China’s healthcare system, which impacts 1.4 billion people, is facing serious capacity issues at all stages of the value chain. Against this backdrop, the country is looking at making wholesale changes across the system but with a very pragmatic approach that reflects former leader Deng Xiaoping’s famous adage ‘crossing the river by feeling the stones’. Wary of launching dramatic changes with unintended consequences, the Chinese authorities are displaying a preference for initiating pilot programs to test the waters before further implementation. While this prudence is understandable, it also results in a fragmented and complex landscape for industry stakeholders to navigate. Here we examine four of the most important pilot programs rolled out in China in recent years.
The ‘4+7’ Generics Procurement Pilot
Perhaps the most famous (or infamous) pilot scheme within the industry, the so-called ‘4-7’ policy for generic drug procurement was launched in November 2018. Under this initiative, 31 products were included in the first batch to undergo a centralized procurement process, including drugs for cancer, hypertension, psychosis, and Hepatitis B.
Tender winners were guaranteed 60-70 percent of the total volume across the 11 cities for a full year – but had to offer significant price concessions to secure their win. The National Healthcare Security Administration (NHSA), a newly established unit in charge of overseeing this progress, announced that approximately 27 percent of the total agreed volumes, amounting to a value of around RMB 533 million (USD 80 million), were procured within the first 14 days of the program’s launch.
The Marketing Authorization Holdership (MAH) pilot
On 5 November 2015, China launched a Marketing Authorization Holdership (MAH) pilot program in ten provinces and cities. Previously, a pharmaceutical marketing license could only be granted to companies with Production Authorization Holdership (PAH) – meaning that the company that markets the drug also had to be responsible for its manufacture in China. This placed a significant burden on drug developers to build capital-intensive manufacturing capabilities early on, driving overall excess capacity and waste within the overall Chinese industry.
Initially planned for three years, backed by strong industry interest, the program has now been extended to 5 November 2019.
China’s Pharmaceutical Marketing Authorisation Holder pilot programme has now been extended until November 2019, providing further opportunities for businesses to enter the rapidly expanding Chinese pharmaceutical market.
The International Medical Tourism Pilot Zone in Hainan Province
The Chinese government tries to take a balanced approach to distributing resources and opportunities across the 33 province-level entities in the country. On 29 December 2018, the State Council introduced a new pathway by which drugs and medical devices could enter the International Medical Tourism Pilot Zone. The Zone itself had been established in 2013 to fast-track approval of new drugs and medical devices, give foreign doctors more time to practice medicine in China, lower foreign investment and ownership restrictions relating to medical institutions, and reduce tariffs on some drugs and medical devices. In 2015, Hainan Province launched their Ten-Year Medical Industry Development Plan.
The December 2018 change is remarkable, however, because it grants the Hainan provincial government the powers to approve the use of foreign drugs and devices not yet approved by the NMPA as long as certain criteria are met.
The ‘Two Invoice’ System for Pharmaceutical Distribution
A significant part of the inefficiencies in China’s healthcare system used to stem from the complex network of distributors that moved drugs from manufacturers to hospitals. With cash-strapped public hospitals often relying on drug sales to generate revenues, the system led to significantly inflated prices. In 2016, the Chinese government therefore piloted a ‘two invoice’ system in Fujian Province to rationalize the entire network, before rapidly expanding the pilot to 11 more provinces.
Under this system, only two tax invoices may be issued during the distribution process from drug manufacturer to hospital – one by the manufacturer to the distributor, and one by the distributor to the hospital or service provider. Thus far, this policy has been limited to pharmaceuticals, though there is speculation that a new pilot could be launched soon for medical devices.
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