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Pharmaceutical Services Negotiating Committee

Margins Survey

Part of the agreement for the 2005 contract was that pharmacies would work with the Department of Health to give information about purchase prices and margins, and the Margins Survey was developed over the years following.

Margin survey process

  • Pharmacy and Drug samples are drawn by the Department of Health, and checked by independent statistical experts retained by PSNC. PSNC also conducts checks for any generics that have not been available during the survey year; where generics are not available but a brand or special has been available, the generic NIC is transferred to brand or special.
  • PSNC collects invoices from the sample Independent Pharmacies. PSNC staff process the data and populate the survey database with all transactions for sample drugs. Details of low spend surcharges and fuel surcharges are also captured to be factored into the results. Once all inputting is complete the final dataset is sent to the Department of Health, along with copies of all wholesaler statements.
  • Data cleansing and checking is carried out jointly by the Department of Health and PSNC. Supplier discount calculations created by the Department from the wholesaler statements are scrutinised by PSNC.
  • DH calculates the results and PSNC conducts analysis of the data and audit the answers. Once the final answers are agreed between DH and PSNC, they are used to inform the negotiations for Community Pharmacy funding.

Mid year adjustment

The process for calculating the margin takes time. The invoices and statements for the last month of the financial year, March, cannot be collected before May, and inputting is not completed until June, with negotiations taking several weeks thereafter. In practice this means that the earliest date for making changes to the Drug Tariff is October.

Regulatory Lag

The PSNC term for this has been benefit sharing – allowing pharmacies to share the benefit of contractors’ work in driving down prices for the NHS. This was an important element of the funding negotiations in 2005.

The Department of Health term, Regulatory Lag, for the same thing, recognises the inevitable lag in time taken to find out about what is happening in the market, and allows pharmacies to benefit from retaining savings made for a defined period.

How the system operates

In October, the results from the previous financial year's Margins Survey are used to adjust Drug Tariff prices. Prices are set to levels that assume that, if volumes and prices remain constant for the remainder of the year, pharmacies (measured by the independent sector) will receive £250m in retained margin from October to March (equivalent to £500m per year). In practice, volume growth, improved discounts and the bonus effect of branded medicines coming off patent and moving into generics where margins can be very high for an initial period, mean that by the year end, pharmacies have made a substantial excess margin. The level of this typically exceeds £250m per annum – i.e. an additional 10% on top of allowed funding.

Useful Links

Drug Tariff and Category M

Current funding settlement details


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