In China, on average, approximately 50% of healthcare expenditures by individuals are made on pharmaceuticals. The pharmaceutical industry is one of the principal industries in China with an average annual growth rate of 16.72% per year. China has steadily gained international market share afforded by its low cost manufacturing and is already the world’s leading producer of active ingredients used in brand name and generic drugs. Cost savings with respect to medical and clinical trials, human capital, and use of existing research facilities have long been attracting foreign investments in Chinese R&D centres, distribution channels and manufactories. However, such savings have not been readily passed on to Chinese consumers. In China, insufficient funding has caused hospitals to aggressively seek revenue through pharmaceutical sales which has led to the present state of over prescribing and over priced pharmaceuticals along with the undermining of public health.
On October 14th 2008, the State Food and Drug Administration (“SFDA”) released the anticipated proposal on the health care reform plan for public review[1] (“Proposal”). One of the most ambitious propositions in the Proposal centres on drug pricing reform.
[1] Draft Proposal available at: shs.ndrc.gov.cn/yg (public review forum will close on November 14th 2008).
I. How are Drugs Priced in China?
In China pharmaceutical prices are either determined by market forces, or otherwise by statutory guidelines which are included in the following laws:
§ Drug Administration Law and its Implementation Rules (2004) (Chapter VII);
If drug prices are fixed or guided by the government, the price should reflect, among others, the principals in the Pricing Law of the PRC, and the average social cost, affordability, supply and demand, to ensure that prices are commensurate with quality, so as to protect the legitimate interests of consumers.
§ National Development and Reform Commission (“NDRC”), “Measures on Government Pricing of Pharmaceuticals” (2000), and SDRC “Implementing Rules on the Law of Pharmaceutical Administration (August, 2002);
For Class A drugs, the SDRC will set the maximum retail prices; while wholesale prices may be determined by the market. For Class B drugs, the SDRC will set maximum price guidelines for provincial level governments. In-house drug prices are based on manufacturing costs plus 5% in profits. See pricing mechanisms for non-listed drugs below.
§ Pricing Law of the PRC (May 1, 1998 ); and
§ PRC Law on the Administration of Drugs (December 1, 2001).
Consumers Suffer Due to Mark-ups Along the Distribution Chain.
The Chinese drug distribution sector is at best highly fragmented. The three tiered distribution chain starts with the manufacturer, then: (i) national distributors (e.g. located in Beijing, Shanghai, Guangzhou, Tianjin, Shenyang), (ii) provincial distributors, and (iii) county and city wholesalers (and occasionally at the bottom of the chain hard to reach retail stores). The end users are either hospitals or franchised retail drug stores, with hospitals being the main market accounting for 80% of drug sales.
Drug prices which according to law may be determined by the market are based on manufacturing and operating costs which are self-reported by manufacturers. Drug manufacturers have incentive to mark-up their operating costs to increase their margins - also directly affecting the margins of the entire distribution chain. The government capped mark-up is set at 15%. However in practice, retail prices illegally extend well over the statutory margin. The NDRC has reported that hospitals collect the largest percentage of the final price for a bottle of pharmaceuticals (as sold to patients) at 45-50% (with 30% representing their mark-up), further up the chain the distributors collect an additional 20-25% and manufacturers on average collect 30% of the final sale price. About 20% is lost to illegal mechanisms that encourage doctors and hospitals to prescribe drugs. What remains are unaffordable prices and pushed sales on unwitting consumers.
What is the Real Root of the Pricing Problems?
Authorities have attempted to cure the issue of overpriced drugs by exercise of 24 nationwide price cuts from 2001 to 2007. The centralized tendering drug procurement policy of 1999 was another attempt to overcome corruption and excessive drug prices. Although these measures reduce the wholesale prices of drugs they still do not address the core of the retail pricing problems which are connected to several factors including lack of fiscal subsidies for hospitals which rely on pharmaceutical sales as their major source of revenue, and underpaid doctors who by way of medical expertise retain a monopoly over the choice of drugs available to patients. Adding to the over-pricing problem are mark-ups from companies with unachievable economies of scale due to outdated technology and the chaos in the distribution system.
II. The Future of Drug Pricing in China
The Proposal pledges to set up a healthcare system by 2020 that provides all urban and rural residents “safe, effective, convenient, and affordable” healthcare.
