Hospital reform in China is gathering momentum, with an increasing number of state-run hospitals removing drug price mark-ups.
IHS Life Sciences perspective | |
Significance | Public hospital reform in China is gathering pace is gathering momentum as hospitals are increasingly weaned off drug price mark-ups for profit. |
Implications | Hainan province, Gansu province, Shandong province, and Zhuhai prefecture have made announcements of removals of drug mark-ups in 2015. |
Outlook | The end of drug price mark-ups means public hospitals may face a revenue shortfall as they are unable to compensate for lower drug revenue with higher medical service fees or government subsidy. |
Hospital reform in China is gathering momentum, with an increasing number of provincial hospitals in pilot regions separating drug sales from drug prescriptions, and removing price mark-ups on medicines, according to Caijing magazine.
For decades, Chinese state-run hospitals have relied on medicine price mark-ups for profit, essentially setting their own profit margins via higher prices in the absence of centralised supervision. At the same time, practitioners relied on kick-backs and "gifts" from patients seeking faster access to treatment.
As part of its national healthcare reforms, the Chinese government has ordered provincial and county-level public hospitals in several pilot regions to remove mark-ups on drug prices, reduce unnecessary prescriptions, and instead make up any shortfall in revenue through higher fees for healthcare services such as surgery and GP and nurse consultations.
According to Caijing, these hospital reforms have gained significant momentum in Hainan province, Gansu province, and Zhuhai prefecture in southern Guangdong province.
Hainan province
Hainan's provincial government has announced that as of the beginning of 2015, it will remove all price mark-ups on pharmaceuticals in pilot area hospitals and raise fees for healthcare services including GP consultations, bed fees, surgery, and other medical services. The move would affect the prices of 2,657 types of healthcare service and raise the cost of healthcare services by up to 15%. See the Chinese-language announcement here.
Gansu province, Zhuhai prefecture, and Shandong province
Pilot hospitals in Gansu province, and Zhuhai prefecture in Guangdong province, and parts of Shandong province will also remove all price mark-ups on medicines.
Outlook and implications
As China's government attempts to break a decades-long reliance by public hospitals on price mark-ups for profit, it faces additional challenges. By discontinuing the use of drug price mark-ups, the central government is effectively reducing the revenue streams of pilot public hospitals from three (drug mark-ups; medical service fees; hospital subsidies) to two. Depending on the level of government reimbursement, the loss of revenue from the discontinuation of drug price mark-ups may not be sufficiently compensated for by higher medical service fees. So far, several Chinese media reports have quoted hospital staff as saying that despite raising medical service fees to their maximum level, the hospitals are still facing a revenue shortfall.
However, the abolition of price mark-ups is likely to be a positive development in terms of patient access as medication prices drop. As medical services fees rise, another challenge lies in raising the quality offered at smaller, lower-tier healthcare institutions to improve patient trust and stem the flow of patients who typically head directly to higher-tier institutions.
Another point to consider is that as China implements hospital reforms, it is also actively trying to raise quality standards of local drug makers, potentially threatening the price premium commanded by foreign branded medications.