Don’t discount discounting: implications for medicines pricing and the NHS

Last week, John Healey gave his first speech as chancellor. Within it was confirmation that HM Treasury will be changing how government weighs up the value for money of a policy or investment. Under new rules, the discount rate, used to adjust benefit and cost figures to account for the time value of money, will be reduced. This means future costs and benefits will be less ‘discounted’, making a stronger business case for policies or projects with longer term benefits.

This might seem like a fairly technical change to help nudge decision making towards longer term investments. But should NICE follow suit, it would have further implications for medicines pricing, following recent generous changes as part of the US–UK trade deal.

About the discount rate

Just as we typically prefer to have the things we want now rather than later, so too does government. The Green Book is the UK government’s guidance on appraisals, the process of assessing the costs, benefits and risks of options for achieving its aims. It explicitly recommends how to adjust benefits and costs to account for the time value of money – that is, that we value things now more than in the future – using a ‘discount rate’. An in-depth and considered independent review by professors Mark C. Freeman and Ben Groomby recommended reducing the discount rate from 3.5% to 3.0%, a change accepted by the Treasury.

All else being equal, this will favour projects and policies with longer term payoffs. So, a business case for a shiny new Neighbourhood Health Centre that will have lower running costs in the long term might now stack up slightly better against quick fixes to crumbling health and care infrastructure. 

What this means for the NHS

The nudge towards longer term thinking is welcome, as short termism has meant underlying NHS issues have remained unaddressed by successive governments. Of course, even if projects with longer term benefits look more attractive, there’s no indication government will loosen its purse strings and approve more of them. The relative ranking of projects may just shift slightly within the same overall envelope of investment.

What this means for NICE and medicines pricing 

NICE, as part of its Health Technology Assessment programme, appraises whether medicines are clinically and cost effective. Treatments are judged based on whether they meet a fixed cost threshold per quality-adjusted life year (QALY). After all, each pound the NHS spends on a treatment for one patient means that it has less to spend on a different patient. The standard, recently increased, cost threshold is £25,000–35,000 per QALY, but this can be flexible, notably for severe or ultra-rare conditions. 

NICE committees weigh up the future benefits of a treatment against its cost using, you guessed it, a discount rate of 3.5%. NICE has historically reflected changes to Green Book discount rates, and the review recommends that public bodies not have their own specific discount rates. So while NICE has independence over their methods, it would be unusual for them to not adopt the new 3.0% rate. We would, however, expect NICE to consult with stakeholders before making any changes to its rate.

The potential impact for patients

Many pharmaceuticals involve paying now for future health benefits, such as where a treatment improves or cures a long-term condition. Much like the shiny new building that looks better under new discounting rules, so too would many new pharmaceuticals.

On one hand, a lower discount rate could mean more treatments would meet the QALY threshold, get approved for use in the NHS and find their way to patients. But over 90% of new treatments are approved anyway. In some cases, it might mean NICE could recommend a treatment for a larger population, allowing more patients to benefit. But in many situations, manufacturers will just raise their prices to account for this new ‘value’ and still squeak in under the threshold. That extra spending on medicines may aid innovation by funding more R&D, but much of the benefit would likely end up with international shareholders. That’s money that could have been spent on other health and care, such as carrying out more routine operations to bring down the waiting list or investing in prevention. Spending that money on higher prices wouldn’t be a good use of already strained NHS funds.

We remain in the dark about how government balances the benefits of supporting the global life sciences sector against the use of NHS resources. But analysis suggests that the NHS has historically generated one additional QALY for every £6,000–8,000 spent, a much better rate compared with the £25,000–35,000 threshold. So, do some medicines prices really need to rise by another few percentage points? If NICE decides to update their methods, any future changes should reflect the latest evidence in a cost neutral way and ensure both value to taxpayers and benefits for all patients who use NHS services over the long term.