Management of Medical Institutions
The drafters recognize that high retail drug prices are connected to the funding issues faced by doctors and hospitals and recommends improvement of wages and to separate the management function of hospitals from treatment and expenditure of drugs. In a further attempt to alleviate hospitals’ reliance on drug sales for revenues, the Proposal mentions amending service fees, which translates to a price hike for hospital visits and in-patient services. The authorities wish to reintroduce similar subsidies for medical institutions as were used pre 1980 when the government paid for everyone’s healthcare - how exactly this will be implemented is not specified. For the public, the Proposal speaks of an establishment of a personnel system to improve the quality of medical services, and a system that strictly defines the appropriate use of technology, workforce, and pharmaceuticals. The Proposal further outlines standardized drug and medical checks, but again still vague on the points. The issues that remain here are the regression of medical diagnostics and the simple fact of unenforceability. Hospital visits will generate more revenue and doctors will be paid more, but will this be enough to curb the retail prices of pharmaceuticals?
Essential Medicines
Essential drugs are those that “satisfy the priority healthcare needs of the population; they are intended to be available within the context of functioning health systems at all times in adequate amounts, in appropriate dosage forms, with assured quality….and at an affordable price.”[1]
Under the Proposal China would like to create a national system of essential drugs and aspires to, by 2010, provide access to affordable and safe drugs to 80% of the population. This system will establish a catalogue of necessary drugs to be produced and distributed under government supervision with the aim to make the most basic and indispensable medicines such as penicillin safe and available in the market. For essential drugs, the government wishes to take macro-control of the existing distribution system and use a centralized purchasing system.
Furthermore in an effort to increase price transparency; the Proposal makes a bold proposition to subject essential drugs to new labelling requirements of printing drug prices conspicuously on the outer packaging. This labelling requirement aims to curtail industry wide margins and will most certainly transform the distribution systems and may possibly cut out the smaller middlemen.
Conclusion
The Proposal closed for comment on November 14th. Several white papers on this topic will be released by experts early next year. At present the wording of the Proposal is too general to leave a particularly impressive forecast although it appears the focus is on essential drugs. Authorities have responded that the Proposal is merely a guideline and will be followed by a formal legislation and at least eight implementing rules. Overall the public is most concerned whether the limited funding will actually be used where it is needed the most.
[1] as defined by the World Health Organization.
** this article can be contributed to http://www.knowledgeatwharton.com.cn/ "Will Drug Price Reform Improve China's Health Care System, or Only Mask Symptoms"
On October 14th 2008, the State Food and Drug Administration (“SFDA”) released the anticipated proposal on the health care reform plan for public review[1] (“Proposal”). One of the most ambitious propositions in the Proposal centres on drug pricing reform.
[1] Draft Proposal available at: shs.ndrc.gov.cn/yg (public review forum will close on November 14th 2008).
I. How are Drugs Priced in China?
In China pharmaceutical prices are either determined by market forces, or otherwise by statutory guidelines which are included in the following laws:
§ Drug Administration Law and its Implementation Rules (2004) (Chapter VII);
If drug prices are fixed or guided by the government, the price should reflect, among others, the principals in the Pricing Law of the PRC, and the average social cost, affordability, supply and demand, to ensure that prices are commensurate with quality, so as to protect the legitimate interests of consumers.
§ National Development and Reform Commission (“NDRC”), “Measures on Government Pricing of Pharmaceuticals” (2000), and SDRC “Implementing Rules on the Law of Pharmaceutical Administration (August, 2002);
For Class A drugs, the SDRC will set the maximum retail prices; while wholesale prices may be determined by the market. For Class B drugs, the SDRC will set maximum price guidelines for provincial level governments. In-house drug prices are based on manufacturing costs plus 5% in profits. See pricing mechanisms for non-listed drugs below.
§ Pricing Law of the PRC (May 1, 1998 ); and
§ PRC Law on the Administration of Drugs (December 1, 2001).
Consumers Suffer Due to Mark-ups Along the Distribution Chain.
The Chinese drug distribution sector is at best highly fragmented. The three tiered distribution chain starts with the manufacturer, then: (i) national distributors (e.g. located in Beijing, Shanghai, Guangzhou, Tianjin, Shenyang), (ii) provincial distributors, and (iii) county and city wholesalers (and occasionally at the bottom of the chain hard to reach retail stores). The end users are either hospitals or franchised retail drug stores, with hospitals being the main market accounting for 80% of drug sales.
