Understanding NHS medicines spending in England

In this article, Pinchas Kahtan discusses what the NHS Business Services Authority (BSA) data can tell us about NHS medicine spending, how these costs break down, and how industry payments shape the true level of NHS spending on medicines and what this means for patients.

The latest NHS BSA data release provides a detailed look at NHS spending on medicines, appliances, and medical devices, reporting a total spend of £19.9bn in 2023/24 after accounting for medicine sales payments back to government by companies [1]. However, interpreting these figures requires careful consideration of the wider financial landscape, including payments made by industry under the Voluntary Scheme for Pricing, Access, and Growth (VPAG) [2].

While the BSA data shows rising costs for medicines, these figures do not reflect the full picture. Industry payments back to government under VPAG are set to be significantly higher than anticipated, reaching £3.5bn in 2025—the highest repayment ever [3]. £2.8bn of this will flow back to the NHS in England [4].  This is at the centre of ongoing debates about the UK’s approach to medicines pricing, procurement, and investment in innovation.

Key points

• The NHS’s spending in England's spending on medicines, appliances, and medical devices reached £19.9bn in 2023/24, but this figure does not reflect the real cost to the NHS because industry payments back to government and other financial adjustments are not included.
• Branded medicine sales [5] in the UK grew to £14.6bn in 2023/24 [6],  but under the Voluntary Scheme for Pricing, Access, and Growth (VPAG), industry payments to government increase when sales exceed pre-agreed caps. For 2025, these payments are expected to be £3.5bn—£1bn more than originally forecast.
• The NHS BSA release does not account for the substantial rebates paid by pharmaceutical companies under VPAG and its predecessor, VPAS, which have returned billions to government. These payments help offset rising medicine costs but also highlight the need for more investment in medicines overall.
• While NHS medicine spending appears to be increasing, the UK still spends proportionally less on medicines than comparable countries—just 9% of total healthcare expenditure versus 15% in peer nations [7]. The UK’s pricing model and underinvestment in medicines is limiting patient access to innovative treatments as well as investments into the UK industry.
• There is a need to ensure transparency in NHS medicine spending data, including what it covers, the impact of industry payments, and the bearing of these on NHS funding decisions.

What is the NHS spending £19.9bn on?

The £19.9bn described in the NHS BSA's figures captures both medicines and medical technology in England, including appliances and devices.

The report categorises spending in the same way as the British National Formulary (BNF), breaking it up into ‘chapters’. For example, chapters 20-24 cover dressings, appliances, incontinence supplies, and stoma equipment, accounting for £1.36bn of spending [8].

However, isolating medicine costs from device costs in other chapters can be difficult, as the proportion of spending on devices versus medicines varies. If we look at the DHSC’s publication on medicines sales, it allows us to infer that sales of branded medicines in England, those tied to specific pharmaceutical companies, account for approximately £11.80bn. This is 81% of the UK-wide figure, which is the assumption used to apportion VPAG payments across the nations in the UK, based on their share of sales. [9] [10]

Understanding how these costs break down between such different technologies is essential, because managing costs for monoclonal antibodies requires different approaches than, say, hearing aids.

When is a cost, not a cost?

You might assume that the costs included the £19.9bn figure are like the costs of a trip to the pharmacy – money is exchanged for medicine – but it is not that simple. While some of the costs are real and borne by the taxpayer, others are ‘paper-costs’ which are recovered by the government and could be redeployed back into the NHS.

VAT

An example of this is Value Added Tax (VAT). VAT rates vary across medicine categories and prescribing settings, with hospital-dispensed medicines attracting the full 20% rate [11]. Primary care prescription medicines, like Jaffa Cakes, are VAT-exempt [12]. Whatever the rate, any VAT paid as the result of NHS spending on medicine goes back into government as tax receipts – although this does not mean it is returned to the NHS. The fact that VAT needs to be paid on some kinds of medicines reflects a deliberate Government policy decision; many goods and services are VAT exempt, or attract a lower 5% rate [13].

Dispensing costs

The BSA's primary care figures also include pharmacies' and practices' dispensing costs. These operational costs are real NHS expenses, but they inflate the apparent cost of the medicines themselves.

Rebates

While NHS hospitals are seeing increasing medicine costs, rising industry rebates to government substantially offset these increases.

