China began to lift price ceilings on most pharmaceuticals on June 1, with the goal of creating a more market-driven pricing system that will help keep medical costs in check.
According to the National Development and Reform Commission (NDRC), China's top economic planner and the body that introduced the new regulations in early May, all drugs aside from anesthetics and grade-one psychiatric medications will no longer be subject to government-set prices.
According to public data, the now-scrapped policy for drug pricing was established in 2000. Within the policy, the government primarily determined drug prices. With the new regulations, a total of 166 price rules have been suspended.
"The reform will turn the government into a defender of orderly medicine market competition and help keep prices reasonable," said Chang Feng, Director of the Research Institute for Drug Prices with Nanjing-based China Pharmaceutical University.
Meanwhile, the NDRC also ordered local authorities to conduct a six-month price inspection campaign into all pharmaceutical companies, medical institutions and disease control centers to ensure that drug pricing is not abused.
In each province or city, drug makers or third-party sales agencies have to receive accreditation to become official suppliers for hospitals, where more than three quarters of drugs are sold in the country.
Relating to prices
With the new policy being put into practice, many worry that the prices of some common drugs will spiral out of control.
However, pharmaceutical analysts have insisted that they believe the possibility of sudden rise in drug prices is zero.
"This is the first step in the relaxation of drug price regulation. The change is unlikely to have a significant impact on China's pharmaceutical market," said Zhu Hengpeng, a researcher with the Institute of Economics of the Chinese Academy of Social Sciences.
He said that most of the drugs involved are covered by medical insurance schemes which are usually sold through hospitals, the prices of which are currently set by local government procurement departments.
In fact, the NDRC has assured the public in its statement that the comprehensive supervision system adopted by the government can prevent an abnormal surge in drug prices. It said the dynamic adjustment of payment standards for the drugs now covered by medical insurance will play a strong role in guiding the prices of drugs in the market and help keep the drug prices within a reasonable limit.
Zhou Yonggang is the director of the Pharmacy Department of the Nanjing-based Bayi Hospital of the People's Liberation Army. He said the abolition of price ceilings for drugs does not mean the government will give up all of its roles.
"The government is intending to strengthen its supervising role in the price-decision process for drugs, which will help prevent sharp rises in drug prices," said Zhou, who added that the tendering process will also help limit the drug prices.
According to him, a drug cannot enter local procurement catalogs without going through the tendering process. "With the tendering price being decided at last, drug prices remain unchanged for a long time," Zhou said.
Chang agreed. He said the tendering process, along with medical insurance and governmental supervision, can guarantee price stability for drugs after the government eases restrictions.
"The ease of the restrictions on drug prices is beneficial to both pharmaceutical enterprises and consumers. It will help improve sales conditions of lower-price drugs because it provides suitable market conditions for the drugs to slightly increase their prices," he said.
Under the former policy, the price ceiling on those drugs has put their production in a defective condition and caused the supply to fall short of public demand.
"Under current situation, the prices of drugs with enough market competition have little opportunity to rise dramatically, while those drugs without much competition are restricted by the price negotiation mechanism," Chang said.
In recent years, with the rapid development of China's medicine market, competition has become more vigorous between different pharmaceutical enterprises. Letting the market play a decisive role in the drug-pricing process has become a general trend.
Public data show that there are more than 8,000 kinds of drugs that are in circulation in China's consumer market, of which more than 2,000 kinds are commonly used. Meanwhile, there are more than 4,000 pharmaceutical producers and 10,000 pharmaceutical wholesalers, and some generic drugs are produced by more than 100 pharmaceutical enterprises.
Medicine sales in China hit 1.1 trillion yuan ($180 billion) in 2013, a 35.7-percent rise compared with 2011, according to data from Wind Info, a Shanghai-based leading integrated service provider of financial data, information and software.
During the same period, medicine sales from hospitals stood at 842.7 billion yuan ($135.9 billion), a 38.2-percent increase.
The country's spending on medicines dispensed from hospitals is expected to hit $185 billion by 2018, according to IMS Health, an international market research firm.
According to the new regulations on drug prices, a medical insurance payment system will be established to regulate the prices of more than 2,000 kinds of drugs that are included in medical insurance schemes. A transparent and multi-participation negotiation mechanism will be formed to regulate more than 200 kinds of patent medicines, and a mechanism combining tendering procurement and price negotiation will be established to regulate the prices of those drugs excluded by medical insurance, such as blood samples and contraception.
The new policy clarifies the role of the governmental supervision in four aspects including perfecting drug procurement mechanisms, strengthening the price-control function of medical insurance, strengthening the supervision on medical services and strengthening the supervision on price behavior.
Meanwhile, the new regulations require enhancing the supervision on the processes of production, circulation and consumption of drugs to guarantee their quality and safety.
"The price reform provides a good top-down design to a scientific pricing system for the drugs, but whether the reform can be successful relies on the implementation of the regulations," Chang said.
On May 17, the State Council, China's cabinet, issued a guideline pledging the government will push forward reform in more public hospitals amid a broader overhaul of its health care system.
China launched a pilot medical reform on public hospitals in 17 cities in 2010, and the guideline stipulates the reform should cover all of the country's 6,800 public hospitals by 2017.
The reform is aimed at changing public hospitals' reliance on medicine sales to supplement their income. Public hospitals should establish a reasonable drug-pricing system and retune recruitment and salary policies, according to the guideline.
Health insurance should cover most of the medical expenditure, while the patient-paid portion of bills should be lower than 30 percent by 2017.
A wider plan is to establish a modern hospital management system, eliminate drug price-added profits and standardize referral procedures.
As a part of the overall health care reform, can drug price reform help solve the problem of "supplementing hospitals' income by selling medicines" and ease the unreasonable medical burden on patients?
Shi Luwen, a professor with the School of Pharmaceutical Sciences of Peking University, believes that the ease of the restrictions on drug prices can solve the problem of "only choosing drugs with low prices" brought about by the cutthroat bidding on one hand, and push low-quality medicines out of the market by improving the procurement mechanism and reforming the medical insurance payment on the other hand.
One important target of the drug price reform is encouraging pharmaceutical enterprises to innovate and strengthen their research capability, while guaranteeing the interests of patients.
Cai Jiangnan, a professor with the Shanghai-based China Europe International Business School, said that one important aspect of the reform is to gradually make medical insurance play a bigger role in drug pricing.
"Currently, the excessively low prices of medical services force many hospitals to supplement their income through selling medicine. In the long term, following the drug price reform, the prices of medical services will be readjusted, which will help perfect the drug-pricing system and keep hospitals in check," Cai said.
Shi said that the systemic designs should be tailored to all parts of the industry including the drug production, circulation and usage. "To completely solve the problem, a comprehensive mechanism including public hospital reform and medical insurance reform is needed," he said.
Copyedited by Kieran Pringle
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