Calculating and Allocating Drug Costs
(last updated September 2006)
Introduction
The purpose of this information and diagram is to illustrate the main features of how drug costs are
calculated and recharged to prescribers. There are links to more detailed explanations where
appropriate. This information is intended to be used as a resource by NHS staff who are interested in
the drugs charging process.
NHS Prescription Services has a system to calculate reimbursements and remuneration to all
dispensers of drugs that are registered in England. This only applies to drugs that are issued on a
prescription (FP10) form and does not include private prescriptions or non-prescription medicines.
The prescriber of the medicine is captured as part of the information on the FP10 form and this allows
the information to be viewed on both a dispenser and prescriber basis.
GUIDANCE
Pharmaceutical Price Regulation Scheme (PPRS)
The prices of branded medicines and the profits that manufacturers are allowed to make on their sales
to the NHS are regulated by the Pharmaceutical Price Regulation Scheme (PPRS). This is an
agreement between the Department of Health (DH) and the branded pharmaceutical industry represented by the Association of the British Pharmaceutical Industry (ABPI). The PPRS is a voluntary,
non-statutory scheme which indirectly controls the prices of branded licensed medicines to the National
Health Service in the UK by regulating the profits that companies can make on these sales. It does not
cover products that can't be prescribed under NHS Pharmaceutical Regulations, standard branded
generics, in-vitro diagnostics or unlicensed products supplied on a 'named patient basis'.
The purposes of the scheme as stated in the agreement are:
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to secure the provision of safe and effective medicines for the NHS at reasonable prices;
to promote a strong and profitable pharmaceutical industry capable of such sustained research
and development expenditure as should lead to the future availability of new and improved
medicines;
encourage the efficient and competitive development and supply of medicines to
pharmaceutical markets in this and other countries.
Follow this link for further information click here
Supply and Reimbursement of Generic Medicines
From 1st April 2005 the Department of Health (DH) reduced the Drug Tariff price of drugs which are
readily available by introducing a new Category M. The scheme applies to all generic licensed NHS
medicines dispensed in the community in England that previously qualified to fall under category A of
the Drug Tariff. The price of category M products in the drug tariff is based on a calculation which
incorporates the volume-weighted, average price charged by manufacturers
Purchasing and Supply Agency
The NHS Purchasing and Supply Agency (PASA) was set up as an agency of the Department of Health
to oversee, modernise and improve supply management across the NHS in England. Currently
contracting is undertaken by regional/divisional pharmacy purchasing groups, representing a
partnership between trusts and PASA. These contracts include the particular delivery arrangements
offered by the manufacturer. Where there is no contract for a product, trusts may put in place a prime
wholesaler agreement and use this to achieve discounts. Alternatively, they may simply purchase their
supplies from one or more wholesalers. PASA is currently leading a project to improve the supply
chains for pharmaceutical products into the NHS.
Association of British Health-Care Industries (ABHI)
The Association of British Health-Care Industries (ABHI) is the trade association for the medical
systems industry. The Part IX Drug Tariff forum of the ABHI has agreed with the Department of Health
and NHS Prescription Services the formula for calculating price increases for devices and appliances in
Part IX of the Drug Tariff.
Statement of Financial Entitlement (SFE) and General Medical Services (GMS) Contract
The SFE covers remuneration of General Medical Practitioners and sets out the payments. Click here
Under the terms of the General Medical Services (GMS) contract which came into force in April 2004 a
PCT receives a cash-limited sum for GMS services as part of its total allocation. PCTs will allocate
resources in three main ways:
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A global sum to cover running costs
Quality payments to reward standards
Enhanced services payments for practices which expand the range of services they provide
Local Pharmaceutical Services
Local Pharmaceutical Services (LPS) provide an opportunity to develop integrated local arrangements
which address and meet local priorities and needs. Service providers will be rewarded in a manner and
at a level agreed by the PCT and the LPS provider. The new arrangements provide an alternative legal
framework for the provision of pharmaceutical services under locally agreed contracts. The primary
legislation for Local Pharmaceutical Services (LPS) is set out in the Health and Social Care 2001. The
Act enables PCTs to develop new ways of contracting for and delivering pharmaceutical services. In
addition it allows provision, within the LPS contract, of a broader range of services than are traditionally
associated with pharmacy. Pilot schemes are in progress currently and a PCT must reimburse the LPS
provider in accordance with the rates and conditions specified in the Drug Tariff. The PCT will
remunerate the LPS provider in respect of the provision of piloted services. The amount or level of
remuneration and the timetable for its payment is a matter to be agreed between parties to the
agreement. Where NHS Prescription Services is to handle the payment of the remuneration on behalf
of the PCT, notification by the PCT of the amount to be paid must be made within the timetable that the
NHS Prescription Service specifies.