Drug prices which according to law may be determined by the market are based on manufacturing and operating costs which are self-reported by manufacturers. Drug manufacturers have incentive to mark-up their operating costs to increase their margins - also directly affecting the margins of the entire distribution chain. The government capped mark-up is set at 15%. However in practice, retail prices illegally extend well over the statutory margin. The NDRC has reported that hospitals collect the largest percentage of the final price for a bottle of pharmaceuticals (as sold to patients) at 45-50% (with 30% representing their mark-up), further up the chain the distributors collect an additional 20-25% and manufacturers on average collect 30% of the final sale price. About 20% is lost to illegal mechanisms that encourage doctors and hospitals to prescribe drugs. What remains are unaffordable prices and pushed sales on unwitting consumers.
What is the Real Root of the Pricing Problems?
Authorities have attempted to cure the issue of overpriced drugs by exercise of 24 nationwide price cuts from 2001 to 2007. The centralized tendering drug procurement policy of 1999 was another attempt to overcome corruption and excessive drug prices. Although these measures reduce the wholesale prices of drugs they still do not address the core of the retail pricing problems which are connected to several factors including lack of fiscal subsidies for hospitals which rely on pharmaceutical sales as their major source of revenue, and underpaid doctors who by way of medical expertise retain a monopoly over the choice of drugs available to patients. Adding to the over-pricing problem are mark-ups from companies with unachievable economies of scale due to outdated technology and the chaos in the distribution system.
II. The Future of Drug Pricing in China
The Proposal pledges to set up a healthcare system by 2020 that provides all urban and rural residents “safe, effective, convenient, and affordable” healthcare.
Management of Medical Institutions
The drafters recognize that high retail drug prices are connected to the funding issues faced by doctors and hospitals and recommends improvement of wages and to separate the management function of hospitals from treatment and expenditure of drugs. In a further attempt to alleviate hospitals’ reliance on drug sales for revenues, the Proposal mentions amending service fees, which translates to a price hike for hospital visits and in-patient services. The authorities wish to reintroduce similar subsidies for medical institutions as were used pre 1980 when the government paid for everyone’s healthcare - how exactly this will be implemented is not specified. For the public, the Proposal speaks of an establishment of a personnel system to improve the quality of medical services, and a system that strictly defines the appropriate use of technology, workforce, and pharmaceuticals. The Proposal further outlines standardized drug and medical checks, but again still vague on the points. The issues that remain here are the regression of medical diagnostics and the simple fact of unenforceability. Hospital visits will generate more revenue and doctors will be paid more, but will this be enough to curb the retail prices of pharmaceuticals?
Essential Medicines
Essential drugs are those that “satisfy the priority healthcare needs of the population; they are intended to be available within the context of functioning health systems at all times in adequate amounts, in appropriate dosage forms, with assured quality….and at an affordable price.”[1]
Under the Proposal China would like to create a national system of essential drugs and aspires to, by 2010, provide access to affordable and safe drugs to 80% of the population. This system will establish a catalogue of necessary drugs to be produced and distributed under government supervision with the aim to make the most basic and indispensable medicines such as penicillin safe and available in the market. For essential drugs, the government wishes to take macro-control of the existing distribution system and use a centralized purchasing system.
Furthermore in an effort to increase price transparency; the Proposal makes a bold proposition to subject essential drugs to new labelling requirements of printing drug prices conspicuously on the outer packaging. This labelling requirement aims to curtail industry wide margins and will most certainly transform the distribution systems and may possibly cut out the smaller middlemen.
Conclusion
The Proposal closed for comment on November 14th. Several white papers on this topic will be released by experts early next year. At present the wording of the Proposal is too general to leave a particularly impressive forecast although it appears the focus is on essential drugs. Authorities have responded that the Proposal is merely a guideline and will be followed by a formal legislation and at least eight implementing rules. Overall the public is most concerned whether the limited funding will actually be used where it is needed the most.
[1] as defined by the World Health Organization.
** this article can be contributed to http://www.knowledgeatwharton.com.cn/ "Will Drug Price Reform Improve China's Health Care System, or Only Mask Symptoms"
