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Lifting Drug Price Controls in China

Consequences For Health Sector

Madhurima Nundy (madhurima.nundy@gmail.com) is at the Institute of Chinese Studies, Delhi and Rama V Baru (rama.v.baru@gmail.com) teaches at the Centre of Social Medicine and Community Health, Jawaharlal Nehru University, Delhi. 

The recent move to deregulate drug prices in China has the potential to fester into a public healthcare disaster. Disruptive practices by hospitals and pharmaceutical companies could completely negate the positive effects of healthcare reforms over four decades.

China recently took a major leap in its pharmaceutical policy by lifting drug price controls and allowing the market to play a bigger role. This is a major setback to the recent initiatives on addressing rising costs of healthcare and inequities in access to health services. While the National Development and Reform Commission (NDRC) said that it would closely monitor prices so that they remain stable and no “disruptive practices” were followed, it is to be seen how this would get implemented (Ryan and AFP 2015).

Before the 1980s, most pharmaceutical products were domestically produced with a small proportion being imported. The Communist Party of China (CPC) had control over distribution of drugs through a single agency in the provinces. China had not adopted patent legislation until 1984, so copying of foreign-developed brand name drugs were legal at that time. Prices were regulated and state-owned drug producers, distributors, hospitals and clinics had little incentive to create surpluses by selling more (Qian and Blomqvist 2014).

Early Health Sector Reforms

China’s health sector reforms have gone through many phases. It began with the opening of the economy in the late 1970s and decollectivisation of the rural economy from the early 1980s. Following these moves, the government withdrew subsidies from the public sector. Domestic drug producers became concerned with increasing their revenues. Their margins were not constrained by the price controls that remained for many basic drugs. As China begun to enforce patent legislation, many multinational pharmaceutical companies entered the Chinese market. They were able to produce and sell their drugs at higher prices and faced less competition from the domestic market.

The government initiated public hospital reforms with the expectation that hospitals would become autonomous and generate revenue by selling drugs and diagnostic services.  The aim was to create a market incentives model by reducing dependence on government subsidies. However autonomisation created many distortions in the hospital sector. There was a strong incentive for hospital managers to invest in high-end equipment and to procure high profit margin drugs given the price markup of up to 15%. The hospital could then charge patients exorbitant prices for the use of diagnostics and prescribing expensive drugs. There was a strong incentive for the doctors to over prescribe as they were rewarded from the profits the hospital made (Nundy and Baru 2013). According to Zhou et al, “In 2009, drug revenue reached 43% of the total revenue in public hospitals, which is about 20% higher than the average percentage among the Organization for Economic Cooperation and Development (OECD) countries (OECD 2013)” (2015).

The outcome of this phase in the 1990s led to visible rural–urban disparities in access and health outcomes. The costs were high especially for the rural residents and the migrants in urban settings. The out-of-pocket expenditure increased from 20% of the total expenditure in 1978 to 60% in 2001.

Solving Out-of-Pocket Expenditure

In 2002, China went through its next phase of reforms to address the inequalities due to the rising costs of medical care. Financial reforms were undertaken in the form of expanding social health insurance to provide coverage to majority of the population. This brought in three insurance schemes targeted at urban employees, urban residents and rural residents. According to China, these schemes have covered 95% of its population and out-of-pocket expenditure has reduced to 34%. (Zhang Yuhui 2014). Even though out-of-pocket expenditure has decreased as a percentage of total expenditure the actual costs are still very high and there have been no major changes.

Like India, rising costs of medicines became the single-most important contributor to rising costs of medical care. The insurance system had little influence on drug costs. While there were a list of essential medicines in China that were price regulated, providers prescribed mostly newer drugs that were priced higher than those in the list of essential medicines. Most drugs were not reimbursed under the health insurance. Attempts to regulate by the government were ineffective due to the strong incentives in prescribing and dispensing of drugs. While there were more people who got coverage under the different health insurance schemes, the major problem was that the hospitals were further autonomised and sought market-linked avenues to maximise their revenue at the cost of affordable healthcare. Under a reimbursement model of health insurance people were still paying out of pocket for drugs and services.

Essential Medicines System

The next phase of reforms was undertaken in 2009. One of the key reform issues had been the setting up of the national essential medicine system in that reform.  Due to the incentives related to prescription and dispensing of drugs, a zero markup policy was introduced where doctors would get no incentives from prescribing drugs in hospitals. The new policy had also given priority to prescribing medicines from the essential medicine list. Furthermore, these drugs would be made available to all clinics across China. But all this would take time to be implemented as hospitals were still allowed to charge a markup of some percentage on the drugs they sold. The pharmaceutical companies and the medical professionals expressed their discontentment through protests.

The CPC had been cautious about the pharmaceutical industry after the 2014 bribery charge on GlaxoSmithKline Beecham who were found guilty of bribing doctors to use their drugs in prescriptions.

While there has been a move towards rectification and restructuring of the pharmaceutical policy, its goals have been in contradiction to the recent health sector reform policy of zero markup and enforcement of the essential medicine list. The government initially wanted to develop the domestic pharmaceutical industry to encourage innovation and control costs but the public hospital reforms were allowed to earn their income from drug dispensing.

Therefore, lifting the drug price control and opening up its drug prices to market forces is a major setback to efforts of the Ministry of Health to control the rising cost of medical care. This is especially the case when rising drug prices can have a deleterious effect on access and out-of-pocket expenditures.

Drug price regulation is important for controlling cost, ensuring rational use of drugs and universal access irrespective of the ability to pay. Deregulation of drug prices in China would have an inflationary effect on the health sector and the breadth, depth and height of coverage through social insurance.  

References

[All URLs accessed on 27 May 2015]

Nundy, M and Rama Baru (2013): “Recent Trends in Health Sector Reforms and Commercialisation of Public Hospitals in China,” Institute of Chinese Studies Working paper 2013/12/2, http://www.icsin.org/uploads/2015/04/12/3f84446dce7db66dc13bfb648dab5aea.pdf.

Qian, Jiwei and Ake Blomqvist (2014): Health Policy Reform in China: A Comparative Perspective, Volume 36 of Series on Contemporary China, World Scientific Publishing Company.

Ryan, Fergus and AFP (2015): “China to Lift Drug Price Controls,” China Spectator, 6 May, http://www.businessspectator.com.au/news/2015/5/6/china/china-lift-drug-price-controls.

Zhang Yuhui (2014): “China Health Financing in the Context of Health System Reform,” Presentation at NHDRC.

Zhou et al (2015): “The Impact of China’s Zero-Markup Drug Policy on County Hospital Revenue and Government Subsidy Levels,” Journal of Asian Public Policy, Volume 8, Issue 1, http://www.tandfonline.com/doi/abs/10.1080/17516234.2015.1005561. An original manuscript of the same paper is available at http://scholar.harvard.edu/files/yanfangsu/files/zhou_su_drug_policy_original_manuscript.pdf.

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