WP/2004/CHN/HTP/5.1/001
AC: 02.02.02.AW.02
Reform of the Chinese Pharmaceuticals System:
A Review and Evaluation
①
The pharmaceutical production and distribution system is an important part of the medical
and health system. An appropriate pharmaceutical system can effectively promote the
healthy development of the health sector; if not appropriate, the pharmaceutical system
can have serious negative effects on the development of the health sector. Viewed from
the current situation in China, a series of blatant contradictions and problems appeared
during the development of the health sector. Among these, the negative impact caused by
problems in the areas of pharmaceutical production and distribution cannot be
underestimated. Therefore, it is necessary to carry out a comprehensive reappraisal and
analysis of the process, characteristics and problems of the reform of the pharmaceutical
system in China.
1. A retrospective and appraisal of the pharmaceutical system during the period of
the planned economy
1.1 The basic characteristics of the pharmaceutical system during the period of the
planned economy
1.1.1 The basic goal of the State’s high-level emphasis on pharmaceutical
development was to ensure basic medical access and to solve the lack of treatment
and medicine
At the early period of the establishment of the New China, the foundation of the
pharmaceutical industry could be said to be extremely weak. Only large cities such as
Shanghai and Tianjin had a few small-scale medicine factories, with quite inferior
production capability and technical levels. At that time, the yearly production volume of
bulk drugs did not even reach 100 tons. Most medicine products relied on imports. At the
same time, the commercial network for pharmaceuticals was quite sparse. A serious lack
of basic medicinal materials along with extremely high prices was a contradiction facing
the pharmaceutical sector at that time.
Based on the above-mentioned contradictions, the Central Committee took as their
primary task in the medical area to quickly and efficiently organize the production and
①
Here, “pharmaceutical” research mainly involves the cycle of production, distribution and consumption
of chemical-based medicines. This report does touch on aspects of medical research, medical
equipment and Traditional Chinese Medicine (TCM), but these are not the focus of the study.
supply of medicine, in order to satisfy disease prevention and treatment requirements of
the military and of urban and rural areas. In a national pharmaceutical production industry
meeting held at the beginning of the 1950s, a developmental policy was established
stipulating “production of bulk drugs as the primary focus, and prepared medicine as
secondary; Traditional Chinese Medicine should undergo a focused, planned
reconstruction”. At the national commercial pharmaceutical industry meeting held in the
mid-1950s, the primary duty of the commercial pharmaceutical industry was stipulated as
“providing medicine for the masses, and satisfying the medicinal needs of the masses.”
1.1.2. The production, distribution and pricing of medicines adopted a rigorous
administrative planning method
--In the production aspect, the producer, what was produced and the amount
produced were all for the most part determined by government planning
In the early days of the founding of the PRC, aside from the few pharmaceutical plants in
operation in the liberated areas, most pharmaceutical corporations were private
corporations. At the beginning of the 1950s, the State, through socialist restructuring of
national capital chemical production industries, gradually accomplished state ownership.
At the same time, the State began to newly construct a set of state (run) pharmaceutical
production enterprises. State-owned enterprises, along with a few collective enterprises
that were also essentially state-owned, became the mainstay of medicine products
production, especially chemical-based medicine products. Based on the basic
organizational pattern of the State-controlled economy at that time, each State-run
medicine factory carried out its production according to State planning; what kinds and
what amounts of medicines produced were all controlled by state planning.
As for the production administration system, in the mid-1960s the China Pharmaceutical
Corp. was established. This organization was responsible for the unified direction of the
national pharmaceutical production sector, for arranging uniform production planning and
scientific research planning, and for the uniform standardization and layout of the
development of the pharmaceutical production sector.
The production of Traditional Chinese Medicine (Chinese medicinal herbs, prepared
Chinese medicine and ready-to-use herbal forms of Chinese medicine) was also subject
to planning, but the special nature of Chinese medicine made it different from
chemical-based medicines. For the production of medicinal raw materials, the China
Medical Raw Material Company was founded in 1955, and was responsible for drawing up
a plan for the production of medicinal material (herbal plants). This unit was reported to by
relevant commercial, agricultural, forestry and health departments or reported to by the
administrative bureau in charge. In 1958, the State Department issued the “Directive
Concerning Problems in the Development of the Production of Chinese Medicinal Raw
Material”, which was a step in incorporating the production of Chinese medicinal materials
into State-directed planning. As for the production of prepared Traditional Chinese
Medicine and ready-to-use Chinese medicines, in the beginning of the 1950s, especially
after the socialization of all sectors had basically been completed, several large traditional
medicine stores in each location took steps to separate the production of prepared
Chinese medicine and herbal raw materials from the traditional stores, independently
establishing special Chinese prepared medicine factories. The medicine production
capabilities of these relatively small stores were centralized and organized to form
relatively large-scale Chinese medicine factories. Administration of relevant production
enterprises also adopted the planned administration method.