National Pharmaceutical Contract
The new pharmacy contract reflects the vision for a diverse and flexible community pharmacy service.
The framework offers choice to PCTs in the services they commission from community pharmacy to
meet local needs and priorities.
Benefits for patients and the NHS include:
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Improved patient choice and convenience in accessing medicines.
Management of long term conditions
Reducing health inequalities and improving public health
Improved patient safety
Sustained achievement of the 24/48-hour access target
Supporting GPs and other primary care staff
Supporting the delivery of nGMS
Better value for money
The framework categorises services into essential, advanced and enhanced, with a focus on quality
and outcome in all cases. Essential services are defined as those services that must normally be
provided by all community pharmacy contractors under the new arrangements (e.g. dispensing, repeat
dispensing, disposal of medicines). Activities to be undertaken as part of each essential service and
standards of delivery have been specified. Advanced services are those which require accreditation of
the pharmacist providing the service and/or specific requirements to be met in regard to premises, such
as consultation areas. An example is medicines use review (where a pharmacist periodically,
systematically discusses with a patient their medicines, to check how things are going and identify
issues of compliance or any problems the patient may have with their medicines). Enhanced services
can be commissioned by PCTs, according to the needs of their local population. Examples include
minor ailment schemes, needle exchange and supervised methadone for drug misusers, smoking
cessation clinics and supplementary prescribing.
Reimbursement & Remuneration
The Drug Tariff outlines what will be paid to contractors for NHS services provided. This includes
reimbursement (the cost of the drugs, appliances etc which have been supplied against an NHS
prescription form) and remuneration (what is paid as part of the dispensing contract e.g. professional
fees/allowances etc). The total sum is paid each month for the products and services supplied as part
of the contractors NHS contract. It can differ slightly, depending on the type of dispensing contractor.
Follow this link for further information drug tariff guidance
There are four main groups for which payments are made:
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Pharmacists
Appliance Contractors
Dispensing Doctors
Personally Administered GP claims
NHS Prescription Service calculates both the reimbursement and remuneration that each group should
be paid based on the drug tariff as described above. NHS Prescription Services makes the actual
payments to only the first two of this group and passes information to the relevant PCT to make
payments to GP's.
Figure 2. shows the elements of payment for each different group
Actual Cost
Basic
Price
Discount Container Other fees On Cost
Allowance
Pharmacist
Appliance
Contractor
Dispensing
Doctor
Personal
Administration
Figure 2. Remuneration
Pharmacists
Pharmacists submit all prescriptions they have dispensed monthly to NHS Prescription Service, sorted
into the chargeable group (where patients have paid a prescription fee), the non-chargeable group and
then by prescriber.
The basic price of the drug which is reimbursed is calculated based on an interpretation of the drugs
dispensed and reference to the cost of that drug in that particular month.
Figure 3 shows the basis of payment for the different items which can be reimbursed on an FP10
prescription.
Figure 3. Reimbursement
The reimbursement cost of the drug (known as the Net Ingredient Cost, NIC) is discounted based on a
sliding scale depending on the size of the batch of prescriptions submitted in that particular month. This is
designed to reflect the level of discount a dispenser would be expected to achieve from suppliers. The
discount does not include any zero discount products as a contractor will not have been able to obtain a
discount on these items.
A container allowance is paid in line with rules set down in Part IV of the Drug Tariff. This is also included
in the cost of drugs.
The remuneration element is also calculated in line with the Drug Tariff rules. There are a range of fees
paid depending on what has been dispensed and also some fees based on the number of prescriptions in
the monthly batch.
Any charges collected from patients are netted off the overall payment due as the Pharmacist retains
these.
Locally Authorised Payments are authorised by the relevant PCT and are communicated by the PCT to
NHS Prescription Service through a secure web connection. There are a standard range of payments that
can be made as well as payments that are specific to the PCT. These payments need not necessarily
cover the same period as the prescriptions.
Pharmacists are paid on the first day of the second month following that in which they submitted their
prescriptions.
The following table shows an example:
April
May
June
1st July
Prescriptions dispensed
Prescriptions batch sent to NHS Prescription
Services
Pricing finished
Payment made.
To ease cash flow problems for Pharmacists an advance is paid at the start of the previous month and
then recovered when the prescriptions are paid.
This advance is calculated on the following basis:
The average cost of prescriptions from the previous months pricing is paid for the current month's
submission and uplifted by 1%. The account value is reduced to 80% and in addition appropriate local
payments or deductions are included. For further information see "Your monthly dispensing payment"
Appliance Contractors
Appliance contractors are also paid reimbursement and remuneration in line with the Drug Tariff. Most of
these products are subject to VAT and therefore, because the NHS is deemed to be the final consumer,
VAT is paid on services and products supplied by appliance contractors.
