China Health Policy Notes is a series of occasional papers on lessons and experiences from China’s ongoing healthcare reform. The series is published by the World Bank in collaboration with the Government of China. The papers track and analyze the reform process, and evaluate early results. Each paper focuses on a key challenge that is central to success. The papers are written from a pragmatic perspective—namely, how the reforms can be refined and improved as the process unfolds over the coming 5 to 10 years. Experience is reported in the context of international best practice.
Research was carried out under the World Bank’s Analytic and Advisory Assistance program, a particularly fruitful collaboration between the Bank and the Government that has been underway since 2003. Initial technical papers were prepared by teams of national and international experts. Preliminary versions were critically discussed with Chinese policymakers and technical counterparts, especially within the ministries that initially requested this assistance in mid-2008. All papers were then subject to rigorous peer review.
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Cover photo: Mark De Fraeye, Courtesy of the Wellcome Trust, London UK. CHINA HEALTH POLICY NOTES, N0. 1 Financing, Pricing, and Utilization of Pharmaceuticals in China: The Road to Reform June 2010 THE WORLD BANK Health, Population, and Nutrition East Asia and Pacific Region Table of Contents Acronyms, abbreviations, currency ………………………………………………………………………………….. iii Executive Summary ……………………………………………………………………………………………………………. v 1.
Introduction …………………………………………………………………………………………………………………… 1 2. The Chinese Pharmaceutical Market …………………………………………………………………………. Background and overview……………………………………………………………………………………………….. Size and composition of China’s pharmaceutical sector ………………………………………………….. Domestic expenditures on drugs ……………………………………………………………………………………..
3 3 4 8 3. Essential Medicines ………………………………………………………………………………………………………. 11 The origins of today’s policies ……………………………………………………………………………………….. 11 Availability and utilization of essential medicines ………………………………………………………….. 13 Essential medicines in the health reform process, 2008-10 …………………………………………… 15 4. Managing the Costs of Pharmaceuticals …………………………………………………………………….
19 Government price setting ……………………………………………………………………………………………… 19 Impact of government price setting, 1996-200 ………………………………………………………………… 22 Room for price reductions ………………………………………………………………………………………………. 23 Alternative approaches to cost reduction, 2006–10 ……………………………………………………… 24 The related problem of irrational drug use …………………………………………………………………….
33 5. Refining the Path to Healthcare and Pharmaceutical Reform ………………………………… 37 Accomplishments during the 2000s ……………………………………………………………………………….. 37 Looking ahead: Pharmaceutical reform in the coming decade ………………………………………. 39 References ………………………………………………………………………………………………………………………….. 34 Tables, Figures, and Boxes Table 1. Hospital Revenues and Expenditures, 2007 ……………………………………………………………
4 Table 2. Source of Pharmaceutical Products by Year, Shanghai…………………………………………… 6 Table 3. Source of Pharmaceutical Products by Value (RMB), Units, Growth Rate, and Market Share (%), 2006 ………………………………………………………………………………………………. 7 Table 4. Growth in Health Expenditure, Pharmaceutical Expenditure, and Relation to GDP, 1990–2006 ……………………………………………………………………………………………………….. 8 Table 5. Growth in Health and Pharmaceutical Expenditure Per Capita, 1990-2006……………
9 Table 6. Where Pharmaceuticals are Purchased,1990-2006 ………………………………………………. 10 Table 7. China’s Essential Medicine List, 1992–2004………………………………………………………… 12 Table 8. Policy Measures Related to Pharmaceutical Pricing, 1996–2007 ………………………… 19 Table 9 Drug Price Reductions, 1997-2007 ……………………………………………………………………… 21 Table 10. Cost-Plus Prices and VAT Rate Differences—China and Comparators …………… 23 Table 11.
Drugs as a Share of Costs per CHC Visit at Two Demonstration Sites in Shanghai, 2004-2006 …………………………………………………………………………………………. 29 Table 12. Indicators of Irrational Use of Medicines, MOH Baseline Study, 2008 …………….. 35 Figure 1. The Annual Growth Rate of Drug Sales—China and Comparators, 2007……………. 5 Figure 2. The Value of Sales Shared by Different Pharmaceutical Manufacturers in China’s 19 Largest Cities ……………………………………………………………………………………………………..
