Supply of Relevant Veterinary Medicinal Products Order 2005

My Lords, I start by thanking the noble Baroness, Lady Byford, for giving us the opportunity to discuss this order, the Supply of Relevant Veterinary Medicinal Products Order 2005, laid before Parliament on 7 October. I hope that I can address some of the concerns that have been expressed in the debate. Noble Lords will be aware that the order is being made under the Fair Trading Act 1973 in response to a report by the Competition Commission published in April 2003. It will improve competition in the market for certain veterinary medicines that can be dispensed only against a prescription. For a long time, the market for these medicines has not been working well for customers. The measures in the order will give customers the freedom to shop around and will encourage pharmacists to enter the market. Ultimately, this increased competition will be good for both consumers and businesses. For several years now, a strong competition regime has been seen as a crucial element of the UK’s economic performance. Effective competition is the best way to ensure that consumers get a fair deal. They benefit from lower prices, increased choice and higher quality. Reflecting this, the Competition Act 1998 and the Enterprise Act 2002 strengthened the entire competition regime. As a result the UK is now regarded as having one of the best competition regimes in the world, according to a 2004 peer review carried out by KPMG for the DTI. The work of the Competition Commission is thorough and highly regarded. Under the new regime, the commission has the power to implement its own remedies, fully taking politics out of the process. The members of the commission taking decisions are experts drawn from various fields. The commission has shown itself able to draw conclusions which strengthen the protection available to customers and consumers without over-regulating and without ignoring the specific circumstances of particular industries. This is especially important where the decision may have an impact on an organisational group of people with significant lobbying power. As has been recognised, the commission report looked at the market for prescription-only veterinary medicines following complaints to Ministers and the OFT about the high price of these medicines. A monopoly reference was made in 2001 under the Fair Trading Act, and although this Act has now been replaced, it remains in force in relation to reports completed under it. As your Lordships can imagine, this is a complex subject involving many levels of the supply chain—manufacturers, wholesalers, veterinary surgeons and alternative suppliers. The commission has obtained significant volumes of information and cost data about a range of specific products. The commission also undertook a series of international comparisons to determine whether prices were higher in the UK than elsewhere, and looked at the comparative prices of non-prescription veterinary medicines. The findings of the commission were not favourable to the existing regime. It found evidence of three complex monopoly situations involving manufacturers, wholesalers and veterinary surgeons who supply prescription-only veterinary medicines in the UK. Whether or not a particular individual organisation is directly engaged in monopoly conduct—for example, unfair pricing—the combined effect of these situations has been detrimental to the public interest. This has led to a lack of choice of suppliers for animal owners and to medicine prices being higher than they would otherwise have been. The first complex monopoly involved veterinary surgeons. Indeed, this has been recognised in contributions from noble Lords today. The commission found that they failed to give clients relevant information about the price of veterinary medicines and the option to take prescriptions. By ““taking a prescription”” I simply mean taking away a piece of paper to buy the medicine from a pharmacist, as happens in most cases involving human medicines. However, they were also involved in pricing practices that inhibited fair competition. In many cases, prescription-only veterinary medicines are priced in a way that cross-subsidises professional fees—again, a point effectively recognised today. Those veterinary surgeons that do this have to put a significant mark-up on the medicines they sell. This removes their incentive to price competitively or to ““shop around”” between manufacturers for the best deal. It also creates a perverse environment in which they are less able or willing to pass on any benefits they do get from manufacturers directly to clients. In the second and third monopolies, manufacturers and wholesalers were found to be operating in a manner—either actively or passively—that prevented pharmacies from buying prescription-only veterinary medicines competitively. The combined result of these activities is a somewhat vicious circle. Clients are not aware of their rights as regards taking a prescription to shop around for veterinary medicines—very few of them do—but, without apparent demand for these products, coupled with higher supply costs, very few pharmacies will see any benefit in taking up shelf space. So those few informed consumers who take a prescription may find that the product they want is unavailable from their local pharmacists. If they have had to pay for a prescription, they may find that the money has been wasted—hardly an incentive even to try. A few facts and figures illustrate the scale of the problem. In comparison to other countries, the commission found that the prices of most of the best-selling prescription-only veterinary medicines in the UK were substantially higher than in most European countries studied, and were never lower. On average, ex-VAT prices of medicines in other countries varied from 75 per cent of the UK price in France to 86 per cent of the UK price in the Republic of Ireland. At ex-manufacturer level—the price paid by veterinary surgeons—the difference was even greater. Compared to non-prescription veterinary medicines, mark-ups were on average 20 per cent higher, and only 16 per cent of dog and cat owners were even aware they could ask for a prescription. In order to remedy these problems, the commission made a series of recommendations designed to improve the working of the markets involved. Manufacturers should be required to provide much more transparent information about costs to modify the practice whereby a large rebate was paid at the end of the year, but left veterinary surgeons and pharmacists unable to predict the best value price to be charged to clients. Both manufacturers and wholesalers should be prohibited from discriminating between veterinary surgeons and pharmacists. Veterinary surgeons should provide much better information about practice policies, availability of prescriptions and the prices of veterinary medicines. To give clients the confidence to shop around, prescription charges should be abolished for a period of three years. The commission also made several recommendations for improvements to the regulatory regime for veterinary medicines, which is operated by Defra. At the time of the report, the regime was subject to