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Pharmaceutical Services Negotiating Committee

Principles for Funding Agreement

Sound Evidence Base

PSNC has established and maintains a comprehensive evidence base to support contract funding. The initial Cost of Service Inquiry was undertaken in July 2003, using a statistically representative sample of pharmacies. In addition to the Cost of Service Inquiry, detailed modelling was undertaken of the new services to ensure they were fully costed. Leading consultants were used to assess the return on investment community pharmacies needed. Costs and returns are based on independent pharmacies.

A key part of the Cost of Survey Inquiry is the allocation of overheads. A survey undertaken in spring 2008 of owners of around 2,800 community pharmacies showed that NHS income accounted for 90% of total turnover.

It was agreed that PSNC and the Department of Health will review at three yearly intervals whether a new Cost of Service Inquiry is needed. 

2010 Cost of Service Inquiry 

The Pharmaceutical Services Negotiating Committee (PSNC) and the Department of Health agreed that it was necessary to undertake a new joint Cost of Service Inquiry in 2010. PricewaterhouseCoopers (PwC) was appointed by the Department of Health and PSNC to conduct the inquiry and the final report was published in July 2011. The joint Cost of Service Inquiry will form the evidence base for negotiations for future funding. It is essential that the costs of the range of pharmacy businesses today are captured fully, as well as identifying the costs of future developments in the community pharmacy service. Initial views of the results were reflected in the 2010/11 funding settlement.

PSNC has urged the Government to offer funding that provides stability for contractors, pending the conclusion of negotiations following the Cost of Service Inquiry (COSI). These concerns were listened to and accepted by the Minister in agreeing the 2011/12 settlement. To view the Cost of Service Inquiry please visit the PwC website.

Prior to 2010 Cost of Service Inquiry

Prior to the 2010 Cost of Service Inquiry a vital element in the new contractual framework was the 'Formula for Future Years', which was designed to ensure that annual adjustments maintained the value of the contract. The components that informed annual adjustments were:

  • The GDP deflator, the Government's measure for underlying inflation
  • Increases in dispensing volume, at marginal cost
  • Increases in staff salaries in excess of GDP deflator levels
  • An efficiency assumption, which assumes some ability to make efficiencies and is consistent with efficiency targets in the NHS as a whole

In addition to the above, adjustments to the sums were also made to reflect costs necessitated by significant additional regulatory burdens on contractors. Regulatory burdens were assessed on a retrospective basis.

Consideration was also given to the levels of retained buying profit and any other factors, for example compensation in light of PPD underpayments.

The uplift mechanism was reviewed as part of the 2010 Cost of Service Inquiry.

Regulatory Burden

The regulatory burden component of the annual uplift formula in 2010/11 added £18m to core funding. Uplifts of £15m, £25.5m, £17m and £9m were agreed in the previous four years.

Significant elements within the 2010/11 regulatory burden component were:

  • NPSA Guidance on Lithium and use of NHS Number;
  • Quota shortages - an incremental amount made available;

The 2009/10 regulatory burden component took account of:

  • Costs associated with CIP;
  • Changes to CD regulations;
  • EPS system upgrade costs;
  • NPSA Alerts on anti-cancer and opioid;
  • Quota shortages;
  • ICO model publication scheme.

The 2008/09 regulatory burden component took account of:

  • CIP - extra time required to sort prescriptions, declaring out of pocket expenses on the FP34C Form and increased costs associated with the secure transport of prescriptions to the PPD;
  • Changes to CD regulations - extra time associated with record keeping and costs of new registers;
  • EPS - workload incurred by pharmacists in relation to obtaining and re-newing smartcards; and NPSA alerts - extra time associated with complying with the NPSA alerts on paraffin containing products and anti-coagulation. In addition, in 2007, the NPSA published a patient safety alert on ‘promoting safer measurement and administration of liquid medicines via oral and other enteral routes'. This included an NPSA recommendation that because more complex medication regimens are now being administered at home, primary care dispensers should be in a position to issue a range of oral syringes. As a minimum, a 1ml, 5ml or 10ml syringe should be supplied depending on the dose prescribed. Currently it is only a contractual requirement for pharmacies to supply the 5ml syringe in certain scenarios. In November, the Drug Tariff will be amended to require pharmacies to stock and provide 1ml and 10ml syringes in certain scenarios. The regulatory burden component of this year's annual uplift includes consideration of the additional costs of these syringes.

The 2007/08 regulatory burden component took account of:

  • the 2006/07 increase
  • the cost of collecting smartcards for EPS
  • changes to the Controlled Drugs regulations
    The measures above should ensure funding that continues to recognise real costs. In addition to this, PSNC and the Department of Health will review at three yearly intervals whether a new cost inquiry is needed.

The 2006/07 regulatory burden component took account of:

  • the additional VAT payments due on part of the Practice payment,
  • the requirement for sorting of hazardous waste introduced by the Hazardous Waste Regulations
  • the increased scope of the Disability Discrimination Act, following amendment in December 2005, when all types of mental impairment could be taken into account when determining whether a person is disabled.

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