--As for distribution: for chemical-based pharmaceuticals, a centralized, unified,
top-down three-level administrative allocation system was formed; for Traditional
Chinese Medicine a method of “unified planning, hierarchical administration” and
“balance allocation” was implemented.
As for the distribution of chemical-based pharmaceuticals, the 1958 national commercial
pharmaceutical industry meeting stipulated that: “The allocation of medicine products
shall be primarily provided to organized medical units, with allocations to the market being
of secondary importance. The goal is to enable organizations with nationwide scope to not
only achieve a high degree of unity, but also bring into play local activism, in order to unify
the planning, unify the system and unify the policies.”
As for operation of the mainstay, by carrying out socialist reform of private commercial
enterprises and constructing a new State-owned industry model, in 1956 a comprehensive
State-run commercial pharmaceutical leadership position was set up.
As for the organizational framework, under the leadership of the China Pharmaceutical
Corp. as the national administrative organ for commercial pharmaceuticals, a large
administrative region and provincial-level pharmaceutical companies were established. At
the same time, a central first-tier pharmaceutical purchase and supply station was
established, along with second-tier provincial wholesale purchase stations and
county-level pharmaceutical companies, forming a medicinal products distribution system
that had “a uniform standard, three-tiered wholesale hierarchical top-down chain of
command, and hierarchical allocation”. In the process of subsequent development, due to
changes in the pharmaceutical administration system, relationships between the levels in
the three-tiered wholesale system also changed. However, the Central Committee and the
commercial pharmaceutical enterprises at the provinces, autonomous regions, and
directly administered municipalities remained in close contact, planning and carrying out
several related overall policies and important measures in a unified manner.
As for distribution of Traditional Chinese Medicine, in 1953, the State determined to carry
out the administration of the grading of pharmaceutical products under uniform planning.
According to the method of “uniform planning, graded administration”, Chinese medicinal
materials in the category of agricultural sideline products were classified into two types,
Type 2 and Type 3. Those classified as Type 2 (mainly the essential raw materials of
traditional medicine) were administered by the State departments in charge; those
materials classified as Type 3 were administered by the local region. For the
administration of Type 2 planned products, a “balance of allocation” method was adopted.
Based on the population of the province, autonomous region or directly administered
municipality, the local sales practices and medical usage, special consideration was given
production units, minority regions and localities. For Traditional Chinese Medicine, aside
from a small number of Type 2 products that used a quota allocation system, the
exchange of other Type 3 medical materials was mainly subject to market regulation. The
market regulation model involved (a) to convene various kinds of exchange fairs for Type
3 medicine materials, and (b) to open up Chinese medicine markets and country fair
trading. Free markets for Type 3 Chinese medicine materials were also quite common.
--As for pricing, medicine production and the wholesale and retail prices of
medicine products were all determined by the government.
As for the price of chemical-based pharmaceutical products, financial accounting was
based on the specific planning system of the time and the uniform receipts and
expenditures for State-owned enterprises. Whether raw bulk medicine materials or
prepared medicines, whether wholesale or retail, prices were all determined by
government planning, and most were determined by Central Committee government
department in charge.
As for the pricing of traditional Chinese medicines, in 1956, the administrative
departments in charge of the Central Committee carried out the administration of the
purchase prices of 17 kinds of plant raw materials in 32 major production locations, the
wholesale prices for sales districts of large- and middle-sized cities, and prices for imports
and exports. The standardization of other Type 3 medicinal materials was administered by
the medicinal products companies of the provinces, autonomous regions, or
directly-administered municipalities. In 1957, the number of product types administered by
the State increased to 38, and in 1960 increased again to 65; the State also controlled the
purchase prices of 111 principle production locations and the wholesale prices of several
large cities. After 1961, the purchase categories of Type 2 products were expanded.
