By Adele Curran
In March 2026, the NHS introduced a major shift in how certain medicines are reimbursed to community pharmacies: Category H - a new reimbursement category in Part VIIIA of the NHS Drug Tariff. At first glance, this change might look like a technical tidying-up exercise. In fact, it could have profound implications for pharmacy margins, medicine supply, and the wider medicines pricing framework in England.
Category H was developed to address a longstanding anomaly in Category C of the tariff - specifically where products with multiple manufacturers and suppliers have historically been reimbursed at a single list price tied to one reference brand or supplier.
The Premise of Category H
To understand why Category H matters, we first need to review how Category C has historically worked.
Category C includes particular branded drugs, or generics to a branded product, where a single list price is set in the Drug Tariff. Unlike Category A or Category M - which are driven by market data or weighted average pricing - Category C has typically relied on one reference price. This has caused challenges when there are multiple manufacturers with differing real-world acquisition costs.
Pharmacy owners have lived with this for years: if the reimbursement price in Category C was set at, say, £1.00 per pack, yet you purchased that same pack at varying costs depending on supplier negotiated deals (for example £0.80 from Manufacturer A, £0.75 from Manufacturer B, and £0.60 from Manufacturer C), the single reimbursement price did not reflect those underlying variations in real acquisition cost.
Category H reforms seek to correct that by introducing market-reflective reimbursement.
How Category H works
Under Category H, reimbursement prices are no longer based on a single reference product or list price. Instead, they are weighted averages based on actual market volume and cost information from manufacturers and wholesalers.
NHS Business Services Authority (NHS BSA) and Department of Health and Social Care (DHSC) now collect quarterly supplier data under the Health Service Products (Provision and Disclosure of Information) Regulations 2018. Reimbursement for a given quarter - for example, March, April and May - will be based on a weighted average of purchase and sales data from the preceding three-month reference period (for instance, September, October and November).
The weighting is designed so that high-volume suppliers carry greater influence on the average reimbursement price. In essence:
- Manufacturers with greater dispensed volume shares will have more influence on the reimbursement price than those with smaller shares.
- The weighted average reimbursement should more closely reflect the real acquisition costs experienced by pharmacies.
This represents a shift from a list-price system to a data-driven market system for these drugs.
Example using Isosorbide mononitrate 25mg modified-release capsules (note costs are est. guides for illustrative purposes)
- Manufacturer 1 supply cost: £3.80
- Manufacturer 2 supply cost: £3.21
- Manufacturer 3 supply cost: £3.46
Let’s say the number of packs dispensed in the reference period was: (estimated industry dispensed totals)
- Manufacturer 1: 5,449 packs
- Manufacturer 2: 3,547 packs
- Manufacturer 3: 27,946 packs
Under Category H, the weighted average cost base would be calculated as:
((5,449 × £3.80) + (3,547 × £3.21) + (27,946 × £3.46)) / (5,449+3,547+27,946)
= (£20,706 + £11,385 + £96,693) / 36,942
= £128,785 / 36,942 = £3.48 per pack
From that weighted cost basis, the reimbursement price is then set with a target margin - historically estimated around 20 percent on Category C products - minus a 5 percent discount for discount deduction rules, unless the product qualifies as discount not deducted (DND) or a price concession is applied.
In this example, if the weighted base is £3.48, a 20% (Est) margin before discount deduction would suggest a reimbursement around: £3.48 × 1.2 = £4.17
After 5 percent deduction: £4.17 × (1 − 0.05) = £3.96 reimbursement per pack
This stands in contrast with the old Category C reimbursement of £4.01, illustrating how Category H reimbursement can materially differ from historic tariff prices.
Why this matters for pharmacy margin
Margin in community pharmacy is the difference between reimbursement and acquisition cost - after negotiated discounts and DND allowances.
Historically, Category C products with a single reimbursement price often yielded a comfortable margin when pharmacy owners could purchase well below the tariff reimbursement. This often helped offset pressure in other areas, particularly Category M clawback adjustments.
Category M uses average market data to achieve the retained margin but then recovers differences through quarterly clawback adjustments, meaning overpayments on Category C influenced Category M reductions. This dynamic has contributed to volatility and instability in pharmacy reimbursements.
Category H potentially stabilises this by:
- Aligning reimbursement more directly with real market costs.
- Reducing reliance on list pricing that may no longer reflect actual purchase prices.
- Potentially smoothing margin outcomes — if weighted reimbursement tracks more closely with pharmacy purchase behaviour.
DHSC argues that by using supplier data rather than list prices, reimbursement becomes a more accurate reflection of genuine acquisition costs, benefiting pharmacy confidence and reducing the need for future adjustments that distort other categories.
Concerns and practical implications
However, not everyone believes this will be smooth sailing.
Short-term impacts on margin predictability are a key concern. Monthly reimbursement volatility could increase if weighted averages move outside the traditional list price movements. This includes:
- Time lags: Category H uses quarterly updated data, meaning prices will reflect data from 3–6 months prior. This could produce a delay between market price changes and reimbursement.
- Reimbursement trends: If weighted reimbursement is lower than legacy Category C prices, pharmacies may see margin compression on those products.
- Supply behaviours: Suppliers may delay or restrict stock if weighted reimbursement reduces profitability, impacting supply reliability.
- Price concessions: A fall in reimbursement may prompt more applications for price concessions — an administrative burden and potential financial impact if not approved.
Community Pharmacy England has flagged concerns that Category H may create additional pricing instability and risk for dispensing practices, especially since reimbursement changes could diverge substantially from historic price expectations.
From a business planning perspective, practices must now:
- Monitor tariff changes closely and compare weighted reimbursement with actual purchase costs.
- Reconsider stock levels for Category H products to avoid losses due to reimbursement lags.
- Factor more sophisticated modelling into margin and profit forecasts.
Longer-term impacts on NHS margin and supply
Category H represents a shift towards data-driven reimbursement that better aligns with modern multi-supplier markets. In theory, this should reduce inefficiencies in reimbursement and reduce overpayments that previously distorted Category M adjustments.
But that comes at a cost:
- Predictability is reduced: Quarterly updates based on lagged data may not reflect real-time price shifts.
- Pharmacy business risk increases: Tightening of reimbursement may narrow margins where acquisition costs remain high.
- Suppliers may adjust behaviour: If weighted reimbursement does not cover supplier costs or margins, stock can be diverted away from the NHS market.
In economic terms, these reforms push the tariff towards a cost reflexive model - one where reimbursement reflects supplier contributions weighted by market volume rather than being anchored to historic list prices.
Conclusion: A necessary change or a new volatility?
Category H is a logical evolution of the Drug Tariff in a multi-supplier environment - recognising that using a single reference price no longer reflects market reality for many products previously in Category C.
Yet the practical impact on pharmacy margins and supply dynamics is not straightforward. Weighted reimbursement will likely benefit margin alignment where acquisition costs have been higher than the old tariff price. But it may also compress margins where weighted reimbursement falls below historic Category C levels. And given the quarterly lag in data, volatility remains a real concern.
Ultimately, Category H represents both an opportunity and a challenge. Pharmacy owners and commissioners alike must adapt quickly, using robust internal data and reimbursement forecasting to navigate this significant reform to NHS generic drug pricing
It is worth noting that Cat H will be introduced as a phased approach with only 11 products being released in the new category in March 26. It will be something that will need to be continually monitored some time before the overall impacts can be seen.
(Adele Curran is chief operations officer at RWA Pharmacy)
