This new trend has upset the old order. The custom has been that manufacturers would supply branded medicines to wholesalers at an industry standard discount of 12.5% below list price. Pharmacies would then benefit from wholesale competition, take a proportion of the discount as margin and enjoy the service that competition delivers. The NHS would reimburse pharmacies at list price, but claw back some of the margin achieved. Everyone was happy or at least acquiesced.
The move to direct to pharmacy (DTP) distribution enables manufacturers to achieve efficiencies in the supply chain. But the Office of Fair Trading (OFT) estimates that in 75% of cases the pharmacy has no choice of medicine to dispense - accounting for about £5 billion a year on domestically sourced medicines. The OFT is concerned that manufacturers may have the incentive and ability to raise prices and reclaim some of the customary margin on the list price. This would reduce the NHS claw back and the pharmacies' profits. Pharmacies also fear that they will lose service benefits if wholesale competition is removed. Eyeing the potential attractions of DTP, logistics service providers (LSPs) and manufacturers are courting each other for closer ties. Some may be left on the shelf if they do not find a partner soon.
The OFT has not referred the market to the Competition Commission, nor has it initiated proceedings under the Competition Act. It has held fire for now and made recommendations to Government. The OFT's preferred option for saving NHS costs is that list prices should be reduced by an amount equivalent to pharmacies' current discounts, with pharmacies paid an appropriate margin. The OFT proposes that the Government should seek the agreement of manufacturers to minimum service levels when adopting a DTP scheme. The OFT will maintain a watching brief on exclusive deals with LSPs.
The uneasy compromise proposed may not please all, but the door has been left open for future OFT intervention. In the meantime, the music is playing and the courtship goes on.