PharmExec Blog

Drug Payment Reform in China: Now That's a Mass Market

The task of building drug access for one billion new customers in China is probably this decade’s grandest public policy experiment.  It is taking place largely behind the scene in a series of often tense exchanges between Beijing and local governments – the dialogue is worth watching for the long-term commercial implications in what all forecasts suggest will be the world’s second largest market for medicines by 2015.

How do you extend basic health insurance coverage to 900 million people while simultaneously creating a new drug payment system to promote efficient prescribing and preserving support for medical innovation?  This is the challenge for China:  and if succeeding there carries the high stakes of a debut performance at Carnegie Hall, then what is going on now is a live experiment  – with lessons that bear repeating on the global stage.

That was the message resonating from a wide range of experts who convened  at the annual meeting of the Sino-American Biomedical and Pharmaceutical Professionals Association [SABPA]  in San Diego on November 6.

Zhu Hengpeng of the Chinese Academy of Social Sciences, who advises the Beijing government on health reform, emphasized the sweeping nature of the transformation undergoing the delivery and financing of health care services .  The sheer weight of reform requires some level of prioritization. Of the five goals of the program – universal cover, creation of a national essential drug system, restructuring of state hospitals, building primary health care institutions, and more equity in health – Zhu noted that the focus is on the first three.

Right now, the major challenge facing the government is reconciling the long-term efficiency gains from reform of the drug payment system to the high short-term costs of increasing access to necessary medicines.

Placing more medicines on the new Essential Drug List [EDL] means a zero mark up in prices so hospitals can no longer derive the bulk of their revenue from the high margins traditionally obtained from dispensing drugs. In turn, this means that with revenues dropping, hospitals are in no position to help fund the goal of increased access for those projected to enter the health care system through the commitment to universal coverage.

“Access to care is at odds with the reduced income of hospitals so there are demands that the government make up the difference with higher fiscal subsidies, to enable the new approach to work,” said Zhu.  “The problem is that those subsidies don’t exist at present and need to be generated through alternatives to the reliance on drug margins; it is no surprise that some 42 per cent of total health spending in China today consists of purchases of medicines, which is largely borne by the individual consumer out of pocket”.

A Short-term Fix
As  a result,  Beijing has opted for a piecemeal approach, pressuring the provinces to implement the reforms but only at the lowest level, covering rural clinics for the poor run by county-level hospitals. In the interim, the plan is to wait for complementary changes to the hospital payment structure – led by capitation, prospective payment and diagnosis related group [DRG] incentives  — to kick in.  The hope is that this approach will reduce the reliance on drug pricing as a driver of hospital income, provide a more stable and predictable source of financing at this institutional level, and thus allow the other two priorities – full implementation of the EDL and universal access – to move forward.

Big Pharma: Science and Quality as the Key Value Differentiator
How long this will take is anyone’s guess.   2013, the target date for implementation of the entire reform agenda, seems overly optimistic.   Investors in China will need to be prepared to adapt and respond flexibly as the central government and the provinces respond to what is a highly politicized pattern of engagement.   As always, the best fallback for foreign drug makers in China is to focus on the link to quality in medicine, which in China is the ultimate guarantor of brand awareness.  What also matters for the future is the association that can be made between quality and cost effectiveness – over time, with the EDL as gatekeeper in  drug procurement,  the value proposition will be just as critical in China as it is now in Western markets.

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