The pandemic has been a trial for the healthcare system of each country. While the goal of most stimulus packages, including the biggest stimulus in the world initiated by Biden’s administration, are aimed at relieving the payment of medical bills, China is making a different move (Cunningham 2021). In the Outline of China’s 14th FiveYear Planning and Long-Term Goal for 2035 just announced in March, the Chinese government has solidified the objective of completing its medical reform in the next five years (He 2020). So, what is changing in the healthcare system in China? And why?

Since the market reform, China has been on a fast track of economic expansion. But the growth of gross domestic product (GDP) is oversized by the increasing pharmaceutical expenditure. From 1990 to 2009, the Chinese GDP’s annual growth rate was 12.9%, but the pharmaceutical expenditure has been growing at 15.2% (Chen, Yang, Luo, Hu, Yin and Mao 2020). The exceeding drug cost in healthcare as a product of the fast economic growth has become one reason for the high saving rate in China. Reaching 44.2% in December 2019, the Chinese gross saving rate is more than twice the size of the U.S. saving rate, 20.6%, at the time. In the face of multiple pressures on its economic growth, including the global recession, China would be able to enlarge its market size by releasing the inertia of its accumulated wealth. To achieve this, it would be vital to lower the cost of the healthcare system so people would feel less worried about saving money for medication. The latest move of the Chinese healthcare reform is to reduce the pharmaceutical cost through the National Centralized Drug Procurement (NCDP) Program.

The overall medical reform in China includes several key policies— Volume-based Procurement, Dynamic Catalog Adjustment, TwoInvoice System, and the MAH system, which covers different healthcare dimensions in drug production, distribution, hospitals, R&D, and of course, the patients (Deloitte 2020). Among them, the Two-Invoice System reduces the distribution layers from production to customers, in which pharmaceutical suppliers would issue at most two VAT invoices. While less distribution layer would indirectly cut down cost on healthcare products, the Volume-based procurement is most significant in cutting down pharmaceutical expenditure. And, to ensure the procurement is supported by regulation, the Dynamic Catalog Adjustment establishes a procedure for the selection of drugs in the Volume-based Procurement.

In January 2019, The NCDP Program was initiated, relying on the implementation of the volume-based procurement. The specific definition of the procurement policy given by the MDPI research group is that “the tenderee (government representative) clarifies the procurement volume (60–70% of the total annual drug use of all public medical institutions) when conducting tendering, and the tenderers (pharmaceutical manufacturer) quote according to this specific volume” (Chen, Yang, Luo, Hu, Yin, and Mao 2020). The mechanism of centralized procurement is essentially using the aggregate size of the national medical insurance entity to negotiate a pharmaceutical price with the drug manufacturers. While individual patients are price takers in the pharmaceutical market, the policy assigns an official group to represent the patients now. Through an open bidding process, the winning manufacturers are contracted to produce an enormous amount of the specific drug at a much lower price than before. As Han and Xu (2020) said in their research, the government is “using volume to replace the price.”

The procurement target is to cut the “virtual height” of the pharmaceutical price (Han and Xu 2020). Due to the fast growth of healthcare needs in China, the source of pharmaceutical development has been primarily imported. The mislinkage of the consumer and the supplier in drug production led to multiple layers in the allocation process. Every layer acquired additional profit, and by the time when the medication is sold to the clinics, the sales price is much greater than the production cost. The difficulty in new medical development also caused the monopolistic nature of pharmaceutical production. And so, consumers had little choice but to accept the price. With the national medical insurance group directly negotiating price with the pharmaceutical developers and producers, the industry would face the reconstruction of allocation. In the bidding platform, winning producers would be providing direct supply flow to the local hospitals, whereas the losing parties would focus on expanding their pharmaceutical distribution to retailers (Han and Xu 2020). The space for the middleman in the industry would eventually disappear, leading to the higher efficiency of the sector and better prices for the patients.

Following the tradition of most economic reforms, the Chinese government assigned pilot cities to experiment with volume-based procurement. In the first round of the NCDP, 11 cities were selected as pilot cities to carry out drug volume-based purchasing, including four municipalities (Beijing, Tianjin, Shanghai, and Chongqing) and seven sub-provincial cities (Shenyang, Dalian, Xiamen, Guangzhou, Shenzhen, Chengdu, and Xi’an) in mainland China. Better known as the “4+7” policy, the program successfully intervened in 25 medical products, and resulted in an average price reduction of 52% and a maximum price reduction of 96% for 25 winning products (Chen, Yang, Luo, Hu, Yin, and Mao 2020). Furthermore, the MDPI research shows that not only was the price significantly reduced, but the expenditure of the winning producers also tripled. In Table 1, figures show that the winning supplier of the selected medicines was able to benefit in revenue as the total expenditure of their products increased. The general decrease in “4+7” related expenditure solidifies the purpose of the volume-based procurement, and its main reason for the drop is in the revenue lost by the non-winning companies.