Appliance contractors are not paid an advance as the smaller number of claims allows NHS Prescription
Service to process these within a month and pay on the 1st of the month following submission.
The system for remuneration and reimbursement of appliance contractors is currently under review as it
has remained unchanged for many years. Currently, the bulk of remuneration comes in the form of "oncost" on the price of a product. Remuneration is not subject to any overall total as in pharmacy (the global
sum). The NHS price for the product is the list price. Unlike for pharmacies there is no recovery of any
discount which may be available to the appliance contractor.
Dispensing Doctors
The basic premise is that these payments are calculated in a similar fashion to those for Pharmacists,
however, there are some notable differences (e.g. dispensing doctors are not paid a container
allowance). From April 2006 all dispensing doctors have to be VAT registered.
The amounts payable in relation to the provision of drugs and appliances are calculated using the
following information:
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Basic Price (Drug Tariff Part II, Clause 8, 10, 11, 13 & Part VII)
Discount Scale (3.17 - 11.18%) (SFE, Annex G, Part 1)
VAT Allowance (SFE, Paragraph 17.3 (c))
Dispensing Fees (SFE, Annex G, Part 2)
Out of pocket expenses (Drug Tariff Part II, Clause 12)
The following document has been produced to act as guidance for dispensing practices on what
endorsements are required for reimbursement:
Dispensing Endorsement Guidance for Dispensing Practices
Another difference for dispensing doctors is that payments are made by PCTs from their nondiscretionary funds. Therefore there is no need for any additional payments authorised locally to be
submitted to NHS Prescription Services.
Personal Administration GP Claims
Claims for personal administration can be infrequent and not on a monthly basis similar to other
prescriptions, therefore there are no advance payments. The prescriptions are processed during the
month they are received and information is sent to the PCT payment site for payments to be made. The
payment is calculated similarly to dispensing doctors. There are several vaccines that doctors "personally
administer" in high volumes such as influenza vaccination. The GP practice claims payment for these
specific High Volume Vaccines using the form FP34D Appendix for Dispensing Doctors and FP34PD
Appendix for Prescribing only Doctors.
Local Supply or National FP10 Routes
Many PCTs are considering the local supply of drugs as part of the Pharmacy in the future initiatives.
Such schemes can have significant patient benefits but there are issues that PCTs will need to address
before the final decision is taken. The list below identifies some of the issues that arise with such
schemes.
VAT
- Some schemes may not allow for the zero rating of drugs supplied via an FP10. This
should be checked with the local Customs & Excise office.
National
- The national reimbursement price is based on a ‘basket’ of supplier prices. Care needs to
Pricing
be taken to examine efficient purchasing is maintained for the whole NHS. A good deal
done locally may adversely effect the national supply ‘price’.
Legislation - The Medicines Act and Pharmaceutical regulations apply to the supply of all drugs.
Ensure that the proposed scheme does not infringe any legislation.
Fees and
- Most fees are currently funded from central budgets not the prescriber. Schemes
Charges
approved by the DH may be able to access these funds
Other Costs - Provision may need to be made for costs of distribution, administration and collection of
patient charges as well as accounts currently paid to Appliance Contractors.
VAT
The following guidelines are intended to give an overview of the VAT position on dispensing drugs. It is
not the purpose of NHS Prescription Service to offer specific VAT advice nor should any reliance be
placed on the following statements without further investigation.
Supply of drugs
Generally the supply of drugs under NHS arrangements is a mixture of exempt and zero-rated supplies.
The tax rate is affected by such things as to who and from whom the drug is supplied and the nature of
the drug or appliance.
Where drugs or appliances are supplied by a GP to a patient whom the GP is authorised to provide
NHS pharmaceutical services, the supply is zero-rated. Zero-rating, however, does not apply to drugs
or appliances supplied to other NHS patients or private patients.
In certain circumstances the supply will be standard-rated.
Supply of services
The provision of pharmaceutical advice and medical treatment are exempt services, provided certain
conditions are met.
VAT and Pharmacy Contract Payments
HM Revenue and Customs has issued guidance (VAT info sheet 04/06) to assist community pharmacy
contractors to determine the VAT liability of the supplies they make when providing essential and
advanced services under the national pharmacy contract. Where appropriate, it will also show the link
between payments and their corresponding services, to assist pharmacies in valuing their supplies. In
particular HMRC gives specific guidance regarding the Practice Payment and pharmacies will need to
apportion the practice payment to reflect the different liabilities of the activities it supports. The
Department of Health will advise the Pharmaceutical Services Negotiating Committee what proportion
of the practice payment relates to each activity, and notify PSNC whenever those weightings change.
Further information can be found on the HMRC website http://www.hmrc.gov.uk and the PSNC website
http://www.psnc.org.uk
Reimbursement of costs
NHS Prescription Services reimburses the cost of drug supplies excluding VAT on the assumption that
a contractor will recover any VAT on standard-rated supplies through the normal process.