discussion at EC level, with wide-ranging changes proposed. These recommendations were also accepted, subject to relevance, once the EC discussions had been concluded, and are now being implemented by Defra. The changes proposed by the European Commission had knock-on effects in the UK, not least a widening of the definition of ““prescription-only veterinary medicine””. To ensure clarity, and following better regulation principles, we have waited until those changes have become law before making this order. We have consulted on the provisions we are discussing today, as was alluded to earlier. There were some concerns from manufacturers and wholesalers about the practical application of the order, which have been addressed by certain changes in the final order. We recognise that the remedies were unpopular among the veterinary profession for a number of reasons. Nevertheless, in a letter to the Secretary of State of 25 July, the veterinary professional association, the Royal College of Veterinary Surgeons, offered to implement the majority of remedies aimed at veterinary surgeons, for which we are grateful. This has been done through changes to its code of professional conduct, which now requires veterinary surgeons to inform clients upfront about the availability of prescriptions, medicine costs and practice policy as regards repeat prescriptions. In the light of those changes, the final order has been heavily slimmed down. It contains the recommendations aimed at manufacturers and wholesalers, and one provision on veterinary surgery that the royal college was unable to implement itself—the moratorium on prescription charges. As such, it does not go in any way beyond the original recommendations but is simply aimed at ensuring that they are fully implemented and customers are given greater freedom to avail themselves of best practice. A number of questions were raised in earlier contributions, and I shall deal with them as fully as I can. The noble Baroness, Lady Byford, asked about the consultation, and the composition of consumer groups which responded. I do not have the exact numbers to hand but it is in the order of 10 manufacturers, five direct consumer groups and five to 10 animal representatives such as dog trusts and so on. Reference was made to the BVA’s position and the fact that that could lead to higher charges. The thrust of the order is to ensure that through the availability of prescription charges without hurdle, real pressure is put on ex-factory prices. All other things being equal, the composition or nature of the charges may change but the overall impact should ultimately be to lower prices for consumers, and that is what this is about. As the costs of dealing with prescriptions can be recharged but not for three years under a specific charge, so they are effectively likely to be racked up in other components of the charge, it is right that that component for that period reflects a lack of transparency. But that needs to be seen in the context of the wider transparency that the order, and the related implementation via the code of conduct, will bring into effect. On the impact on the profession, the suggestion that to proceed on the basis of a continual cross-subsidisation and lack of transparency as a means of defending and promoting the profession seems misplaced. It is very important that components of the charge and the true value of the services that have been provided are properly reflected in the charges. That is why bills are itemised. In circumstances where the true cost of a consultancy is effectively being masked because a profit on a medicine can be marked up and netted off against it does not seem to be helpful, neither is it helpful within the profession because not all veterinary surgeons follow that practice to the same extent as others. Therefore, it discriminates against those who seek to be more transparent. I can give one example. I recently became aware of a veterinary surgeon who believed that he was charging a 65 per cent mark-up on the manufacturer’s list price for a particular medicine. On receiving the price list in due course, which is what this order required, he was surprised to discover that he had actually been charging nearer to 450 per cent mark-up on the price that he was actually paying because of the way that discounts flow back into the system. That is not a sustainable basis on which to proceed. The issue of the impact of changes generally on veterinary practices was debated a little earlier in relation to the other order, but it is an overreaction to suggest that allowing veterinary practices to continue cross-subsidising veterinary fees and overcharging on medicines is in some way essential to maintaining practice viability. Indeed, a change by veterinary surgeons to a more flexible and customer-based service can actually strengthen practices, particularly rural practices. Increasingly, the vet can be seen as the head of a team of farm service providers. The noble Lord, Lord Addington, asked why we could not just deal with the manufacturers. The way to get to the manufacturers is to ensure that, through the availability of prescription charges, pressure can be put on them to price more competitively. It is not fair to say that veterinary surgeons are piggy in the middle on this matter. They are an integral part of the problems that exist at the moment on these pricing structures. It is right that that is changed for this three-year period. The noble Lord, Lord Soulsby, raised a point that was covered by the BVA about what happens if pharmacists and others only stock the high turnover types of medicines. If that is what happens, at least that will be reflected in the changed market circumstances. The rest would still pertain as it is. In relation to rumour about the responsible use of medicines, to have a system where one cross-subsidises and there is no incentive to reduce the costs of medicinal products—certainly the price at which they are charged—helps less than a transparent system where the price of a medicine is driven down by these processes. That is transparent and people know what the costs are. There is a risk, although I do not suggest that the practice is widespread, that people have no disincentive to prescribe medicine. That is a clear conclusion from the current arrangements, which persist. The noble Lord, Lord Kimball, talked about the withdrawal of prescription charges. Other noble Lords have recognised that that does not mean that a charge cannot be made for the work involved, but simply that it is reflected in other components of fees charged. That is acknowledged to have some impact on the transparency in the short term, but this measure is for a three-year period and we believe that this is vital to kickstart the thrust of the emphasis that needs to be given to private competition in these markets to make sure that there are long-term benefits for veterinary practitioners and their customers as well as owners and their animals. This order should be widely supported by the House and I hope that I have dealt with questions fully. If not, I will certainly seek to follow them up in writing. I hope that the noble Baroness will now feel able to withdraw her Motion.