The detail of the changes in contractor funding for 2008/09 are set out below. These changes will be published in the October 2008 Drug Tariff and will take effect from 1^st October 2008.

Note these changes apply to England and Wales.

The Process for Calculating Funding Changes

A vital element in the new contractual framework was the 'Formula for Future Years', which is designed to ensure that annual adjustments to contract funding maintain the value of the contract. The components that inform annual adjustments (formula uplift) are:

• The GDP deflator, the Government's measure for underlying inflation;
• Increases in dispensing volume, at marginal cost;
• Increases in staff salaries in excess of the GDP deflator levels; and
• An efficiency assumption, which assumes some ability to make efficiencies and is consistent with efficiency targets applied throughout the public sector including the NHS as a whole.

In addition to the above, adjustments to the sums are also made to reflect costs necessitated by significant additional regulatory burdens on contractors, for example changes in NHS requirements imposed on pharmacy contractors that have resulted in additional costs. Regulatory burdens are assessed on a retrospective basis.

Consideration is also given to the levels of retained buying profit and any other factors, for example compensation in light of PPD underpayments.

2008/09 Funding Agreement

Total contractor funding has increased to £2,231m.

Formula uplift

The formula uplift recognises volume growth at marginal cost, general and staff cost inflation, and an efficiency discount imposed by the DH. This generated an increase in core funding of £71m. This is comparable with previous years.

Regulatory burden

The regulatory burden component compensates contractors for the costs of increased activity arising from changes in regulations. The increase for 2008/09 included funding for:

• CIP - extra time required to sort prescriptions, declaring out of pocket expenses on the FP34C Form and increased costs associated with the secure transport of prescriptions to the PPD;
• Changes to CD regulations - extra time associated with record keeping and costs of new registers;
• EPS - workload incurred by pharmacists in relation to obtaining and re-newing smartcards; and
• NPSA alerts - extra time associated with complying with the NPSA alerts on paraffin containing products and anti-coagulation. In addition, in 2007, the NPSA published a patient safety alert on ‘promoting safer measurement and administration of liquid medicines via oral and other enteral routes'. This included an NPSA recommendation that because more complex medication regimens are now being administered at home, primary care dispensers should be in a position to issue a range of oral syringes. As a minimum, a 1ml, 5ml or 10ml syringe should be supplied depending on the dose prescribed. Currently it is only a contractual requirement for pharmacies to supply the 5ml syringe in certain scenarios. In November, the Drug Tariff will be amended to require pharmacies to stock and provide 1ml and 10ml syringes in certain scenarios. The regulatory burden component of this year's annual uplift includes consideration of the additional costs of these syringes.

The regulatory burden component of the annual uplift formula has added £25.5m to core funding. Uplifts of £17m and £9m have been agreed in the previous two years.

Transitional Funding, pending new Cost Inquiry

PSNC has strongly and consistently made the case to the Department of Health that contractors are suffering an unsustainable shortfall in funding. Consequently the Minister has agreed a transitional payment of £150m to help contractors with their present financial problems and to maintain stability as we move forward towards implementation of the White Paper. This is subject to an agreement to undertake a cost of service inquiry as soon as possible, ideally to inform 2009-10 funding negotiations. DH officials have agreed with PSNC that the methodology must be fully reviewed to ensure that the cost of the aspirational "White Paper pharmacy" is identified, as well as the gap between that and present costs.

Stock loss and PPD underpayment

As in previous years, funding was also agreed to compensate contractors for underpayments made by the NHSBSA Prescription Pricing Division. This is separate from the ongoing negotiations between PSNC and the Department of Health and the NHSBSA on the accuracy of the PPD's new pricing system, the Capacity Improvement Programme. Funding was also agreed to compensate contractors for stock losses.

Pre-registration Training Grants

PSNC sought an increase in funding for pre-registration training of £2,000 per trainee. The DH has agreed to pay this in full, representing an additional £2m. Part XIII of the Drug Tariff will be updated from October 2008.

In the past, funding for the pre-registration grant came in part from pharmacy contract funding and in part from central Department of Health funds. From a budgetary perspective, funding for the pre-registration grant will now be charged back solely to pharmacy contract funding. Additional funding has been added to the pharmacy contract funding arrangements to compensate for this administrative change.

Retained buying profit

The joint 2007/08 survey into retained buying profits has been completed, providing information on the actual buying profit available in 2007/08. As part of the contract funding arrangements, it was agreed that £500m would remain in retained purchase margin through generics and other purchases. PSNC works jointly with the Department of Health to monitor and ensure the availability of the guaranteed £500m purchase profit. This is measured and monitored using regular inquiries into the actual purchase prices paid by independent pharmacy contractors.

The Survey is used to support the reconciliation of funding for the last financial year and to estimate on-going levels of buying profit. The survey showed that actual purchase profit levels were exceeding the target level and as a consequence, pending the results of the margins survey for 2008-09, Category M prices will be reduced by 32.5m per quarter which equates to approximately 16p per item. This change is intended to ensure that in the second half of this financial year, only the agreed levels of purchase profit income are available to contractors.