7 Box 1 . Key Pharmaceutical and Medical Service Reforms, 2006……………………………………….. 25 Box 2. A New Policy on Trusteeship of Hospital Pharmacies? ………………………………………. 32 ii Acronyms, abbreviations, currency AAA BD BMI CAA CCCP CHCs CHEI DDD DfID DRC DRGs EDL EMP FDA FFS GMP GWIS HAI HTA INN JV LHIS LMI LPGs MA MAT MeTA MHIs MNCs MOA MOF MOH MOLSS MOHRSS World Bank Analytic and Advisory Services Brand drug Basic Medical Insurance Civil Affairs Administration (operates the Medical Assistance program) Central Committee of the Communist Party of China
Community health centers China Health Economics Institute Defined daily doses Department for International Development State Council Development Research Center Diagnosis-related groups (medical insurance reimbursement system) Essential Drug (Medicine) List Essential Medicines policy United States (US) Food and Drug Administration Fees for services Internally accepted standards of good manufacturing practices Government Welfare Insurance System (medical insurance set up in 1992) WHO Health Action Initiative, on essential medicines Health Technology Assessment, International non-proprietary name Joint venture.
Labor Health Insurance System (Scheme) (workers and dependents in formal sector, merged with UBEMI in 1990s) Labor Medical Insurance (state- and collective enterprises, 1950–98) Lowest-priced generic drug Medical Assistance (a social welfare program for poor families) Moving Annual Time Medicines Transparency Alliance (MeTA) Mandatory health insurance systems Multinational Corporations Ministry of Agriculture Ministry of Finance Ministry of Health Ministry of Labor and Social Security Ministry of Human Resources and Social Security (previously MOLSS) iii MPR MRIs MSAs NCMS NDP NDRC NEDL NEDS NHS NICE NRCMI.
NRCMS NRDC OECD PBMs PHI POU NRCMS RHC SDPC SDRC SETC SFDA SHI SPC THE TPE UEBMI URBMI USFDA VAT WHO Median Price Ratio Magnetic resonance imagery (a high-tech radiological imaging procedure) Medical savings accounts New Cooperative Medical System National Drug Policy National Development Reform Commission National essential drug list (price caps on essential medicines, NDRC, 2009) National Essential Drug System [established by MOH, 2009; sometimes written in English as National Essential Medicines System (NEMS), or National System of Essential Medicines (NSEM)] National Health Service (United Kingdom)
National Institute for Clinical Excellence (United Kingdom) New Rural Cooperative Medical Insurance New Rural Cooperative Medical System National Reform and Development Commission Organization for Economic Cooperation and Development Pharmacy benefits management companies Private health insurance Point of use Rural Cooperative Medical System Rural health center State Development and Planning Commission State Development and Reform Commission State Economic Trade Committee State Food and Drug Administration Social health insurance State Planning Commission (following reorganization of SDRC) Total health expenditure.
Total pharmaceutical expenditure Urban Employee Basic Medical Insurance Urban Resident Basic Medical Insurance Food and Drug Administration, US regulatory body Value-added tax World Health Organization _________________________________________________________________ Exchange rate 6. 82 RMB = 1 USD (May 1, 2010) iv Executive Summary T his paper examines the financing, pricing, and utilization of pharmaceuticals in China—the pharmaceutical system as it has evolved, and some changes that would improve it in the context of the national health reform process.
The present paper builds upon earlier critical reviews and other papers published in the series China Health Policy Notes. The present version has been updated to reflect key steps, especially between 2005 and 2010, in the evolution of a formal Essential Medicines System as a product of the major national health reform formally launched in April 2009. A brief introduction is followed by substantive sections on the Chinese pharmaceutical market today, the national system of essential medicines, and the ongoing struggle to contain constantly rising pharmaceutical costs.
