China Ready for Drug Pricing Reform

The biggest reform of Chi- na’s medicine retail sector seems ready to roll out. The National Development and Reform Commission（NDRC）， china’s planning agency， has prepared a draft law for review by the industry.

According to the draft， restriction on price ceilings of 280 Western medicines and 250 Chinese patent drugs， previously priced low by the government to relieve patients’ medical bur- den， will be lifted， allowing producers to set prices according to their production costs. Prices of more than 2700 drugs will soon be determined by the market， industry sources said earlier.

NDRC announced that the retail price cap of low-cost medicines is set to be scrapped to revive dampened production caused by weak profits and ensure supply of essential drugs.

The draft had caused heated discussion in the industry. Chang Feng， director of the medicine price research department under China Medical University， said that the move， allowing the market to play a bigger role in deciding prices， will help motivate low-price medicine production and guarantee necessary supply.

Unexpectedly， some pharmaceutical corperations’ response to the deregulation has been underwhelming. A securities trader says that it is because direction of the reform is still ambiguous， especially on the purchasing through collective bidding system， which effects drug prices the most. All in all， only the less-acceible and less-competitive sectors， blood products for instance， will be benefiting from the policy changes. “The reform won’t be carried out properly or achieve anything unless the governement abolish the collective bidding system and delegate the purchasing power to hospitals.” said Yu Mingde， President of China Pharmaceutical Enterprises Association.

Yu also said that to scrap the price cap doesn’t mean the government will totally let go of the industry. For example， drugs that are covered by national medical insurance fund will still be priced by the department concerned.

Why the Reform Is Necessary

Drug management systems of different countries differ greatly from each other. Due to different management bodies， price management systems can be classified into several patterns. But all of them take supply-side and demandside interventions at the same time.

China is the world’s second-largest pharmaceutical market， and its spending on medicines will reach about $155-185 billion in 2018， according to the latest report from the International market research firm IMS Health.

Before the reform， the drug price management policy doesn’t always meet the demand of market and drugs of high quality usually can’t be sold at competitive and well-deserved prices. Under the collective medicine purchasing system， which has been used for years， medicines are purchased by provincial medical authorities， and all local public hospitals in the province can sell medicine to patients at only 15 percent over the collective purchasing price when they sell the medicine to patients.

Although China has lowered prices in the collective purchasing system more than 20 times in the past 10 years， drug prices in some public hospitals are still high. The collective purchasing system should have given more bargaining rights to buyers. But most of the provincial buyers are representatives from big hospitals in the provinces， even if the purchasing process is organized by governments. Since the hospitals can only profit from the 15 percent increases over the base prices， the purchasing representatives have all the reasons to keep the collective purchasing prices comfortably high.

The representatives may pocket huge sales commissions from the pharmaceutical enterprises as well. And their hospitals’ 15 percent shares rise accordingly.

All parties benefit from the deal， except the patients. Experts and patients have been calling for the government to establish a more efficient and unified regulatory system， making the medicine price management more scientific and transparent for the market.

Delegating the power of bargain to hospitals actually makes the 15 percent price-hike practice obsolete. The intermediary section of the medicine business will be simplified and become more orderly after the factors of personal interests are eliminated. In fact， it is another， and faster， solution is to reform the collective purchasing process and remove the hospital representatives from the deals. But the resistance is obvious， too. That is probably why the reform starts with the hospitals.

This reform will promote price competition in the medicine market and more importantly， benefit the patients. The change in the sales market will cut the costs of deals and stimulate competition among pharmaceutical enterprises to produce the best drugs at the lowest costs.The hospitals’ motives to overprescribe medicines will also be curbed as the medicine prices drop.

In light of the that， some Chinese cities have been piloting the medicinepricing reform and giving state-run hospitals the right to negotiate their own medicine prices， says earlier reports. Excerpts：

“China has been slowly stepping back from caps on consumer prices for drugs but faces a difficult task balancing the need to ensure steady supplies of vital medicines with its desire to keep prices low.

China removed price caps on a limited number of drugs in last April after criticism that its controls had caused shortages of a number of critical drugs used by millions of patients to treat hyperthyroidism and other ailments.

The supply of low-price drugs has decreased as rising costs and shrinking demand made producers shift their attention to more profitable medicines， causing production of some first-aid medication including digoxin to be suspended.”

President Xi Jinping has made a priority of providing affordable， accessible healthcare in the country’s struggling with rising healthcare costs， long waits for care and lapses in medicine safety. Therefore， this pilot reform in some cities is of vital importance to the whole medicine industry and the medical care business of China， and it should be carried out step by step in wider areas to finally lower the medicine prices.

Other experts said that the NDRC’s planned reforms to relax drug pricing were， perhaps， also aimed at addressing the issue of possible corruption in price control.