As noted by NHS England’s release, in the last year, the industry returned £631m in rebates to NHS England through centralised commissioning and Cancer Drugs Fund (CDF) commercial agreements on individual medicines. But the largest rebates flow directly to the Department of Health and Social Care through industry-government agreements. The last two of these agreements—the Voluntary Scheme for Branded Medicines Pricing and Access (VPAS, 2019-23) and its successor, the Voluntary Scheme for Pricing, Access and Growth (VPAG, 2024-29)—yielded a total of £3bn rebates over the 2023/24 financial year [14]. Under these schemes, industry must repay all sales above pre-agreed spending caps.

The result is that while NHS hospitals saw medicine costs rise by 44.3% between 2019/20 and 2023/24, most increases in branded medicine costs were ultimately returned to the government through these rebates. The cap under the VPAS meant that real growth in 2023 and 2024 spending was limited to 2% (with an additional £150m adjustment in 2024) [15] [16]. These rebates could, in principle, flow directly to NHS organisations instead of central government, helping to ease frontline pressures.

How to improve public understanding of NHS spending

It is right to scrutinise spending on health at a time when budgets are so constrained. But there is another way of viewing the BSA data too – as showing not only costs to be borne by the system but as investments into innovation and the kinds of treatments available to patients.

For example, in the BSA data, the largest area of spending was on Malignant Disease and Immunosuppression, accounting for £3.36bn of total spend. This seems like a large number, but – as a proxy for the level of treatment opportunities for patients suffering from malignant cancers and autoimmune disorders, among the most painful and debilitating conditions – this figure also reflects growth of treatment options available to patients – something well worth celebrating.

The UK does not spend as much on medicines as similar countries.

In 2018, for example, the UK spent just 9% of its total health spending on medicines. This is a remarkably low proportion of the budget compared to France, which spent 15% of its health budget on medicine; Germany, Japan, and Italy, which all spent 17%; or Spain, which spent 18% of its health budget on medicines [17]. This lower level of spending may be partially accounted for by the rebates paid to government by industry, together with NICE’s evaluation of cost effectiveness and NHS England’s commercial negotiation approach, which are putting increasing downward pressure on prices.

The UK is slipping in the rankings for access and uptake of medicines.

The Office for Life Sciences (OLS) publish competitiveness indicators that measure the UK’s domestic market against other countries. These show the UK falling against a number of key metrics, including the percentage of new medicines receiving marketing authorisation (MA) that are available to patients, where England has fallen from 72% to 56% from 2016-19 to 2019-22; and in per capita uptake of new medicines, where five years after a medicines’ MA, uptake is only 62% of the average of comparator countries [18]. This data suggests that while the focus is on controlling costs, the UK is underinvesting in innovative medicines to its patients' detriment.

References

[1] Prescribing Costs in Hospitals and the Community
[2] Voluntary Scheme on branded medicines
[3] 2024 Q3 Final Freeze VPAG Operational Model, 2025 payment required from industry plus underpayment from 2024. The model is held internally by DHSC and shared confidentially with the ABPI.
[4] Based on 81% of VPAG payments apportioned to England, see: VPAG_Metrics_Tracker_Slides_Q1_2024 for publication - Branded Medicines Information Site - DH eXchange, slide 11
[5] Defined as ‘measured sales’ included in the Voluntary Scheme and the Statutory Scheme
[6] Aggregate net sales and payment information: February 2024 - GOV.UK, Q2, 3, and 4; Aggregate net sales and payment information: November 2024 - GOV.UK, Q1.
[7] How does the NHS compare to the health care systems of other countries?, The King’s Fund, p.57 
[8] Prescribing Costs in Hospitals and the Community, ‘table 5’, Supporting Summary Tables
[9] Aggregate net sales and payment information: February 2024 - GOV.UK, Q2, 3, and 4; Aggregate net sales and payment information: November 2024 - GOV.UK, Q1.
[10] VPAG_Metrics_Tracker_Slides_Q1_2024 for publication - Branded Medicines Information Site - DH eXchange, slide 11
[11] Health professionals and pharmaceutical products (VAT Notice 701/57) - GOV.UK
[12] Jaffa Cake VAT Case Explained | Aston Shaw
[13] VAT rates on different goods and services - GOV.UK
[14] Aggregate net sales and payment information: February 2024 - GOV.UK, Q2, 3, and 4; Aggregate net sales and payment information: November 2024 - GOV.UK, Q1. 
[15] Voluntary scheme for branded medicines pricing and access annexes.pdf, Annex 3
[16] Annexes to the 2024 voluntary scheme for branded medicines pricing, access and growth, Annex 4
[17] How does the NHS compare to the health care systems of other countries?, The King’s Fund,
[18] Life sciences competitiveness indicators 2024: summary - GOV.UK, tables 11 and 13.