Several ideas for strengthening the reform process are discussed in the final section. The Chinese pharmaceutical market Innovative drugs and Western medical technologies came into increasing demand in China from the mid-1980s onward. Hospitals began to use them—and then to overuse them—both to treat illness and to reduce operating deficits resulting from underpriced medical services and the loss of government subsidies in the 1980s. The higher prices and markups on imported and branded drugs helped hospitals to balance revenue shortfalls, a practice that persisted and eventually led to financial dependency.
In 2007, hospitals showed a negative balance on medical services of RMB 108 billion and a positive balance from drug sales of RMB 17 billion. The surplus from drug sales is equivalent to 39 percent of their net subsidy from the government. Without pharmaceutical revenues, in other words, hospitals would operate at an overall loss. China has emerged as an important player in the global pharmaceutical market. By 2004, China had become the ninth largest pharmaceutical market in world. Pharmaceutical sales grew at an annual rate of 28 percent during the mid-2000s, much faster than in the rest of the world (9 percent).
The value of pharmaceutical imports was 350 times higher in 2007 than in 1978, and the value of exports was 86 times higher during the same period. China’s domestic pharmaceutical industry has grown substantially. In 2007, the gross value of China’s pharmaceutical industry reached RMB 600 billion. The industry’s share of GDP rose from 2. 17 percent in 1978 to 2. 71 percent in 2007. IMS reports (2006) indicate that domestic manufactures dominate the market, accounting for 70. 3 percent in sales value.
China has become a major overseas market for many multinational pharmaceutical corporations. Sales growth in China of these companies was much higher than the global rate. For example, the growth rate of AstraZeneca was 25 percent for the China market and China Health Policy Notes, No. 1 7 percent for the global market. The IMS reports (2006) showed that 29. 7 percent of the sale values in China were joint venture and import products. The share could be as high as 40-46 percent in large cities such as Beijing and Shanghai. Pharmaceutical expenditures reached RMB 448.
6 billion in 2006. It accounted for more than 40 percent of total health expenditure, which is about 10 percentage point lower than it was in the 1990s, but still substantially higher than many countries in the world. The high pharmaceutical expenditure is associated with both high retail prices of drugs and high utilization, some of which is irrational use of drugs. Furthermore, both price and utilization factors are deeply associated with policies including overall health sector regulation, health care financing policies, and pricing policies. Essential medicines.
The notion of essential medicine and an essential drug list was first advanced in the mid1980s by the World Health Organization (WHO). The idea was to identify the highestimpact generic drugs and make them affordable and universally accessible on a global scale. In 1992, China started to formulate an essential drug list combined with the launch of urban medical insurance reforms. The essential drug list served as the basis for the urban medical insurance drug reimbursement list. Although the list remained in place and has been revised every two years since 1996, essential medicines have had a limited impact in China for several reasons.
First, prices imposed by government authorities were often based more on social ideals than on the economic realities of a competitive pharmaceutical market. As a result, unrealistically low prices left manufacturers with little incentive to produce essential medicines. Second, most essential medicines are generic medicines intended for use at the lowest possible cost; so even when local pharmaceutical manufacturers have produced them, hospital providers have not necessarily been eager to prescribe them, because they rely on drug sales (primarily brand drugs) to supplement their physicians’ incomes.
Third, until fairly recently clinical guidelines were not available on the utilization and medical management of essential drugs. Physicians are ? educated? about new drugs primarily by manufacturers’ representatives. The widespread perception that generic drugs are not safe, effective, or reliable compared to brand drugs has been reinforced by several extremely well-publicized failures in quality control. Although there is only limited evidence available, the availability of drugs on the list appeared to be very low and the prices appeared to be high.
One WHO/HAI evaluative survey in Shanghai (mid-2000s) found procurement prices of essential medicines to be 7. 6 to 9. 9 times higher than the international reference price for brand drugs, and about 1. 4 times higher than the international reference price for the lowest-priced generics. The availability of essential medicines was estimated at between 13. 3 percent and 33. 3 percent in public hospitals and between 10 percent and 15 percent in pharmacies, with the generic drugs being more accessible than the innovator brand drug.
