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China's drug price deregulation

19 December 2014 Sophie Cairns

Last month, media reports surfaced over a missive that China's central pricing authority had issued to provincial pricing authorities during an internal meeting, and which was leaked to the press. The statement detailed one of the biggest drug pricing changes in China in years - the widescale liberalisation of pharmaceutical prices. While the finer details of the directive will not be announced until next year, the policy change has sparked a wave of debates among pharma players, physicians and patients in the country.

According to China Business News, the central pricing authority, the National Development and Reform Commission (NDRC), issued a statement discussing the complete liberalisation of drug pricing in China, the partial liberalisation of the prices of medical services, and liberalising the prices of essential drugs. The document also included a recommendation by the National Price Bureau to dismantle the drug pricing department of the NDRC itself.

By the end of this year, the NDRC plans to scrap price controls on blood-based treatments, essential vaccines, contraceptives, psychotropic drugs, narcotics, and four other types of drug this year. In 2015, it plans to lift price controls of treatments listed on China's national reimbursement drug list (NRDL).

As for patented drugs, these are seen by the NDRC as belonging to the "innovative drugs" category, which have been a market presence for a relatively short period of time and which have a small market volume. Lifting price controls on innovative patented drugs would mean the prices will rise and in turn encourage innovation. And, in another move to boost pharmaceutical sales as well as bring doctors into contact with high-quality innovative treatments, China also plans to liberalise online sales of prescription drugs by the end of this year or early next year, according to media reports.

China has fought a decades-long battle against high drug prices, which has long been a gripe of Chinese patients at the mercy of hospitals who tend to profit from drug sales and rely on cash "presents" to expedite health services. The previous broad reform - the so-called "Anhui system" - effectively led to a race to the bottom as drugmakers competed on price and sometimes skimped on quality. Sometimes, drug prices fell below manufacturing cost, leading to several drug shortages. Prior to this, China had forced companies to adhere to government-regulated price caps on some drug retail prices, a system which was scrapped in May.

The drug pricing reforms go hand in hand with wider national healthcare reforms in China, many of which are aimed at increasing the role of private and foreign investment, for example hospital reform. In a similar way, liberalizing the drug pricing system across China would also award a greater role to the free market to set prices.

So far, several provinces have followed Beijing's directive. On 10 November, Guangdong Province announced that it would revise six aspects of the procurement and distribution processes of essential and non-essential drugs, as well as transaction management and supervision. China's northeastern Shandong province was also an early mover, canceling retail price caps on low-cost drugs in order to encourage greater supply and manufacturing in this area.

Within the pharma industry, reactions to the drug price liberalisation have been mixed. Some observers argue that China's insurance sector should be allowed to take over the drug tendering process, or introduce a third-party regulator to oversee drug bids and tenders. Other industry sources have been quoted as saying that even if the NDRC cancels its price-setting powers, the move is a mere formality as in practice, companies will not really enjoy the freedom to set their own prices due to red tape and the need for administrative approvals.

While the fine print of China's new policy remains to be seen, the operational challenges remain in terms of harmonising drug pricing, which is now expected to follow market forces, with national reimbursement criteria. At the moment, patients typically pay in cash for medicines and healthcare, and claim the price later. Execution of the new drug pricing policy across China is expected to be lengthy, and complicated by the need to work in conjunction with the Ministry of Human Resources and Social Security (MoHRSS), which is responsible for reimbursement.

In the meantime, the sheer scale of China's drug pricing reforms means that many healthcare experts also expect little to change in the near future, as hammering out a policy for such an enormous and varied market will invariably take time.

Sophie Cairnes is a life sciences analysts for IHS
Posted December 16, 2014

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