A copy of the Categroy M reimbursement price list for October 2008 - December 2008 can be found in the National Contract Funding Section of the site.

Changes in Fees and Allowances

*Using the results of the joint PSNC/DH survey into retained buying profit, it has been estimated that there was an excess of £65m purchase profit earned against target levels in the first half of 2008/09. This figure has been used in considering funding levels for the second half of the year but is provisional pending the outcome of the 2008/09 retained buying profit survey.

There is no change to the fee levels of the dispensing fee, additional fees, repeat dispensing payment, transitional payment and EPS Allowances. The arrangements for the following fees and allowances will change with effect from 1^st October 2008:

Establishment Payments

The level of the Establishment Payment remains unchanged however there has been an increase in the payment thresholds of 3%.

More detailed information on Establishment Payments can be found in Part VIA of the Drug Tariff.

Practice Payments

The threshold to receive the Practice Payment, other than a contribution for provision of auxiliary aids for people eligible under the Disability Discrimination Acts has risen by 3% to 2180 items per month.

For contractors dispensing over 2180 items per month, the Practice Payment level will increase from 34.5p per item to 70.9p per item from October 1st 2008.  In addition, from October 2008 to March 2009 inclusive, a supplementary payment of 30.2p per item will be added, bringing the Practice Payment for the period, October 2008 to March 2009 to 101.1p per item.

Contractors will be aware that previously 10% of the Practice Payment was deemed by HMRC to be subject to VAT. This reflected specific sums that were paid to contractors via the Practice Payment covering the disposal of unwanted medicines and signposting. The increase in the Practice Payment from October represents increased funding to cover the cost of dispensing medicines which is zero rated. Revised guidance on how the Practice Payment should be apportioned will be published on the PSNC website shortly.

More detailed information on Practice Payments can be found in Part VIA of the Drug Tariff.

Advanced Services

The fee for Advanced Services (Medicines Use Reviews and Prescription Interventions) rises from £27 to £28 and the maximum number of reviews per pharmacy remains unchanged at 400 per year, for those pharmacies that made arrangements to provide Advanced Services before 1 October 2008. A contractor who completes his full allocation could receive a maximum income of £11,200. More detailed information on Advanced Services can be found in Part VIC of the Drug Tariff.

Pre-registration Training Grants

From 1 October 2008, the pre-registration grant will increase by £2000 to £18,440 per year.

For existing pre-registration trainees, contractors are entitled to monthly payments at the old rate for the time a pre-registration trainee was employed before October 2008 and monthly payments at the new rate for the time a pre-registration trainee is employed after October 2008.  Payment is made by PCTs in arrears so there is likely to be a lag time before the increased payment rate is seen on a contractor's Schedule of Payments. The lag time is dependent on the PCT's internal payment authorisation processes and can vary from PCT to PCT.

Funding Frequently Asked Questions

Why is the supplementary 30.2p per item being added to the Practice Payment from October 2008 to March 2009?

The level of practice payment for the remainder of the current financial year takes into account the lower levels paid during the first half of the financial year.  The increased rate is calculated to deliver the total agreed funding for 2008/09 by the end of the year.

Are the Department of Health clawing back excess purchase profit earned in the first half of the year?

From the results of the 2007/08 survey into retained buying profit, it was estimated that purchase profit levels were exceeding the target level by 32.5m per quarter in the first half of 2008/09. This figure has been used in considering the Practice Payment levels for the second half of the year but is provisional pending the outcome of the 2008/09 retained buying profit survey.

Also to ensure that in the second half of this financial year, only the agreed levels of purchase profit income are available to contractors (i.e. 125m per quarter), Category M prices are being reduced by 32.5m per quarter which equates to approximately 16p per item.

When will the funding increase reach me?

The changes to the funding arrangements will take effect for prescriptions dispensed from 1st October 2008. Prescriptions dispensed in October must be submitted to the PPD for pricing before the 5th of November. Contractors will receive an advance payment for October's prescriptions in early December. This is normally an 80% advance; however as the advance payment will be calculated based on the AIV of September's prescriptions and the national AIV is expected to rise in October, the advance payment made is likely to be less than 80% of the total payment for October's prescriptions. In early January 2009, once the NHSBSA Prescription pricing Division has completed the pricing of October's prescriptions, the remaining balance will be paid. The payment that will be made to contractors in early January will be the first payment to reflect the new payment levels.

Detailed information on the funding timetable can be found on the PSNC Website.

Does my VAT liability increase in-line with the increase in Practice Payments from October 2008?

Previously 10% of the Practice Payment was deemed by HMRC to be subject to VAT. This reflected specific sums that were paid to contractors via the Practice Payment covering the disposal of unwanted medicines and signposting. The increase in the Practice Payment from October 2008 represents increased funding to cover the cost of dispensing medicines which is zero rated. Revised guidance on how the Practice Payment should be apportioned will be published on the PSNC website shortly.

More Information

Letter sent to all contractors 5/9/08

Contract Funding Section of Website