Wednesday, 8 June 2011

The NHS and VAT on drugs

In the UK, drugs administered in hospital are exempt from VAT.  But, as the result of a fine distinction drawn by the VAT tribunal, the same drugs administered by a nurse in a patient's own home are zero-rated.

There is an important difference between VAT exemption and zero-rating.  Healthcare providers are charged VAT at the standard rate (currently 20%) on the drugs they buy.  If their use of the drugs is zero-rated, they can reclaim the VAT they've paid.  If the use is exempt, they can't.

Some chemotherapy drugs are very expensive (this is unrelated to production costs: rather the patent-holder is trying to recoup the drug's development costs from relatively few sales).  So consider the effect of this VAT charge on a drug that is sold for £2000+VAT per dose.  If the NHS administers the drug itself, on an outpatient basis, the cost to it is £2000 plus £400 VAT plus some nursing and bed space costs, say £2450 altogether.  If a third party provider such as HAH administers the drug in the patient's home, the cost might be £2000 plus £100 for a nurse plus £100 profit for the provider, say £2200 altogether.  Not surprisingly this sort of saving is attractive to NHS managers, and home treatment is increasingly being offered as an option for patients on chemotherapy.

However, from the point of view of the British state, the costs are much less attractive.  If the NHS administers the drug itself, the state is in effect (via the NHS budget) paying £400 to itself (except that it has to give a few pounds of that to the EU, which is funded partly out of a levy on VAT revenues).  So the net cost to the state is not £2450 but about £2050.  The state is actually £150 worse off with the home treatment option.

Some patients on chemotherapy prefer to be treated at home, so the money is not entirely wasted.  But it's extraordinary that resource allocation is being determined not by consideration of how best to spend the money but by a quirk in the VAT laws.