 UK pharmacies is arbitraging drugs and by May an estimated £40 million in drugs destined for the NHS were being diverted every month. Because manufacturers allocate supplies according to the price paid, shortages have developed in the treatment of cancer, high blood pressure, epilepsy, asthma, osteoporosis, and high cholesterol — despite official promises that “patients must come before profits.”

Until 2009, the United Kingdom used a variety of techniques, including rate-of-return regulation on pharmaceutical companies, to control spending on prescription drugs.

Danzon and Furukawa (2008) estimated that the UK price index for brand name drugs [gated, but with abstract] was about 75 percent that of the US. It was 30 percent higher for generic drugs, and more than twice as high for over-the-counter drugs.

However, the UK was slower to get new drugs to patients. For drugs launched in 1995-2005, the US put new drugs on the market in 4.4 months. The UK took 9.7 months. The diffusion rate in the UK, the rate at which the drugs are prescribed, was half that of the US 5 years after a drug was launched.

 In 2009 the UK announced that it would reduce the price paid for branded drugs by 3.9 percent. On October 12, 2009, the Department of Health announced a further price cut of 1.9 percent. The British government’s Department for Business Innovation & Skills (yes, the government has a department for that), says that such arbitrary reductions will “enable drug companies to supply drugs to the NHS at lower initial prices, with the option of higher prices if value is proven at a later date.”

If past experience is any guide, the government is unlikely to ever find that higher value received justifies higher prices.

Comments (7)

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  1. Virginia says:

    There’s nothing like drug arbitrage to improve margins! I bet there’s a special pirate ship docked off the coast of England ready to ferry drugs all over the world! Ahhh! Capitalism at work.

  2. Devon Herrick says:

    Awhile back I ran across a UK-based firm that ran an online pharmacy from the Republic of Seychelles.

    Being offshore allowed them to sell drugs by mail that came from the U.K. or generic drugs from India, which were not yet available in generic form in Europe, the U.S. and U.K.

    I suspect this was drug arbitrage. A doctor based in Seychelles would review an online survey and write a prescription. The drugs would be mailed from Seychelles.

  3. Ken says:

    Sounds like entrepreneurship is alive, well and thriving in the UK. It’s just not directed at NHS patients.

  4. Tom H. says:

    Ken, just think how different British medicine might be if all the entrepreneurs were incentivized to solve British patient problems instead of other country patient problems.

  5. John R. Graham says:

    What does the Royal Surrey Hospital then do with the profits? Share it as bonuses? I expect that this is one drawback of the “foundation trust” model under government monopoly: It addresses the problem of soft budgeting in a government agency, but introduces a profit motive in the absence of competition.

    I’m surprised that the Health Services Journal published such research. Most academic journals are not interested in lifting up the carpet like this, which explains why they miss the consequences of perverse incentives in government-run health care.

    On the other hand, the competitive market is serving the needs of British patients. Because the NHS denies coverage for innovative cancer drugs, patients must buy them for cash, and pharmacies have started a price war. ASDA, the U.K. subsidiary of Wal-Mart started the price war ( but others quickly followed (

    My experience observing the politics of the NHS tells me that advocates of “universal” coverage will soon rise up to demand the practice stop, because it leads to “two-tiered” health care.

  6. monkeywrench says:

    So why can’t the drug suppliers just withhold the drugs from the Royal Surrey Hospital and sell the drugs to the Germans themselves? With the crazy-quilt of price controls and other regulations, why do any drug suppliers even bother selling to the British market at all?

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