China's legislature has approved several amendments to the Drug Administration Law, including the removal of drug price controls as part of the country's ongoing healthcare reform.
IHS Life Sciences perspective | |
Significance | China's Standing Committee of the National People's Congress, the country's legislature, has approved several amendments to the Drug Administration Law, including the removal of price controls on drugs of which prices were determined or guided by the government (Article 55). |
Implications | The development, reported by local media, follows a brief statement last week from Xu Kunlin, director general of Price Supervision of the National Development and Reform Commission (NDRC), emphasising plans to drive forward liberalisation of China's drug prices. |
Outlook | The amendments are expected in particular to target the provincial drug tender and bidding process by allowing hospitals and drug makers to enter direct price negotiations. |
China's Standing Committee of the National People's Congress, the country's legislature, has approved amendments to the Drug Administration Law, including the removal of price controls on pharmaceutical products (Article 55), according to local media.
Drug prices to be increasingly set by market forces
The amendments call for the removal of Article 55 of China's Drug Administration Law, which stated that pharmaceutical companies, drug distributors and medical institutions were required to abide by the government's pricing mechanism, where the medicine price was mandated or guided by the government. Pharmaceutical prices would then in theory be determined through market competition (including tendering or negotiation with local medical insurance authorities) instead of fixed price caps.
Furthermore, pharmaceutical manufacturers are required to provide government pricing authorities with information on drug production and distribution costs.
In addition, the amendments by the Standing Committee also called for streamlining the licensing process for drug makers (removal of Article 7 and part of Article 14) and other administrative changes. Articles 7 and 14 of the original Drug Administration Law required a pharmaceutical manufacturer or distributor to obtain a drug manufacturing license or drug distribution license in order to obtain business licenses and operating permits. The amendments also call for the removal of Article 100, and is aimed at simplifying the administration surrounding revocation of operational permits.
Outlook and implications
The latest amendments by the Standing Committee of the National People's Congress – China's de facto legislature – are another step forward in China's campaign to introduce market forces into its pharmaceutical industry. It further confirms a statement by China's pricing authority, the National Development and Reform Commission, that it is reportedly set to abandon its control over drug prices later this year.
In particular, the amendments are expected to target the provincial drug tender and bidding process by removing the layer of government involvement, allowing hospitals and drug makers to enter direct price negotiations. The amendments are seen as a response to the controversial and widespread practice of second-round price negotiations in China's provinces, which have resulted in hospitals calling for drug makers to re-negotiate bid prices even after an official price had been struck. This has forced a large number of drug makers to take part in a "race to the bottom", bidding prices that verge on undercutting their own production costs. In several cases, the practice of second-round price negotiations have forced drug makers to withdraw from bidding as prices have become unsustainably low, resulting in drug shortages and restricted access to treatment.
For example, earlier this year Hunan province forced companies into price cuts of up to 50%, according to tender results. Foreign drug makers may simply abandon bidding in the province as a result, according to media reports. Innovative and patented treatments – including from foreign drug makers – are therefore expected to benefit from this development, after being hit hard by provincial price cuts in China.
According to the reports, the amendments are aimed at raising the quality of domestically produced drugs on the market and protecting the interest of patients by ensuring availability of good-quality treatments. They also re-affirm the ban on drug price mark-ups, which China's public hospitals have relied on for decades as a source of income (see China: 6 January 2015: Chinese hospital reform gathers momentum, drug mark-ups diminishing).