Chinese Provinces Start Rolling Out Regional Essential Drug Systems Following Government Reform Guidelines

Following Chinese central authorities' guidelines for national healthcare reform, and a series of follow-up policies including the announcement of an essential drug list and maximum retail price, many provinces have started marking their regional execution plans with a local list of essential drugs and related policies largely in line with central government's guidance. Guangdong province, the first Chinese province to start opening up and reform over 30 years ago and one of the country's wealthiest provinces, last week issued the 2009–11 Execution Plan for Guangdong Healthcare Reform, earmarking 42 billion yuan (US$6.1 billion) to reform the province's healthcare system during this period. The target is to control the increase in people's medical expenditure and improve their affordability and accessibility to medical services and products by 2011.

Earlier this month, East China's Jiangsu province released its execution plan for the country's essential drug guidelines, which has added 292 drugs in addition to the 307 products on the national essential drug list. In 2009, the regional essential drug policy will be adopted in 37 cities or counties within the province, where the essential drugs will be subject to a tender and purchase procedure to form a unified price at provincial level. The government will provide financial assistance to ensure a zero-profit margin on the 599 essential drugs.

Many other provinces, including Jilin, Henan, and Hubei, have also joined Jiangsu and Shanghai in the process of rolling out their local healthcare reform plans, of which the essential drug system is one of the first and major mechanisms. The provincial execution plans on the essential drug system have been consistent with national guidelines, and the main features demonstrated include:

• Local governments have made all the 307 essential drugs issued by the country's Ministry of Health (MoH) and National Development and Reform Commission (NDRC) subject to a maximum retail price imposed by the central authorities (see China: 2 October 2009: China Issues Guidance MRP for 296 Essential Drugs, Nearly Half to Face Price Slash). In addition, many provinces have expanded the list with their supplemental essential drugs to be applied locally.
• In 2009, the essential drug policy applied to about 30% of the cities and counties in most provinces.
• One price applies to each essential drug sold in the aforementioned cities and counties' community clinics following unified tender and purchase procedures across the province.
• The essential drugs will be sold with no profit margin added to the purchase cost, compensated by the government's financial aid.

New Guidelines Stipulate "High Service Charge, Low Drug Price"

Earlier this week, the NDRC released supplemental guidance on the establishment and execution of an essential drug system, Guidelines on Medicines and Medical Services Pricing Mechanism Reform, which set out further direction for the ongoing reform of medicines and medical services pricing. The guideline stipulates that the prices of medical services such as check-ups, diagnosis, operations, and care should be increased on a tiered basis to reflect the costs, and to meet patients' different needs and compensate for the cut in drug prices. In addition, the guidelines also request that first-to-market generics will be priced higher than their follow-up products.

Outlook and Implications

From what has been revealed so far in terms of the local execution of China's national healthcare reform, especially the establishment of an essential drug system, the provincial governments have unsurprisingly followed the central government's guidance while finalising their respective plans. The essential drug system has become the core of the reform and the first step among other measures, including the public hospital reform and public health insurance coverage expansion. IHS Global Insight is expecting to see many more provinces follow suit in the coming months and apply essential drug mechanisms in community medical facilities in 30% of the region. However, one of the biggest challenges to a smooth execution of the reform will lie in the capability difference in terms of financing the reform among different provinces. Guangdong's 42 billion yuan will be an investment hard to match by many of its poorer counterparts, especially in the north and west of China, which will mean that a further spread of the essential drug system and other reform measures will be difficult to put into practice. Regional disparity is therefore going to be inevitable, which will dent the final results of the national reform.

On the other hand, the new guideline of "high service charge, low drug price" has also raised broad concerns of a new burden on patients. Especially where drug prices have not been brought down properly, the increase in medical service charges could lead to difficult additional overall medical costs. In addition, the maximum retail price has not seen any obvious impact yet, as many maximum prices are actually higher than their current retail price. Furthermore, some prices have been set at lower levels than the cost to pharmacies or clinics, which led to those facilities ceasing selling the products on the list. Supply has therefore been negatively affected, and the goals of the new system have not been achieved.

Nevertheless, large scale domestic generic drug manufacturers with wide marketing and distribution networks will still be able to benefit from the essential drug system across the country. They will have an edge over smaller competitors in terms of price advantages and the ability to realise a provincial distribution. It may also provide an opportunity for them to acquire smaller, local drug makers to strengthen their presence. For multinational drug makers, the price controls will make it very difficult for their products to be included on the essential drug list, be it the national list or the supplemental lists of various provincial governments. Although the gravy train of China's healthcare reform is leaving the station, the multinationals still have a hard battle to fight to benefit from the substantial 850-billion-yuan investment.