For dispensing doctors who all now have to be VAT registered an allowance is made for personally
administered drugs and appliances which are standard-rated. This is not a VAT payment but a payment
of an allowance to cover the net VAT incurred by the dispenser for these products.
VAT registration
Information for GPs on how to register for VAT, information about the VAT treatment of good and
services they provide and advice about how much VAT can be recovered on purchases is available at
the following link
VAT recovery
If VAT registered you are entitled to deduct input tax incurred on costs used in making taxable supplies.
Input tax relating to the exempt supplies is not normally deductible.
If the input tax relates to both taxable and exempt supplies, normally only the input tax related to the
taxable supplies can be deducted. Under these circumstances you are said to be partially exempt for
VAT purposes. Guidance on partial exemption and related calculations can be found in VAT Notice 706
‘Partial Exemption’
Other related information
VAT Notice 701/31 ‘Health and Care Institutions’ provides further information on this related subject in
respect to hospitals and other care institutions and may contain some useful guidance.
This information has been provided for general information and does not constitute advice. NHS
Prescription Services does not take any responsibility for any loss as a result of the information
provided and recommends that specialist VAT advice should be sought prior to making decisions
regarding the VAT treatment of any transaction or your own VAT affairs.
Home Oxygen Therapy Service
Oxygen suppliers are now responsible for delivering an integrated oxygen service (i.e. cylinder,
concentrator and liquid). The supplier will provide the home oxygen service ordered by clinical staff on a
Home Oxygen Order Form (HOOF). The supplier will provide the equipment that best meets the clinical
needs of the patient as indicated on the HOOF. The supplier is also responsible for arrangements for the
payment of patient's electricity costs associated with use of equipment supplied.
Each oxygen service supplier will be able to access NHS Prescription Services’ website and submit
oxygen payment claims at any time within the first 10 calendar days of the month following that in which
the home oxygen service has been provided.
Part X of the Drug Tariff gives a guide to the Home Oxygen Therapy Service arrangements which have
been in place since February 2006.
The PCT where oxygen supply has taken place as part of the Home Oxygen Service is responsible for
payment of that service and all costs are charged back to that PCT.
Prescribing Information
A full list of the paper and electronic reporting systems are available at the following link Information
services.
User defined reports are available to PCTs via the electronic systems. Prescribing information is drawn
from the prescriber details found on each prescription. The only information that is available at this level
concerns the reimbursement cost of the drug as some of the remuneration elements are based on the
batch of prescriptions not the individual script.
However, even at the reimbursement level the cost of a prescription is not always apparent. The cost of a
drug to the NHS varies dependant upon where it was dispensed due to the discount scale. For
performance management purposes it is important to reflect the cost of the same drug equally across all
prescribers. Therefore two methods are employed; the first is to ignore discount and report the Net
Ingredient Cost (NIC); the other is to average the discount claimed in a particular month across all drugs.
Calculation of this average is not available when all the reports are produced and therefore can be the
average of the previous month.
The first method of showing NIC only is used in reports; the second method is used in budget reports,
such as Prescribing Monitoring Documents (PMD). The costs of the same drug can vary therefore
between months as the average discount shifts each month. Reports that show previous months data
such as PMD use the latest average discount calculated for the month in question.
Hospital Prescribing
NHS Prescription Service also reimburses prescriptions that are prescribed by a NHS Trust but dispensed
in a community pharmacy. The method of reimbursement is exactly the same as any other type of script,
the differing treatment lies in the recharging to the prescriber. The drug cost is discounted by the average
discount of the previous month and then a fee is calculated as accurately as possible on the particular
script (no allowance is made for fees that relate to the size of the batch). If the prescription attracted a
patient charge this would be offset against the charge.
This treatment means that the full cost of the prescription (as opposed to the drug element only) is
recharged to the prescriber. NHS Prescription Services invoices this recharge directly to the NHS trust.
Drugs Bill Charging
The total cost of drugs in any month is charged back to the prescriber on the basis of the cash paid out in
that particular month.
The payments in any one month are made up of the 80% advance and the balance of the previous
months account. Therefore the charge is calculated on 80% of the drug cost (NIC less discount) for the
current month and 20% of the previous month. Other costs that are not part of the performance reporting
but are part of the drugs charge e.g. VAT, dentists prescribing etc. are prorated to PCTs on the basis of
their share of the total drugs cost.
The NHS Prescription Service produces a monthly schedule along with the Itemised Prescribing
Payment (IPP) reports to the DH to enable them to charge individual PCT cash limits for this expenditure.
The methodology for charging the drugs bill costs to PCT is in the NHS finance Manual under PCT
detailed guidance