In December 2010, when launching the UK coalition government's proposal to replace the Pharmaceutical Price Regulation Scheme (PPRS), Health Secretary Andrew Lansley explained that the current drug pricing scheme "does not promote innovation or access in the way this government is looking for." Advocating instead a system that provides a closer link between the price the National Health Service (NHS) pays for a drug and the value it delivers, Lansley wrote: "Pharmaceutical companies need a pricing system that is more stable and transparent, and that gives clear signals about priority areas so that research efforts are directed to greater effect."

The consultation document that followed—"A new value-based approach to the pricing of branded medicines"—set out the UK coalition government's plans to replace PPRS with value-based pricing (VBP), which, among its "broader objectives," aims to "improve outcomes for patients through better access to effective medicines" and "stimulate innovation and the development of high-value treatments."

The proposals remove the National Institute for Health and Clinical Excellence's (NICE) power to determine whether the NHS should adopt a drug or not (although NICE will retain responsibility for an initial cost-effectiveness appraisal). The new system will instead see pricing decisions shift to the Department of Health (DH), with pharma companies then deciding whether to offer products to the NHS at the prices the government set down, and doctors (in hospitals or represented by the new GP Consortia) making a judgement on whether to prescribe them. These decisions will hinge on price thresholds geared to the maximum amount the government is prepared to pay for medicines. The basic threshold accounts for benefits displaced elsewhere in the NHS. Higher thresholds will be put in place for medicines tackling particularly severe diseases or disease with unmet needs; medicines that can demonstrate wider societal benefits; and medicines that can demonstrate greater therapeutic innovation and improvements compared with other products.

In the reports from industry, patient groups, and health associations that rolled in on the consultation document's response deadline of March 17, concerns were inevitably raised about how the government was defining and planning to deal with this 'therapeutic innovation.'

The consultation document defines innovation as a significant improvement relative to existing treatments that reflects "any additional health gain not captured by the normal pharmacoeconomic assessment of the health gain because of measurement difficulties" and provides a large Quality of Life Years (QALY) benefit.

But this, according to the Association of the British Pharmaceutical Industry (ABPI), is too narrow and needs to take account of improvements on any or all of the dimensions of potential benefits of medicines—for example, patient benefits and cost savings within or beyond healthcare and personal social services.

Of equal concern was the DH document's declaration that the current pricing system "may lead companies to focus on incremental improvements that can easily be made, and not to make the significant investments required to achieve breakthroughs in performance through innovation."

In its response, ABPI suggested that this "indicates a misunderstanding of the innovation process." Companies do not aim for incremental innovations at the expense of larger "breakthroughs," it said. Incremental innovations are the result of dynamic competition and are in themselves valuable. Only by rewarding these incremental innovations can developments in science lay the foundations for new therapeutic advances. A pricing approach that leads to increased uncertainty for companies about their future earnings if they fail to launch a first-in-class breakthrough medicine could actually deter a lot of worthwhile R&D, ABPI stated.

These sentiments were strongly echoed in the response of the pro-market UK think tank Stockholm Network, which accused the consultation document of pandering to "the myth that incremental innovation is not real innovation." "Breakthrough" medicines are not created out of thin air, the Network argued; rather, they emerge from a gradual process of discovery. And while it is important to reward the most innovative medicines, "it is wrong to treat all other new products as worthless and assume that they offer no value for money." Distinguishing between "good" and "bad" innovation, it says, is just far too simplistic.