Similar results for prices were found in vi The Financing, Pricing, and Utilization of Pharmaceuticals in China: The Road to Reform Shandong and availability was even lower. In addition, the Shanghai study indicated that the cost of some essential medicines may potentially pose financial burden for patients, especially those with chronic conditions. The government has started another wave of reform to reinvigorate the National Essential Medicine System and this has high priority on the political agenda.
The new wave of reform focuses on every aspect of the system, including production, pricing, distribution, procurement, payment, and use. There are still debates about the roles of government and market, whether it is appropriate to require exclusive use of essential medicines in primary facilities, and how to evaluate the use of essential medicines in other facilities. Managing the costs of pharmaceuticals In both absolute and relative terms, the cost of pharmaceuticals is extremely high in China, with pharmaceutical expenditure accounting for 41 percent of overall healthcare cost.
For most of OECD countries, by contrast, this share is in the range of 15 to 25 percent. Price controls Price control strategies have evolved through several stages. During the planned economy prior to 1978, the government set all prices. In the early stages of China’s economic transition in the early 1980s, drug prices were left largely to the market. However, when drug prices rose at nearly 10 percent a year, both the central government and local administrations stepped back in to control prices.
A series of measures between 1996 and 2007 included a pharmaceutical law, a decree on administering drug pricing, and 23 separate price reductions. The number of items subject to control rose from about 1,500 to 2,400. The effect of those past government-initiated price reductions appeared to be limited. Results were not satisfactory for a number of reasons. First, only a small percentage of drugs were actually affected (one survey in 2007 showed that 80 percent of drugs used in hospitals were not subject to price controls).
Second, hospitals tended to limit the availability of pricedcontrolled drugs—for example, by not stocking or reordering them. Third, physicians were able to use the power of prescription to substitute drugs that were not price-controlled for drugs that were. Fourth, hospitals continued to rely on revenues from pharmaceutical sales to balance their perennial operating deficits. Their narrow financial self-interest was at odds with the broader goals of social policy, and they dragged their feet in implementing any price control measures that might place their financial viability in jeopardy.
New approaches to cost reduction, 2006-10 Comparing China with several other countries (using the cost-plus pricing methodology) suggests substantial ? room? for significant additional pharmaceutical price reductions, particularly in the distribution segment of the pharmaceutical supply chain. For example, the cost-plus markup in China is in the 60 to 70 percent range (including VAT), compared with ranges of about 10 to 20 percent for the United States, and about 20 to 25 percent for Japan. vii China Health Policy Notes, No. 1.
While pharmaceutical cost containment has mostly focused on government-directed price control, other approaches are increasingly being explored. Many new policy levers are being considered and tested—for example, reforming the payment system from fee-forservice to global budget control, implementing a capitation system in ambulatory services, and using disease-related groups (DRG) payment in inpatient departments. In 2006, the State Development and Reform Commission (SDRC) announced measures to consolidate markets for pharmaceuticals and medical services.
These included increasingly sophisticated (and transparent) price-setting methodologies. The practice of creating ? new drugs? to avoid price regulation was banned, and specific incentives aimed to expand the production and use of lower-priced generic drugs. At the same time, more latitude was allowed for market-based competition to foster price reduction. Medical devices and hightech services were subject to similar logic and more advanced pricing methodologies.
Clinical guidelines were established to help physicians make better use of generics; and measures were taken to delink higher drug sales from higher income for physicians and hospitals. Irrational drug use The term irrational drug use refers to overuse, medically inappropriate use, or financially inefficient use of drugs. Studies reveal that irrational drug use is extremely high in China— for example, excessive demand for intravenous injections based on the belief that they ?
Work better?to deliver drugs; prescription of two or three drugs when one or two will work as well; widespread overuse of antibiotics and steroids; preferences for heavily advertised drugs and familiar brand names; and the near-universal conviction that higher-price brand drugs cure more effectively than the same active ingredient sold under a generic name. In 2009, the Ministry of Health developed a series of 112 ? clinical pathways? (guidelines on appropriate use of particular drugs and procedures). These covered 112 diseases in 22 medical specialties.