On the consumer side, patients also saw real changes in pharmaceutical prices. By 2021, the NCDP program has completed four volume-based procurement cycles, with 157 types of medication listed. In the first round, Crestor rosuvastatin tablet, used along with a proper diet to help lower “bad” cholesterol and fats, is lowered from 0.78 RMB to 0.2 RMB per one piece, accounting for a 74% decrease. In the second round, more respiratory disease-related drugs were enlisted. Levocetirizine hydrochloride tablets, used to relieve allergic symptoms, experienced a price reduction of 93% (Han and Xu 2020). By the third round, coronary heart disease-related medication was focused, and the highlight of the procurement was the significant decrease in heart stents. The price for one stent dropped from 13,000 RMB (1,800 USD) to 700 RMB (100 USD) (Li 2020). Journalist Danqing Li (2020) jokingly wrote that “before one stent can buy you six bottles of Maotai, but now, you can sell one Maotai for six stents.” Though the centralized procurement still remains at the trial phase in the “4+7” pilot cities, sharp cuts in the pharmaceutical price are becoming the norm as the policy shows the real result. The government has now officially written the reform direction into its Five-Year Plan.

The positive direct effect on the patients and the manufacturers is unarguable, but critical voices of the volume-based procurement are also concerned about disincentivizing research and development (R&D). The dilemma between saving lives or incentivizing pharmaceutical developers seems to be a zero-sum game. Critics worry that the lowering of sales price would discourage small-to-medium scale R&D companies that have exhausted resources to invent new medication. The Chinese government recognizes the critical value of R&D, and it has established the MAH system to separate production and R&D so that the profit earned by R&D clinics would be independent of the volume-based procurement, but this is beyond the scope of this article.

The NCDP Program reflects the Keynesian approach to the economy: the government could establish a healthier industry environment through policymaking and regulation. As a critical part of social welfare, China’s healthcare industry has been suffering from inflated prices. With the national health insurance entity representing the consumers, the relationship between patients and pharmaceutical producers is more balanced. The macroeconomic implication of the volume-based procurement is that the release of China’s wealth inertia through its accumulated savings would enlarge the domestic market for further economic developments.

Looking beyond the case in China, the problem of high pharmaceutical prices in healthcare is recognizable in the U.S. as well. The Biden administration’s current stimulus package identifies the struggle for households to pay off their medical bills. Indeed, while the aid’s size is sufficient, increasing the efficiency of government spending in the healthcare system should also be a primary consideration. Why spend $1.9 billion when maybe just a portion of that could finish the job?

Sources

Chen, Lei, Ying Yang, Mi Luo, Borui Hu, Shicheng Yin, and Zongfu Mao. 2020. “The Impacts of National Centralized Drug Procurement Policy on Drug Utilization and Drug Expenditures: The Case of Shenzhen, China.” International Journal of Environmental Research and Public Health 17, no. 24 (December): 9415. https://doi.org/10.3390/ijerph17249415.

Cunningham, Paige. 2021. “The Health 202: Buried in Biden’s Stimulus Plan Is a 29 Percent Spending Hike in Obamacare Subsidies.” The Washington Post, March 3, 2021. https://www.washingtonpost.com/politics/2021/03/03/health-202-buried-biden-stimulus-plan-is-29-percent-spending-hike-obamacare-subsidies/.

Ewert, Jens, and James Zhao. 2020. “New Medical Reform in China: Pharma Companies’ Tax Challenges, Opportunities and Responses: Deloitte China: Life Sciences and Health Care.” Deloitte China, July 8, 2020. https://www2.deloitte.com/cn/en/pages/life-sciences-and-healthcare/articles/pharma-companies-tax-challenges-opportunities-and-responses.html.

Han, Zhongjiang, and Qian Xu. 2020. “Analysis of the Influence of the Mode of Centralized Volume-Based Drug Purchase.” Journal of Pharmaceutical Research 2020, 12, 39 (December): 742–44. https://doi.org/10.13506/j.cnki.jpr.2020.12.012.

He, Juan. 2020. “浅谈‘十四五‘规划中医疗保障事业 (Brief Talk about Healthcare Progress in the 14th-Five-Year-Plan).” 正北方网 Northern News, December 2, 2020. http://www.northnews.cn/2020/1202/1939165.html.

Li, Danqing. 2020. “两年、三批、四轮…药品、耗材相继参与常态化集中带量采购谈判 ‘灵魂’砍价，能为看病省多少钱？(Two Years, Third-Fourth Rounds, Drug Centralized Procurement Effects, and How Much Can Be Saved Through the Negotiation?).” 中国经济 网 (Chinese Economic Website). December 22, 2020. http://www.ce.cn/cysc/yy/hydt/202012/22/t20201222_36139876.shtml