How are medicines prices set in the UK?

Claire Duddy

In the 2023/24 financial year, the total cost of medicines and medical devices purchased by the NHS in England was estimated at £20.6 billion, an increase of 7% from £19.2 billion in 2022/23. The King’s Fund has reported that UK medicines spending accounts for a lower share of overall health spending than in comparable countries.

In May 2025, the Times reported that the Prime Minister had told the pharmaceutical industry that the UK would pay more for medicines in the future, following a commitment to “improve the overall environment for pharmaceutical companies” as part of a UK–US trade deal.

Pharmaceutical companies set medicines prices, but they take NHS purchasing power and cost control mechanisms into account. This Insight explains the mechanisms that help to control the price of medicines purchased by the NHS.

The role of NICE

Before a new medicine can be routinely used in the NHS in England, the National Institute of Health and Care Excellence (NICE) evaluates its clinical effectiveness (how well it works) and cost effectiveness (whether it provides value for money). NICE recommendations are typically adopted in Wales and Northern Ireland too. In Scotland, the Scottish Medicines Consortium evaluates new medicines.

To assess cost effectiveness, NICE uses a measure called a quality adjusted life year, or QALY. It compares the cost of giving patients one extra year of life in good health using the new medicine against the cost of existing treatments.

If a medicine is more effective and cheaper than existing treatments, NICE will recommend it for use in the NHS. If a medicine is more effective but more expensive, it must meet a cost-effectiveness threshold before NICE recommends it. In England and Wales, this is generally between £20,000 and £30,000 for each additional QALY the medicine enables, but NICE can adjust the threshold so that it can recommend more expensive medicines for very severe or rare health conditions.

The Association of the British Pharmaceutical Industry (ABPI) highlights that pharmaceutical companies take this evaluation into account when they set prices. If they set medicine prices too high, their product will not be recommended for routine use in the NHS, and a company might prefer to set its prices lower and make some money from the NHS than to set them higher and make no money from the NHS.

NHS price negotiations

The NHS commercial framework for new medicines sets out NHS England’s approach to purchasing new medicines. It allows pharmaceutical companies to offer, or the NHS to negotiate, discounts for medicines. For example, the NHS may be able to negotiate discounts for medicines that NICE did not find cost-effective at the manufacturers’ recommended retail prices (known as list prices).

NHS England can also use special funds like the Cancer Drugs Fund and the Innovative Medicines Fund to pay for medicines where NICE has determined that more data is needed to show that the medicines work well. In these cases, pharmaceutical companies are asked to provide access to the medicines at a “responsible price” for a limited time, while more data is collected.

Schemes to control spending on branded medicines

When a new medicine is developed, companies take out patents that allow them to be the sole suppliers of the medicine, which is sold under its brand name. When the patent expires, other manufacturers can produce a generic version of the medicine.

There are two schemes for regulating NHS spending on branded medicines: one voluntary and one statutory.

The voluntary scheme (VPAG)

The 2024 voluntary scheme for branded medicines pricing, access and growth (VPAG) is an agreement negotiated between the Department of Health and Social Care, NHS England and the ABPI. The agreement indirectly controls the prices of newer, brand name medicines from 1 January 2024 until 31 December 2028 by capping overall NHS spending on these medicines.

The ABPI says the scheme offers pharmaceutical companies stability and contributes to “eco-system wide improvements” for the industry. If a pharmaceutical company chooses to join the VPAG, it is free to determine the individual price of each medicine that it sells to the NHS. The agreement sets the NHS’s baseline level of spending on branded medicines and caps the rate at which spending is allowed to grow.

If NHS spending on branded medicines exceeds the cap, companies must repay a percentage of sales revenue back to the government. In 2024, this levy was set at 15.1% of eligible sales; in 2025, the headline levy rate is 22.9%. Different rates apply for older medicines. In practice, each company in the scheme pays an individual rate calculated to take account of its size and portfolio of medicines.

The VPAG scheme is currently being reviewed.

The statutory scheme

Pharmaceutical companies that do not join the VPAG are subject to a statutory scheme, as set out in the Branded Health Service Medicines (Costs) Regulations 2018. The statutory scheme works in the same way as the VPAG, by capping spending on brand name medicines.

The government regularly reviews the terms of the statutory scheme to keep them broadly in line with VPAG. Under the current terms of the scheme, pharmaceutical companies must pay 23.4% of sales revenue that exceeds the growth cap back to the government.

Generic medicines pricing

Generic medicines are named after the medicine’s active ingredient. For example, the generic medicine sildenafil is used to treat erectile dysfunction, but it is better known by its brand name, Viagra. In England, 81% of the medicines used in primary care are unbranded generic medicines.

Generic medicines usually cost less than the equivalent branded product, and there are no direct controls on the prices of generic medicines. The government says that it relies on market competition and efficient purchasing practices to deliver value for money on generic medicines.

When there are fewer suppliers, the price of generic medicines can increase due to a lack of competition. In some cases, significant price increases have been investigated by the Competition and Markets Authority (CMA). In May 2025, the CMA fined the pharmaceutical company Advanz, and two of its former owners, for “excessive and unfair” pricing of the thyroid medicine liothyronine.