This effort was done in the context of continuing medical education, and begins to address serious deficiencies in up-to-date drug knowledge among practicing doctors. However, the misuse of resources is not simply a matter of medical education and dissemination of treatment guidelines. A key argument in this paper is that a pervasive pattern of irrational drug use is driven less by misinformation than by an underlying structure of financial incentives that reward physicians and hospitals for over-prescription. Bulk (pooled) purchasing.
Bulk drug purchasing refers to pooling of demand for better prices through shared wholesale procurement. Lower prices are achieved through increased leverage in price negotiation, competitive bidding, and reduction in intermediary distributor costs. There is considerable controversy over the relative advantages and impact of bulk purchasing policies in regard to controlling pharmaceutical expenditure. As the role of hospitals shift from that of sellers to bulk purchasers, hospitals lose critical revenue that must be replaced by one means or another.
In addition to direct revenue losses, bulk viii The Financing, Pricing, and Utilization of Pharmaceuticals in China: The Road to Reform purchasing requires alternative systems for procurement and logistics. These too can be costly—for example, the IT costs of decentralized web-based distribution can be substantial. The government has reiterated its commitment to the notion of bulk purchasing on many occasions over the past decade. A policy notice on ? Normalization of Drug Bulk Purchasing in Hospitals?
was issued by the Ministry of Health (MOH) and the National Planning Council (NPC) in 2001, and ? Some Regulations on Further Normalization of Drug Bulk Purchasing in Hospitals? was issued by Ministry of Health and the National Development Reform Commission (NDRC) in 2004. The Government subsequently announced that it will reform and expand the present system of bulk purchasing. The plan is to improve the existing system and to upgrade it from city level to provincial level, as well as pooling purchasing through designated websites.
All drugs in the community health centers plan are to be purchased through web-based public bidding eventually, so the distributers’ role will be reduced primarily to the physical distribution of drugs. Zero markup Zero-markup refers to a policy of no additional margin when a health institution sells drugs, that is, the retail price and the wholesale price are the same. In principle, the transaction costs are then to be subsidized by government.
This policy was initially implemented at urban community health centers. Some centers (e. g., several centers in Shanghai and Nanjing) experienced success in reducing drug prices and average cost per visit after they implemented this policy. Zero-markup policy was piloted in urban hospitals as well, with results to be seen. If zero-markup were scaled up to more CHCs, and to secondary and tertiary hospitals, overall pharmaceutical revenues would decline.
One way or another, the subsequent losses would have to be compensated in reality as well as in principle—either by direct subsidy or by raising fees for labor-intensive medical services such as patient consultations, diagnostics, and surgery.
The 2009 health reform plan specifies budgetary support for the notion of zero-markup. The working agenda describing five key areas of the medical and pharmaceutical reform includes the following statement: ? Improve the compensation mechanism for urban and rural grassroots health institutions [facilitating] government financial subsidies in accordance with zero-markup policy.? (The State Council, July 2009. ) The separation of drug prescribing from drug dispensing Presently, most patients in China purchase their drugs directly from providers or hospitals.
Direct provider benefit from drug sales represents a legally sanctioned conflict of interest that is at odds with the goals of financial efficiency and sound clinical practices. Several approaches have been proposed to delink prescription from dispensing. By whatever method, the underlying problem is complex and deeply engrained in China’s healthcare system. A fundamental structural change cannot be expected to come about easily. ix China Health Policy Notes, No. 1 In 2005, the Ministry of Health began piloting a new way to separate primary providers’ revenues from the fees that they generate for services and drugs.
Under the pilot system, all revenues from user charges are to be turned over to the government; and the government in turn provides a fixed budget to the facility to cover volume-adjusted operating expenses. This has been piloted at the CHC level in many cities, including Shanghai, Tianjin, Hangzhou, and Chengdu. Although this system might reduce the prescription of unnecessary drugs and tests, it remains to be seen whether the new incentives will be sufficient to motivate a shift from curative to primary care, or to prevention and treatment of chronic diseases.
In Shanghai, a global budget and pay-for-performance system was introduced in tandem along with an initiative to uncouple operating revenues to the health facilities from the volume of charges for services and drug sales to patients (see Hu et al. , The Lancet, October 20, 2008 for further detail). Refining the path to pharmaceutical reform A significant series of healthcare and pharmaceutical reforms evolved during the decade of the 2000s, especially toward the end of the decade.
