To ask Her Majesty's Government what plans it has for the pricing of generic medicines used in NHS primary care

I am today announcing the Government's proposals for setting maximum prices for generic medicines supplied for use in NHS primary care.

Generic medicines play an increasingly important part in NHS treatment. In 1998, 63% of all prescriptions were written generically and savings from generic prescribing have allowed the NHS to invest in other areas of patient care. The Government is committed to building on this success.

The policy of encouraging generic prescribing depends on a reliable supply of generics which offer value for money. Over the last year the generics market has failed to deliver either. There have been apparent shortages and steep price rises in many generics, which cannot adequately be explained by changes in the cost base for generics manufacture.

Generic price increases and related turbulence in the generics market are expected to cost the NHS in England some £200 million in 1999-2000. Equivalent pressures have been experienced in Scotland, Wales and Northern Ireland. The Government is determined that the NHS should not face further additional cost pressures arising from generics in 2000-2001. We therefore propose to use powers in the Health Act 1999 to introduce a statutory ceiling, applicable across the UK, on the prices of the main generics. The proposals will not apply to branded medicines sold to the NHS by the research and development-based pharmaceutical industry, the profits of which are regulated voluntarily under the 1999 Pharmaceutical Price Regulation Scheme (PPRS). The statutory ceiling will correspond to prices some fifteen months ago, before last year's steep price inflation. It will be reviewed after 15 months. We also propose to require the submission of information by suppliers of generics to underpin the review. The scheme will also include provision for appeals and for penalties in cases of contravention.

Subject to the outcome of consultation, we propose to lay regulations to underpin the controls around the middle of June.

The Government has considered the scope for introducing a voluntary scheme for setting maximum prices. It is difficult to see how a meaningful voluntary scheme could be negotiated, given the fragmentation of the generics supply chain, the number of representative bodies involved and the fact that many companies are not represented by any of them. However, if the Government is persuaded, through the consultation exercise, that a meaningful voluntary agreement could satisfactorily be negotiated, then it will seek to do so.

The Government is committed to ensuring that the principle of fair reimbursement for community pharmacists and dispensing doctors is maintained under the proposed scheme. At the same time, we share the House of Commons' Health Select Committee's view that aspects of the reimbursement system – in particular the Category D arrangement – are flawed. We believe that Category D has had the effect of encouraging speculation in the supply chain and now propose to abolish it. We intend to discuss this and the wider implications of the price control scheme with the Pharmaceutical Services Negotiating Committee (PSNC) and the General Practice Committee of the BMA (GPC). There will be separate discussions to cover arrangements in Scotland and Northern Ireland.

The Government's proposals are intended to correct last year's unjustified price increases in the generics market and, in so doing, to protect the position of the NHS. At the same time, the Government remains committed to building on the UK's successful record on generic prescribing. We are therefore determined to ensure that, for the longer-term, we have in place arrangements which best serve the Health Service as well as supporting a soundly managed and fully competitive generics market. Identifying such arrangements is the purpose of the Fundamental Review of the generics supply chain, which we have commissioned from Oxford Economic Research Associates (OXERA). We expect OXERA's programme of work to be concluded in the summer.

A copy of the consultation document setting out the Government's proposals for setting maximum prices has been placed in the libraries of both Houses. It is also available on the internet at www.doh.gov.uk/gendcon.