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Beijing Considers Resuming Control of Medicine Pricing

01-23 00:00 Caijing Magazine


By staff reporters Zhang Yinguang and Li Qiyan

In a desperate attempt to bring down sky-high medicine prices, the National Development and Reform Commission (NDRC) has proposed that the central government set prices for all prescription drugs, which make up 80% of the total medicine market. China liberalized drug pricing in the early 1990s, and high prices have since become the public’s chief complaint against the health care system. Beijing has sought to take back control gradually, setting 17 different price caps since 1996, but to little avail.

Both the government and the market currently influence drug prices. The government sets prices for what it calls “basic medicines,” while other drugs are priced according to market rate. In October 2005, NDRC revised this definition so that more medicines were subject to government price caps, an increase from 1500 to 2400, or about 20% of total available drugs.

According to NDRC, prices are too high because the government lacks proper controls, and because politically powerful special-interest groups rely heavily on high medicine prices. But even the NDRC recognizes the limited effect of price caps. One official told Caijing that decreasing medicine prices is like playing on a seesaw – when some drug prices are artificially kept low, prices for other drugs increase.

Opponents of the possible move argue that the NDRC is ill equipped to handle the potentially huge additional workload. A general manager of a state-owned pharmaceutical company said he believed it would be almost impossible for a department of a dozen people to set prices for thousands of medicines according to individual assessments of production costs.

According to data from China’s National Bureau of Statistics, though the retail prices of medicine have decreased for four consecutive years since 2001, individual patients’ medical costs have increased. The central government has tried to lower prices, but overall high prices persist. Drugs that fall under price caps end up disappearing from the urban market, or go out of production entirely as they are replaced by new, higher-priced versions not subject to the government cap. So patients benefit little from government efforts to keep prices down.

Many blame the government’s historically low investment in the health care system, as hospitals and doctors must rely on selling overpriced medicines to make ends meet.
China’s annual health care costs total 350 billion yuan, of which central and local governments cover only 50 billion.  To close the yawning gap, doctors and hospitals must seek profits by selling medicines and services just to maintain their daily operations.
Revenue from drug sales in public hospitals totaled 140 billion yuan in 2003, amounting to 40 billion yuan in profit. That figure does not include over 25 billion yuan in kickbacks, according to a conservative estimate, which are rampant given lax regulations and doctors’ relatively low salaries.

NDRC officials say that the medicine pricing problem only scratches the surface of a larger problem with China’s health insurance and service industry. Incremental increases in medical expenses are to be expected, but they hit harder in China than in many developed countries because patients here are responsible for a larger percentage of the cost of their care. China’s most recent national public health care survey found that 45% of urban residents and 72% of rural residents had no health insurance whatsoever. Out-of-pocket payments for medical expenses rose from 21% in 1980 to 56% in 2003.

Competition between medical care facilities is important in this regard. The government should encourage the establishment of private hospitals, so that public hospitals can concentrate on meeting health care needs while private centers can service those who can afford them.

But because the reform involves eight central government departments, including the Ministry of Finance, Ministry of Health and the NDRC, a single department can do almost nothing to tackle the tricky issue. NDRC has proposed that the state council set up a high-level commission to coordinate tasks of different departments. In addition, the reform will influence the interests of hospitals, medicine suppliers, and medical equipment producers. One analyst pointed out that many small and medium-sized hospitals sustain themselves almost entirely by selling pharmaceuticals and medical equipment. These hospitals, which have the primary responsibility for China’s public medical services, face bankruptcy if the government cuts medicine prices further while still failing to provide sufficient compensation to cover their costs. 

Caijing’s investigations suggest that lax drug approval procedures for new pharmaceuticals are the main reason price caps have been ineffective. Pharmaceutical producers can win approval by tinkering with slight changes in dosage or name to create “new” drugs out of old ones. NDRC proposes to solve the problem by tightening control over both drug approval and pricing.

NDRC has proposed several other long-term solutions to the problem. They include increasing government contributions to public hospitals to cover all costs; resuming control of pricing for all prescription drugs; speeding up legislation to prevent medical staff kickbacks; and deepening the urban and rural medical service reform and changing the allocation of medical resources. Some of these long-term “prescriptions” for overpricing penetrate to the core of the issue; but detailed measures have not yet been released.

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