Price regulation vs' Competition in China

1
Price regulation vs. Competition in China

• Lu Ye. Ph.D Associate Professor
• School of Public Health
• Fudan University
• Nov.11, 2008

2
Policies of Drug Price Control in China

• Direct control policy
• -- Reduction of drug price (as well as
  increase price recently)
• -- Bulk purchasing through bidding
• Indirect control policy
• -- Separating accounts of drug revenue
• expense in hospital
• -- Capping hospital pharmaceutical revenue by
• annual growth rate
• -- Separation between prescribing dispensing

3
Drug Price Setting Under Planning Economy in China
Manufacturing Cost
Retail Price
Ex-factory Price
Wholesale Price
4
Policy Changes in Drug Price Setting

• Pharmaceutical price have long been regulated in
  China before 1992 (actually before the opening up
  policy)
• 1992-1996 let the market set drug prices
• Recentralized the drug pricing in 1997,and drug
  price set by both government and market
• Pricing based on average market cost of various
  drug categories (since 1998)
• Highest retail price set by NDRC (since 1999)
• Bulk procurement through price bidding (since
  2001)
• Market price approach for out-of-formulary
• Individual drug price setting for patent or some
  off-patent drugs with public hearing (on needed
  basis)

5
The National Development and Reform Commission
(NDRC) has issued nine policies on drug pricing
since 2000

• Set maximum retail prices for medicines based on
  a mark up above the average production cost
  declared by manufacturers, medicines include
• -the essential drug list (actually the BMI
  reimbursement list)
• -some special drugs such as innovative brand
  , family planning and immunization (EPI vaccines)
  
• -controlled medicines ( narcotics,
  Psychological medicines )
• All other drug prices are market based

6
Principles of the Policy

• 1?Offering good medical services with low cost
• 2?Government control combining with market
  mechanism

7
Differences Between NEDL NDL
Year 2000 Revise1/2year New drug 1/year
NEDL Central Government Level SFDA
2000.5 Revise1/2year New drug 1/year
NDL Central Government Level Ministry of Labour
and Social Security
List A 327 Western Drugs 135 TCM
List B 586 Western Drugs 440 TCM
15 adjustment
Prov.IDL B
8
Role of Government in Price Control

• Setting the highest retail price of all drugs in
  national basic medical insurances reimbursement
  list, including prescription drug and
  over-the-counter drug
• Bulk procurement through price bidding, then,
  adjust retail price generally three months later
• Originator drug is allowed to be priced
  separately
• Three tired pricing policy
• Patented innovators
• Branded generics
• General generics

9
Summary of price resetting of listed drugs from
1997 to 2007
10
Effect of cut down selected medicines price

• Regulated price decreases appear to have had
  limited effect in controlling health spending
  growth,
• -controlling retail drug prices was not an
  effective way to contain drug expenditures
  (quantity not contained)
• - many local company remove low priced
  products from the market
• (among 1,500 essential medicines defined by
  the SFDA, one third of them
• could not be seen in the pharmaceutical
  market in Beijing
• of those not available in Beijing, some
  30 of the products are no longer produced by any
  Chinese pharmaceutical manufacturers)
• - manufacturers register new drugs with new
  formulation/dosage form/packaging

11
The higher the medicine can get priced, the more
likely it would be produced by the manufacturers

• Contributing factors
• -low prices not profitable
• -competing newer drugs
• -perverse incentives in health systems prefer to
  buy higher margin (high price) drugs
• -problems in the distribution system (multi-tired
  distribution and mark-up)
• -no coordination between drug regulatory
  authority and pricing authority

12
Bulk purchasing through bidding(hospital
tendering)

• Tender purchasing is established as the main
  channel for most of the drugs used in hospitals
• Tenders are commonly issued on an annual basis
  and increasingly cover a large number of
  hospitals, often on a provincial basis
• The bidding process differs among the provinces

13
The problem of bidding system

• The potential volume of business covered by
  tenders places more pressure on companies to win
  the bid since the stakes are higher than ever.
• Even winning a bid does not automatically
  guarantee that a product will be sold since
  hospitals retain the right to decide whether they
  will buy a particular drug.
• Remove products whose prices had been cut from
  the bidding process.
• The bidding system has failed to provide any
  benefits to patients.

14
Solutions

• For effectively controlling rapid growth of drug
  expenditures,
• Developing appropriate incentives for service
  providers to improve rational use of medicines
• Introduction of drug list in health insurance
  scheme
• Eliminating incentives for doctors to prescribe
  drugs of high price but not more cost-effective
• Enforcement of price regulation