Section 5 of this paper recommends a series of measures to deepen and strengthen the reforms in the following areas: National System of Essential Medicines.
Revise the essential drug list dynamically as needed; reduce the list based on medical and economic criteria; align the national Essential Medicine System with basic benefits packages for the health insurance systems; strive toward 100 percent affordability for the most basic of essential drugs; involve and coordinate with a broader range of stakeholders to create additional political and popular momentum; extend education on essential medicines within and beyond the medical community; extend the government’s role in the logistics of distribution of essential medicines. Generic drugs.
Subsidize the manufacture of generic drugs; adopt the use of international non-proprietary (INN) drug nomenclature; designate a list of approved manufacturers to supply generics for bulk purchasing; take additional efforts to ensure strict adherence to GMP standards in manufacturing; and simplify drug packaging. Improving drug pricing. Adopt pharmacoeconomic evaluation methods to set prices on innovative and new medicines; separate pricing according to categories of drugs; abandon one-off individual drug price-setting; reduce the scope of price-setting by the government.
Zero-markup policy. Support zero-markup with direct budgetary support from the government; separate drug revenues and expenditures accounts within health facilities; separate channels and accountability in the management of funds. Pooled purchasing. Make the public procurement (bidding) system fairer, more equitable, and more transparent. Learning from international experience. Test the applicability of a range of experiences and lessons from international experience—in particular, on designing a national essential x.
The Financing, Pricing, and Utilization of Pharmaceuticals in China: The Road to Reform medicine policy, drug procurement and distribution, pricing of drugs, and reimbursement models within various insurance programs. Deeper structural reforms. Recognize that pharmaceutical reform can only be effective in a broader context of successful health reform. Conceptualize pharmaceutical reform as a component of universal coverage of the basic medical security system and the development of the National System of Essential Medicine.
Take a long view on the challenge of establishing a good drug provision and security system. xi China Health Policy Notes, No. 1 xii Financing, Pricing, and Utilization of Pharmaceuticals in China: The Road to Reform/1 1. Introduction T he Government of China is committed to affordable high-quality health care for all citizens. It has worked toward that vision by building on four pillars of reform—to medical services, public health services, medical insurance, and pharmaceutical supply. In November 2008, the State Council issued a draft document, ?
Guidelines for Deepening Health Care and Pharmaceutical System Reform,? [1] which articulated principles as well as a strategy for reform. For the pharmaceutical pillar, this included a national policy on essential medicines and a commitment to standardize the production and distribution of drugs. A month of hearing and public input followed, yielding more than 35,000 comments from the public, received by email, fax, and post. Of these, nearly a quarter addressed issues related to the high cost and difficult access to pharmaceuticals.
The present Health Policy Note, intended to contribute to the evolving discussion of pharmaceutical reform, examines the financing, pricing, and utilization of pharmaceuticals. It discusses how the present system evolved and key issues that should be addressed, and suggests areas where policy reform should be refined. Following this introduction, the paper is divided into four parts. The first section provides an overview of the Chinese pharmaceutical market: how the sector has grown; China’s position in the global market; and size, composition, and trends in the domestic market.
The second section examines the evolution and status of China’s system of essential medicines, an area emphasized in the government’s health reform plan announced in April 2009. It shows how the use of essential medicines has evolved over the two decades since the idea was formally adopted, 1 This paper was prepared by Professor Shanlian Hu, MD, School of Public Health, Fudan University (Shanghai). He is grateful to the World Bank health advisory team, including Dr. John Langenbrunner (World Bank Beijing Office), Dr.
Andreas Seiter (consultant), and Dr. Shuo Zhang (consultant); as well as to external reviewers Shiyan Chou (World Bank) and Michael Borowitz (Organization of Economic Cooperation and Development). Comments are welcome to hushanlian@hotmail. com. China Health Policy Notes, No. 1 and discusses why practice has fallen far short of the ideal. The third section looks at the issue that dominates today’s debate: managing high pharmaceutical costs. It reviews the components.