The shift from government-fixed prices to free-market tendering

The Chamber’s Pharmaceutical Working Group has long advocated the reform of China’s drug tendering process. Daniel Sellers, Business Manager at the European Chamber and manager of the Pharmaceutical Working Group in Shanghai, looks at some of the recent developments in this area. While there have been some general improvements, Sellers notes that there is still too much emphasis on price at the expense of quality.

This spring, China made a series of legislative and policy reforms to relax the administrative controls over drug prices that have been in place for more than a decade, and which relate to the majority of drugs sold in China. The reforms are aimed at creating a new system whereby drug prices are mainly determined as a result of market competition rather than set by the authorities. However, the way pharmaceutical companies set prices will still remain subject to the scrutiny of the PRC pricing authority under the Price Law and the Anti-Monopoly Law.

This milestone reform has been largely welcomed by foreign drug makers, at least in theory, as the higher quality of foreign originator drugs would be expected to justify higher prices under free market conditions; however, in practice, the inequalities of China’s provincial tendering system has undermined the reform’s effect.

Tendering has been evolving in China for 20 years now. First established during the 1990s, the process was originally handled by the purchasing departments of hospitals and medical institutions with support from local information technology players. This remained the status quo for about seven years, until the government stepped in to manage the process by establishing procurement platforms for each province.

This basic government purchasing model remained in place until 2010, when the double envelope system, adapted from Delhi, India, was introduced in Anhui Province and subsequently rolled out across China. The double envelope system is designed to allocate weight to competing tenders based on a technical quality evaluation (the first envelope), as well as price (the second envelope).

In China, in order to reach the end user and make a sale, pharmaceutical companies must first win a tender at the provincial or city level before being allowed to negotiate a procurement price with local hospitals and medical institutions. The problem faced by European pharmaceutical companies is that the first envelope has not been adequately designed and the threshold that defines quality remains unsuitably low, and therefore price, not quality, has become the principle criteria on which prospective tenders are evaluated. According to the European Chamber’s Pharmaceutical Working Group, this fixation on price in provincial tenders and procurements has placed its members at an innate disadvantage – they simply cannot be expected to compete on price with domestic manufacturers of inferior generic drugs. Aside from the obvious imbalance between European and local players, at the end of the day it is Chinese patients who suffer most from this situation as they are denied access to the best and most innovative treatments available.

During a recent Pharmaceutical Working Group meeting, Professor Hu Shanlian of Fudan University’s School of Public Health delivered his views on this topic and gave recommendations for the development of China’s drug tendering system.

According to Professor Hu: “The two-envelope system is already beginning to see some changes. Previously, the problem was that the first envelope—the assessment of drug quality—did not provide a high enough threshold and, in fact, was ineffectual. This meant that the second envelope, based on cost, became the main focus, so that bidding was decided purely on the basis of price.

“This meant that it was sometimes possible for small companies of lower quality to gain approval through the bidding process, leading to quality problems or price bids lower than cost, and therefore supply issues.”

Indeed, the European Chamber’s Pharmaceutical Working Group targeted tendering as a key lobbying focus for 2015, recommending structural reforms to the tendering system so that drugs are classified according to quality and separated into different bidding groups accordingly. If implemented at the central level, it is the view of the working group that this measure would significantly benefit Chinese patients by encouraging provincial governments to bid for drugs according to the needs (in terms of quality and quantity) of local patients.

Professor Hu notes that there has been some progress on this issue at the local level: “The most significant change to the tendering system has been the shift in emphasis from cost to quality. This is chiefly seen in the use of drug tender categories, which vary according to a province’s needs. The double-envelope evaluation system will continue to be used, this is not in doubt, but provinces have been told to make improvements. The second ‘cost’ envelope retains the basic method, but improvements are being made at the first envelope stage, known as the economic and technical evaluation envelope.”

Mr Xuan Cui, Chair of the European Chamber’s Pharmaceutical Working Group, notes that on the one hand the strategic direction of the government is clear, which is to allow pricing to be determined by market mechanisms. In addition, he says, recent policy developments should influence the positive development of the whole pharmaceutical industry and are welcomed by foreign pharmaceutical companies – foreign products have a strong reputation for quality and should be able to compete in a fair and balanced tendering system.

On the other hand, when a new policy system replaces an old one, multinational companies often need time to adjust, so adapting to change becomes a key core competency in the Chinese market. He adds that tendering and pricing will certainly remain a key focus for the working group for the time being, a message that resonated during Prof Hu’s talk, when he stated:

“One of the key difficulties remains pricing. Up until now, products that successfully win bids and enter the tender system are very difficult to price appropriately, chiefly because there has been no volume-related consideration. Volume-based pricing is essential in order to achieve an appropriate price, and so we should see more price-volume agreements becoming evident.”

This month, the National Health and Family Planning Commission (NHFPC) will implement new reforms related to tendering. It is the ongoing objective of the European Chamber to work with the authorities on this important issue to ensure the effective implementation and optimisation of policies in this area.

This article was written by Daniel Sellers, using input from Mr Xuan Cui and other members of the Pharmaceutical Working Group, as well as adapted sections from an interview with Professor Hu Shanlian that featured in CPB Review Volume 86.