Medical industries and regulators have been plagued by controversies in recent years， and problems can be found in all fields， including in drug pricing and sales and medical services. Liao Xinbo， a health official in Guangdong province， said that NDRC officials are not familiar with the medical industry and set the prices of drugs by relying on information provided by pharmaceutical companies. And Several drug company owners claimed that the old pricing system forced them to pay bribes to regulators to affect government-set procurement prices.

An Open-air Medicine Market

The draft rules， which were sent to eight industry bodies for feedback， propose to "cancel government-set prices on drugs， and through insurance price controls and the bidding process， allow the actual transaction price of drugs to be set by market competition.” It means China’s medicine prices would be set by a combination of health insurance departments， existing bidding processes and multi-stakeholder negotiations.

For the drugs that are covered by medical insurance， the medical insurance departments will work with other related departments to work out insurance payment standards so as to guide the market price to be formed in a reasonable way.

For drugs with little market competition， such as patent drugs and exclusively produced traditional Chinese medicines， authorities will explore ways to establish a pricing negotiation mechanism with multilateral participation.

Prices of blood products， immunity and prevention drugs that are purchased by the nation and contraceptives will be formed through bidding purchases or negotiations. Class I psychic drugs， anaesthetic drugs and low-cost drugs will， however， will adhere to the current pricing policy.

Policymakers have also analyzed the possible influences of the new policy and believe that drug prices in hospitals will not rise as they are constrained by a series of mechanisms and regulations， such as the drugs bidding procurement mechanism， controls on total expenditure for medical insurance as well as intensified government monitoring and supervision of market trading prices. But the possibility that drug prices will rise in some retail drugstores in the initial stages cannot be ruled out， it said.

"Specifications differ for various drugs， and it is difficult to detect their real cost. The government pricing system will easily lead to rent-seeking，" said Li Lei， former head of the price supervision department at the NDRC， adding that the conditions are ripe for cancelling the government price ceiling.

The drugs purchased through the bidding procurement mechanism have also played a big role in limiting prices. Controls on the total expenditure on medical insurance will motivate hospitals to bring down purchase prices， Li said.

The NDRC has asked local authorities to release a list of low-cost medicines to the public by July 1 and strengthen monitoring over unreasonable price lifting. The full removal of caps should ease the price pressures on both domestic and international pharmaceutical firms hoping to tap China’s healthcare market that McKinsey & Co. estimates will grow to $1 trillion by 2020， nearly triple of its size in 2011.

The recent crackdown on high prices has pushed some Chinese firms out of business and forced global drugmakers - which have long banked on being able to charge steep premiums in emerging markets - to rethink their China strategy.

However， some analysts point out that the caps play only a limited role in the government’s price control regime， with around two-thirds of drugs still sold in China’s vast hospital network where prices are kept low through a bidding system.

"We continue to expect very limited impact， since most drugs are sold in hospitals and the pricing is determined by bidding process，" Deutsche Bank healthcare analyst Jack Hu said in a note.

Medicine analyst at Minzu Securities said that the blood products business will benefit from the reform the most this time， since the supply is not adequate to the demand in the market and a cap-free [ricing system will bring substential advantage to the suppliers.

Besides， the reform also takes a lot more effort to fully implement. “In an open-air market， how will the new pricing management system connect with the medical insurance system？ Can the market pricing and bidding purchasing coesxit？ How to avoid the risk of price inflation after loosening the restriction？ We will need some time before we can answer these questions.”

TCM to Play Bigger Role

A health official said earlier that traditional chinese medicines （TCM） will also benefit from the pricing reform and take a bigger role in China’s medicine market as TCM has its advantage in disease prevention and health care.

TCM and western medicine complement each other， which is an important trait of China’s health service system， said Wang Guoqiang， head of the State Administration of Traditional Chinese Medicine， at the first TCM Science Conference held in Beijing last November.

In 2013， China has more than 200 million senior citizens above 60， posting great challenges to the country’s health sector.

"As TCM has the advantage in disease prevention and health care and is relatively cheaper than western medicine， it will make it easier for common people to get medical treatment，" said Wang. Wang encouraged strategic studies on the development of TCM with both short and long-term goals and targets.

According to Zhang Boli， principal of the China Academy of Chinese Medical Sciences， the TCM industry has developed rapidly during the last 10 years. In 2013， the total value of TCM output exceeded 560 billion yuan （US$91.4 billion）， one third of the total value of China’s medicine industry.

Although TCM is greeting new opportunities， it still faces many restrictions. Wu Yiling， academician with the Chinese Academy of Engineering， has suggested NDRC to revise the draft with more supporting price policies for TCM， especially for those that have already been proved effective.