China’s scandal-hit pharmaceuticals sector is in for a regulatory shakeup
After several vaccine scandals have shaken the country in 2018 and 2019, China is reforming its pharmaceutical sector, restructuring healthcare administration and improving hospital management, in a bid to restore confidence in the system.
What next
China’s need to provide cheaper and safer drugs to its citizens implies relying more on imported products in the short term. In the long run, however, Beijing’s objective is to protect and consolidate the national pharmaceutical industry.
Subsidiary Impacts
- There will be growing opportunities for foreign companies to invest in China’s drug market and digital healthcare.
- Policies will improve drug traceability and supervision, reducing scandals, but not address broader issues of monopolies and corruption.
- Institutional restructuring and reform of hospital management will improve healthcare, but the public’s trust will not be easily regained.
Analysis
Several healthcare scandals have shaken China already this year.
In January, more than 100 children in Jiangsu received expired polio vaccines. In February, 12,000 blood plasma treatments contaminated with HIV were found in Shanghai.
These follow a major scandal in July 2018. Changchun Changsheng Biotechnology, China’s second- largest manufacturer of rabies and chickenpox vaccines, was caught selling close to 500,000 faulty DPT (diphtheria, pertussis and tetanus) doses and falsifying data on substandard rabies vaccines.
These scandals highlight monopolies in the vaccine market.
Two markets
Vaccines in China are divided into two types.
Compulsory vaccines paid for by the government (category one) account for 80% of the market. These are mainly supplied by a handful of companies owned by the state-owned China National Biotec Corporation (CNBC), or with close links to it. Changchun Changsheng was one such firm.
Beijing is not likely to open the sensitive sector of compulsory vaccines to competition, even though some economists have called for opening the market to imported products.
Voluntary vaccines (category two), in contrast, are paid for by individuals in a competitive but relatively small market. Of the 34 vaccine manufacturers in China, four are international joint ventures. The share of foreign vaccines in the Chinese market has been below 5% since 2012 and declined to around 2.5% in 2017.
2.5%: Foreign share of the Chinese vaccine market
Reform and opening
More opportunities will arise for foreign companies in the Chinese drug market as Beijing opens to foreign products in order to provide cheap and safe drugs to the domestic market.
However, Chinese partnerships are required for foreign companies to import drugs, so this will ultimately benefit the largest domestic players.
Since 2016, Beijing has:
- created a priority review pathway for key imported drugs;
- allowed overseas clinical trials for imported drugs;
- removed tariffs on all imported cancer drugs.
In 2017, it added 339 domestic and foreign drugs to the list of 2,535 reimbursable drugs, the first additions in eight years.
Improving drugs safety
The State Council last year introduced several policies to reinforce drug and vaccine safety and supervision, all pending enactment by the National People’s Congress Standing Committee.
Vaccine Administration Law
This new law establishes mandatory liability insurance and stipulates that every batch of vaccines must be inspected and authorised.
It encourages industry integration, and research and development, through preferential tax policies, guaranteed profits and centralised price negotiations at the national level.
Chinese manufacturers' investment in research and development is much lower than their international counterparts
Drug Administration Law
An amendment to this law shifts the regulatory focus from certificates to ongoing compliance and supervision, and increases penalties, currently 2-5 times the value of the drug products, to 5-30 times the value – in addition to criminal liability.
It requires the manufacturer to implement a traceability system, with especially strict provisions for vaccine traceability information.
Basic Medical, Hygiene and Healthcare Promotion Law
This new law lays out the basic principles of healthcare in China.
It stipulates that drugs review and approval should be based on clinical needs.
It encourages centralised purchasing of drugs by the state and strengthens price supervision and investigation of price monopolies (see Anti-monopoly enforcement will strengthen in China). It also bans prices lower than the production cost.
It encourages the development of an information system and big-data applications in healthcare while protecting personal information (see New rules strengthen data privacy in China).
Institutional changes
The efficiency of these policies will be strengthened by an institutional reshuffle last year that created dedicated administrations for China’s healthcare policy (see Xi’s big bureaucratic shake-up).
The China Drug Administration has replaced the China Food and Drug Administration. The separation of food and drug safety issues should allow for better monitoring and reduce drug approval time.
The new State Medical Insurance Administration, directly under the State Council, oversees medical insurance policymaking and centralises the basic insurance schemes of urban employees, rural residents and urban non-employee residents, previously managed separately.
It also centralises drug price negotiations and procurement, which will make negotiating drug prices with foreign companies more effective.
The new National Health Commission is tasked with improving the overall health conditions in China, with a focus on disease prevention and health education.
Reducing costs at the hospital level
Other reforms aim to reduce medical bills for patients by changing drugs prescriptions at the hospital level.
In January last year, a pilot programme in 100 prefecture-level cities abolished drug price markups at public hospitals. Hospitals will only be allowed to charge the wholesale price instead of a 15% markup as previously. This reform will remove existing incentives for doctors to sell unnecessary, expensive drugs to complement their salaries.
China will also accelerate the implementation of a Diagnosis-Related Groups system, piloted in several provinces during the past few years, according to a State Medical Insurance Administration notice in December. This system, widely used in the United States and Europe, sets a fixed price that government-led insurers can reimburse hospitals for each disease.
As a result, hospitals will be under pressure to reduce their costs and their prescriptions of unnecessary drugs. In the long term, this will help improve public confidence in doctors.
This article was first written for the Oxford Analytica Daily Brief, which is the copyright holder.