The architects of China's future medical system have thrust the flaming sword of health reform into the dark heart of the
nation's pharmaceutical tendering, procurement, and distribution sector. While changes to pharmaceutical procurement guidelines
have been debated for well over a year, it is only recently that regional governments have begun to face the critical question
of how the new rules will be executed and enforced. Initial results suggest that the new framework, while potentially able
to solve some problems that have plagued drug tendering in the past, will also create new challenges for the biopharmaceutical
industry. The complexity of the process also makes it likely that the system will face a slow and uneven rollout, with varying
impact across the country and among individual companies.
Jon Zifferblatt, MD/MPH
A key feature of the new procurement guidelines is mandatory full-scale implementation of a centralized, online drug procurement
system for each province, with required participation by all sizable public medical institutions. Additionally, bidding/tendering
by drug wholesalers will be replaced with direct bidding/tendering by drug manufacturers, and distribution should be carried
out only by government-appointed distributors, which the government has suggested will be drastically reduced in number. Reading
between the lines of the regulations, it is clear that healthcare authorities are seeking to modify the structure of the distribution
sector as one way to reduce middle-man-related price markups.
Thump to Tender Agents, Distributors
The new procurement guidelines carry a one-two combination punch aimed directly at significant portions of the drug wholesale
and distribution sector. Provincial bidding centers have been asked to select a small pool of qualified drug distributors
(from a field of potentially thousands), which will be authorized to participate in the centrally tendered drug supply chain.
These agents will be required to have Good Supply Practice (GSP) certification and likely will consist of larger entities
with solid regional governmental ties. Some regions (including Ningxia and Xinjiang) have stipulated that wholesalers will
have no involvement in central tendering, while others have drastically reduced the number of allowed participants. For example,
after a multiround vetting process, Beijing recently selected only 10 distributors authorized to carry out centralized drug
distribution within the municipality.
In addition to significantly limiting pharmaceutical wholesaler and distributor access to regional governmental procurement
centers, the new regulations also move to pry apart the close relationship between these agents and the end user—hospitals
and medical facilities. One reason for the unwieldy number of wholesalers/distributors (more than 9,000 companies by some
estimates) in the China pharmaceutical sector has been the ability of small wholesalers to survive on tight relationships
with medical facilities—in some cases with just a single key hospital as a customer. Via blood relations (guanxi) or other
arrangements, wholesalers have in many cases been able to act as gatekeepers to hospital formularies, requiring a slice of
the action from manufacturers and up-line distributors in order to place products on pharmacy shelves. The new procurement
regulations now specify that tendering will occur directly between medical institutions and drug manufacturers, their agents
(for foreign companies with minimal domestic presence), or (in some cases) top-level large distributors. Moreover, post-tendering
confirmation and finalization of supply contracts—traditionally another step in which non-transparent incentives entered the
process—will be done directly between government authorities and manufacturers (provincial authorities on behalf of Tier 3
hospitals and grouped prefectural city authorities for Tier 1 and 2 hospitals). In short, the new rules challenge wholesalers
and distributors from upstream and downstream directions, denying participation in central bidding processes (supply) as well
as short-circuiting the importance of relationships with the next users in the value chain (demand).
Downward Pressure on Tender Prices
Close administration of drug tendering by provincial healthcare authorities keen to realize medical system savings mandated
by the central government has resulted in tender prices that are notably lower than 2008 levels in many regions. Average price
reductions have ranged from 4 percent (Inner Mongolia) to 34 percent (Shanxi) and have even been reduced by as much as 47
percent. These lower price levels apply to both essential drug list (EDL) and non-EDL drugs, although essential drugs have,
as expected, seen greater overall price reductions—for example, prices for drugs on the EDL in Hunan were reduced by 43 percent
compared with 2008.