REF: 2021

Impact case study

Improved monitoring of the NHS drugs bill


The Margin Survey allows the DHSC to adjust reimbursements to pharmacies as necessary to make sure that they remain properly incentivised and fairly reimbursed, while protecting the NHS from overspending.

Public Health Analyst

Department of Health and Social Care [DHSC]

Professor Chris Skinner

Research by

Professor Chris Skinner

Deceased February 2020

Dr Yajing Zhu

Research by

Dr Yajing Zhu

PhD alumna, Department of Statistics, LSE

Statistical work by LSE to improve the design of medicine price surveys led to reductions in sampling error and therefore lowered costs for the NHS.

What was the problem?

The UK’s National Health Service (NHS) spends around GB £9 billion a year on medicines dispensed by community pharmacies. The Department of Health and Social Care (DHSC) monitors this expenditure via the Community Pharmacy Contractual Framework (CPCF).  

Under this framework, pharmacies buy medicines directly from the market, and are reimbursed by the DHSC according to a set “drug tariff” for each medicine. This allows pharmacies to retain a “medicines margin” – that is, the difference between the price they pay and the price they are reimbursed at, which covers their costs and gives them an incentive to purchase cost effectively. 

The framework sets an overall target of GB £800 million per year for this medicines margin. If it is much more, the NHS will be out of pocket; much less and community pharmacies are not being fairly reimbursed.  

To monitor these costs, and the margin, the DHSC carries out a survey of pharmacy invoices. It then adjusts the reimbursement level for medicines the following year if it needs to recoup any overspends or reimburse any underspends from previous years.  

When the National Audit Office (NAO) reviewed this cost survey process, they concluded the medicines margin target was exceeded by, on average, GB £277 million per year. It therefore advised the DHSC to reassess how it calculated the margin, and be quicker in making any adjustments. To do this it recommended it: “continue to work with recognised experts in survey design and analysis to maintain and improve the invoice survey.”  

In short, the Department of Health and Social Care needed a robust method to set the drug tariffs accurately based on survey data from pharmacy invoices. 

What did we do? 

Since joining LSE in 2011, and until his death in February 2020, Professor Chris Skinner led a programme of research into the statistical methodology of sample surveys and censuses.  

In 2013 to 2015 and 2018 to 2020, the DHSC invited Skinner to work with them on improving the medicine margin survey methodology. The challenge of accurate assessment and sampling design related especially to the drug tariff survey’s complex sampling scheme, in which a sample of medicines is crossed with a sample of pharmacies in the context of fluctuating prices from a volatile wholesale market for generic medicines.  

The DHSC had already established basic design and estimation methods, but they were concerned about the accuracy of their estimates. Skinner developed a new approach to accuracy (standard error) estimation for such a “cross-classified” design. This enabled the separate and interacting effects of medicine sampling and pharmacy sampling to be identified. In turn, this allowed the medicine and pharmacy sample sizes to be adjusted separately and efficiently to improve accuracy. Skinner also extended his approach to capture the temporal aspect of the sampling, demonstrating a gain in accuracy which could be achieved by a shorter “rotation period” for the medicine sampling.  

A further challenge was the influence of outlier observations on accuracy. Skinner developed standard, error-based rules for identifying outlying observations, and reducing their influence on mean and standard error estimators.   

Skinner’s research advanced earlier survey sampling work on cross-classified sampling, and attracted significant international and national attention.  

What happened? 

The results of the margin survey are used to determine how much community pharmacies in England are reimbursed for medicines dispensed via NHS prescriptions. The reduction in sampling error resulting from Skinner’s work has helped to ensure that reimbursement price adjustments are smoother and based on more accurate evidence.  

Skinner’s role in this was the provision of expert – and, crucially, impartial – advice to both the DHSC and the Pharmaceutical Services Negotiating Committee (PSNC), which promotes the interests of NHS community pharmacies in England, as they negotiated an agreement on the optimal margin size.  

In recent years the NHS has faced considerable cost pressures. Inaccuracies in the estimated margin can lead to a situation in which the NHS is unable to recover overspends, simply because it cannot prove that the target margin has been missed (the adjustment of medicine reimbursement prices is made only when evidence can be provided that the target margin has been missed, without it the drug tariff cannot be adjusted nor overspend recouped). By reducing errors in the margin survey estimation, Skinner’s research has helped to ensure the NHS is better able to recoup overspends on prescription drugs, helping to produce significant savings.  

The revised survey methodology has significantly reduced the DHSC’s annual overspend (based on NAO estimates). It has helped ensure both efficiency in NHS spending on prescription medicines and a more stable and predictable NHS funding stream for community pharmacies, which have also faced severe cashflow challenges, with smaller independent pharmacies especially vulnerable to income variation. In July 2019, the PSNC, NHS England and NHS Improvement, and the DHSC agreed a five-year deal for community pharmacies, guaranteeing funding levels until 2023/24.  

By helping to ensure that pharmacies have a more stable and predictable stream of income from prescription medicines, while saving money for the NHS, the ultimate impact of the research is therefore a contribution to improved NHS finances and patient wellbeing.