High drug prices: no easy way to cut the Gordian knot

By staff reporter Zhang Yingguang and intern Dai Wei

to his family in the remote northwestern province of Ningxia, where for many years he lived and practiced medicine. His daughter buys the drugs and sends them more than a thousand miles back to her father in Beijing.

“Drug prices in Beijing are too high, and many of the inexpensive drugs have disappeared from the Beijing market,” Dong said. He estimated that purchasing the drugs in rural Ningxia saves him at least 1,000 yuan (US＄123.5) a year.

Many have noted this yawning gap in medicine prices between urban and rural areas. For example, Ceftazidime, which is used to treat bacterial infections, costs 20 yuan (US＄2.5) per injection in rural areas, while patients in first-class urban hospitals pay up to three times that price.

According to the National Development and Reform Commission (NDRC), which controls drug prices, generic versions of brand-name medicines are subject to strict government price controls, while corresponding brand-names can be sold at much higher prices. The cost of the same medicine can thus vary wildly depending on who has manufactured it and what name it bears.

But what has embarrassed policy-makers is less that this price gap exists and more that generic drugs have all but disappeared from more expensive urban markets, leaving urban residents without access to lower-priced drug options. Analysts says that consumers in large urban areas, who enjoy public medical subsidies and are generally better-off in the first place, are the losers of the medicine market’s distorted pricing system. Although the NDRC has lowered drug prices seventeen times, their cost remains one of the public’s top concerns.

“Most of Beijing’s hospitals keep only a small amount of low-priced penicillin or other antibiotics in stock – for their employees and their families,” said Zhang Miao, a pharmacist at a Beijing hospital. “A distorted pricing mechanism is at work for antibiotics in China; the higher the prices are, the more they are prescribed.” Although the NDRC has tried many times to lower prices, manufacturers just rename their products to circumvent regulation.

In industry jargon, low-priced drugs sold mainly in rural areas are labelled “ordinary,” which are generic versions of brand-name drugs whose contents are similar or even identical. Newer, brand-name drugs are called “special new.”

A law passed in 2000 requires hospitals are required to buy their most-prescribed medicines through a competitive bidding process to lower prices. But sales of new drugs are heavily dependent on sales executives, or “representatives,” from pharmaceutical factories. According to Zhang Miao, doctors receive commissions from those representatives depending on how much of the drug they prescribe; the more prescriptions, the larger the commission. To promote sales, pharmaceutical manufacturers must also earmark funds for “public relations,” including obtaining approval for “self-pricing” to sell their products at a higher price. The consumer pays the costs of that promotion: according to one general manager at a large state pharmaceutical manufacturer, who declined to be named, promotion fees account for about 30-40 percent of his company’s drug prices.

Prescribing physicians aren’t the only ones who benefit from these commissions, sources say; promotional benefits are shared within a hospital between pharmacists, doctors, and others in charge of medicine-related affairs. “Before 2000, when the government launched the bidding system for hospitals’ drug purchases, a sales representative generally needed to go through 18 people to ensure that doctors would prescribe the drug,” said Zhang Xin, who has worked as a sales representative for five pharmaceutical manufacturers over seven years. “The price would increase at every link.” While the 2000 reforms established a bidding system to keep prices down, its effects for many drugs have been far outweighed by these sales and promotional costs.

Analysts say that flawed market regulation is a key cause of the unaffordable drug problem. China also allows hospitals to profit from drug sales, and that doctors’ salaries are unusually low.

NDRC regulations allow pharmaceutical companies to price their own brand-name products independently. Selling them at higher prices means more funds are available to cover the exorbitant cost of promotion and sales. That arrangement has prompted any manufacturers to go to great lengths to ensure that regulators categorize their new drugs as “new-specific” rather than generic. Some simply add several inactive ingredients and label the old drug with a new name to make it a “new” invention.

One expert told that lax regulation for drug approval was the State Food and Drug Administration (SFDA)’s most serious flaw. The agency approved almost 10,000 new drugs last year alone; in contrast, the United States approved only 136. Chinese standards for approval are much more lenient than those of the United States. Analysts say that without an effective watchdog mechanism to supervise the approval process, opportunities for rent-seeking are high.

The government has implemented a bidding scheme in hospitals to help reduce price irregularities. But while such a mechanism should theoretically help get lower-priced generic drugs in the door at urban hospitals, it does not ensure that doctors will prescribe them. More fundamental changes are necessary to solve that problem. Analysts say policy-makers need to reform the pricing mechanisms themselves, strengthen the approval process for new drugs, and enhance hospital supervision. They should also form independent committees to supervise and investigate excessive prescribing.

On a larger scale, the Ministry of Health must also separate its policy-making responsibilities from its direct oversight of hospital operations, said Ni Jian, a professor at Guangxi Medical and Pharmaceutical College. Its dual role blurs its responsibilities and makes it more difficult for the Ministry to defend the public interest in an unbiased way.

English version by Xin Zhiming and Lauren Keane