SHANGHAI – After a flurry of high-level meetings discussing China’s drug pricing, the new leadership said it will continue to apply pressure on drug prices to reduce the cost of healthcare, but will make greater use of market forces.

“After a lot of sound and noise in the past weeks,” said Robert McTiernan, China analyst at IHS Health Services, “what has emerged is that the Health Ministry and National Development and Reform Commission [NDRC] agree that the current drug price management structure of NDRC-set retail price ceilings is now viewed as ineffective, and failing to influence market realities.”

Reining in drug costs is a key element to China’s healthcare reforms. China’s drug bill is 43 percent of healthcare expenditure, compared to 15 percent to 25 percent in Organisation for Economic Co-operation and Development countries, according to the World Bank. As China’s population ages and with expanded health insurance schemes coming into effect, reducing drug expenses is key to keeping healthcare affordable. (See BioWorld Today, Aug. 13, 2013.)

REIMBURSEMENT CAPS PILOTED TO REPLACE RETAIL CAPS

China has a complex system for setting prices and covering drug costs. Currently the powerful NDRC sets retail price caps affecting about 60 percent of drugs sold by revenue. Drugs that are perceived to be expensive, have very high margins or benefit from monopoly power, can see their prices come under scrutiny.

This top-down approach has failed to assure that drugs are available for those in need.

The NDRC has now stated that it is considering setting reimbursement prices to replace the current retail price caps system. This would entail setting a limit on the amount the (rural and urban) national insurance schemes would reimburse a particular drug, with patients paying the excess out of pocket.

The system would introduce greater market pressure particularly on prices of foreign-made originator drugs. For example, whereas currently an imported off-patent originator drug treating cardiovascular disease might cost ¥50, and the locally made generic costs ¥20, the government may choose to set a reimbursement cap of ¥10.

“This would allow a greater role for market forces to determine prices; in theory the company would voluntarily lower the price to maintain sales,” McTiernan said. The scheme would only impact those imported innovative biologics that are included on the national or provincial reimbursement lists, such as some diabetes drugs, more basic protein drugs like growth hormones, or antiviral interferons. The most innovative and expensive monoclonal antibodies and personalized disease-modifying medicines remain outside of this system.

There are a number of concerns regarding the proposed changes, including whether patients could face higher out-of-pocket expenses, or whether the level of medical service provision could fall.

Any national roll-out would be contingent on other reforms to unify management of the basic medical insurance schemes, and the NDRC would require a much greater level of data regarding underlying drug costs to set reimbursement prices. For now, the system will be trialed as a pilot scheme during 2014 across four provinces and cities.

“The news is reinforcing the trend: off-patent generic drugs produced by foreign companies are going to continue to be targeted for price cuts; the likelihood is this will encourage foreign companies to increasingly recalibrate portfolios to focus on innovative drugs” says McTiernan.

FOCUS ON PRICE OVER QUALITY

The hospital tender process was the focus of discussions between the NDRC and the National Health and Family Planning Commission (NHFPC), and also during a national work conference on central drug procurement held in November. Authorities have indicated they will seek to reduce the number of tenders and introduce greater pricing pressure particularly on off-patent originator products during procurement.

This trend already has been seen in a number of provinces. As well as encouragement for the tender model piloted in Anhui province, the authorities plan to encourage provinces to group off-patent originator drugs together in the same pricing category as generic drugs.

Over the past five years, Chinese provinces have tested a variety of different pricing models for hospital drug tenders. The Anhui model has been employed across many provinces in relation to the Essential Drug List (EDL) tenders, and has been controversial for stripping quality considerations out of the process in favor of competition based on price alone.

In September, Guangdong province introduced new tender rules that will see Anhui-style bidding methods favoring price over quality applied to both EDL and non-EDL drugs, as well as an online tendering platform that cuts out the negotiation space between drug companies and hospitals.

Given the influence of Guangdong province, the concern is that other provinces will follow its example, and that problems with quality and supply will increase as hospitals and patients are restricted to cheaper, poor quality generics.

The government sees the massive effort to revamp the manufacturing sector to comply with increasingly strict good manufacturing practice (GMP) guidelines as key to mitigating quality issues. There are also new initiatives being piloted to strengthen clinical pathway guidance for rational prescribing.

CLOSING THE AFFORDABILITY GAP

The fact remains that many drugs are just too expensive with only an elite few able to pay for them. This is particularly true for innovative new drugs.

A recent IMS report states cancer drugs can cost as much as 10 times the average worker’s annual income. There are only 25 oncology drugs on the essential drug list, just added for the first time in March of this year. In the case of Herceptin (trastuzumab, Roche Group), only 2,000 patients were treated with this drug, or less than 0.2% of the total patient population.

This forces drug makers to increase affordability. The solution has been to develop patient access schemes that have become increasingly widespread, McTiernan said.

Many are looking to see results from a deal between Roche AG and re-insurance firm Swiss Re under which the pharma firm provides the patient data necessary to draw up insurance policies, typically unavailable through public authorities in China. Swiss Re then works with local insurance companies such as China Life to sell policies supplementing public insurance to cover more expensive drugs such as Herceptin.

Novartis AG, of Basel, Switzerland, is among a number of foreign firms that use patient access schemes in order to increase access and affordability of more expensive drugs. The Swiss firm provides three free doses of cancer treatment Gleevec for every one purchased by the Chinese government. This strategy allows firms to ease access to drugs without lowering prices, which could affect its price in other markets.

While MNCs in China had a difficult third quarter in 2013 in the wake of corruption scandals that put a damper on sales, McTiernan pointed out that Novartis was one of the few companies to maintain double-digit sales growth in the country. In an earnings conference call, Novartis highlighted its focus on innovative drugs had helped keep growth at 18% for the quarter.

“The unspoken agreement that companies are relying upon,” says McTiernan “is that there will be more room for expansion for companies producing innovative drugs because there is so much pressure on off patent drugs.”

KEY TERMS TO KNOW

National Development and Reform Commission (NDRC): An agency with broad powers to enforce China’s Price Law which includes setting maximum retail prices for drugs and vaccines as well as investigating anti-monopolistic behavior.

Essential Drug List (EDL): Lists more than 500 molecules as basic medicines to be available to the public at all times at a price the public can afford. Dominated by low-cost generics though the latest round included more MNC products. Prices and profits are capped, but the list provides substantial volume business and market access. The list is revised every three years; the last update came into effect May 1, 2013.

National Drug Reimbursement List (NDRL): Lists 2,152 drugs covered by central and local medical insurance. List A is fully reimbursable nationwide. List B is partially reimbursable in some provinces and covers more expensive drugs. All EDL drugs are included in the NDRL.