1.1.3 Emphasis was placed on the special role of medicine products in serving the
health needs, and adherence to the principle of “lowest medicine prices”
In 1953, the 4th National Commercial Pricing Working Meeting proposed the pricing
guideline slogan “low profits for the cities, a reasonable urban-rural ratio”. In 1958 the
National Commercial Pricing Working Meeting also proposed the slogan “Commodity
prices should be conducive to production, conducive to public consumption and to State
fund accumulation, with all three in appropriate distribution.” Specifically with regards to
pharmaceutical prices, four principles were raised: (1) Domestic production should
adequately provide products that are depleted after discounting, resolutely retaining the
low prices; (2) For high-profit imported medicinal products, the lowered price should be
appropriate in that it doesn’t stimulate a large increase in sales volume; the lower price
should not stimulate a large sales volume expansion that leads to increased consumption
of foreign exchange; (3) Products with a low imported investment and a high domestic
investment should be priced with reference to the set price of domestic products, in order
to spur the development of domestic production; (4) Pharmaceuticals for which supply
does not meet demand, and which are still at a stage of supply-demand disequilibrium,
usually should not be priced low. In the mid-1960s, to address the lack of affordable
medicine in remote areas and minority areas, national unified out-of-the-factory prices and
retail prices for pharmaceuticals were established, eliminating local pricing differences.
In the more than 30 years after the founding of the PRC, the nationwide total value of the
price of chemicals dropped to 100 million only seven times, principally involving antibiotics,
antipyretics and analgesics, vitamins and medicines for local ailments. According to
calculations, the medicine products retail price index for 1950 was 100; by 1969 it dropped
to 20.85; in 1983 it was 16.42; and in 1984 the pharmaceutical price index had fallen to
15.72, a total drop of 84.28%.
Through planned adjustment of the purchase prices of medicine materials, the appropriate
management of sales prices for Chinese medicine, implementation of “low-profit
operations”, numerous revisions of the pricing method for traditional Chinese medicinal
materials, and through two nationwide price reductions in 1960 and 1969, the price of
traditional Chinese medicine fell continuously.
1.1.4 No beneficial relationship between medical services and pharmaceuticals
In the era of the planned economy, the service goals at every level and of every type of
medical and health unit were very clear; namely to elevate the health of the masses,
rather than any profit motivation. In their specific organizational model, medical services
organizations basically all adopt a direct planning administration model, with accounting
records and salaries all determined by the government or its associated economic
collectives. At that time, there was no relationship between the income of medical and
health services and units and the individual economic benefit of professional personnel.
Medical service organizations and professional personnel had no motivation to benefit
from profits derived from pharmaceutical sales, and in fact, there was essentially no
opportunity to obtain such profits. In other words, at the time the system was such that the
medical services and pharmaceuticals were separate.
1.1.5 The administration system for medicine products overall was centrally
managed by the central government, but at the lowest level was always
administered by branch departments.
As for vertical hierarchy, the administration of medical reference materials, standards and
inspection, the chemical-based pharmaceutical industry, the medical instruments industry
and commercial pharmaceutical industry, all adopted the top-down vertical administrative
method of relevant departments of the Central Government.
At the lowest level, basically there was an adopting of separate department administration
model for each separate area. That is to say, the operations for the various
pharmaceutical production, circulation and medical administration domains were
administered by different governmental departments or their associated units. Among
these, due to the influence of State organ departments and adjustments in function, the
specific low level administrative systems also underwent numerous adjustments and
changes. Along with administrative work allocation adjustments at the Central
Government level, the local governments often also undertook related adjustments.
1.2 Positive results and problems of the pharmaceutical system during the period
of planned economy
1.2.1 The main positive results
--The scope of pharmaceutical production rapidly expanded, with the distribution
network increasingly covering the cities and countryside, basically solving the
problem of lack of medical services and drugs, and realizing access to medicines.
1.2.1.1: Production of pharmaceuticals enjoyed a relatively large development,
resulting in a clear improvement in the serious of lack of basic medicines.
Through more than 30 years of development after the founding of the PRC, China’s
pharmaceutical industry production quotas, the types of pharmaceuticals, medicine
production techniques, and pharmaceutical production volumes all saw enormous
①
increases. As of 1985 , there were a total of 839 pharmaceutical factories in the
chemical-based medicine industry system, machine-based medicine factories numbered
32, and there were 66 factories making pharmaceutical glass, auxiliary materials, and
wrapping materials, producing a cumulative total of 1255 kinds of bulk medicines, and
producing more than 3000 kinds of products. In 1985, the total gross product of
pharmaceuticals reached 10.704 billion yuan (based on 1980 prices), more than 300
times that of the early part of the 1950s. The production volume of the 12 kinds of bulk
medicines reached 5.76 tons, more than 600 times that of the year 1952. From the
viewpoint of types, the chemical-based medicine industry is closely contingent on the
needs of prevention and treatment. From the beginning of the 1950s to the early part of
the 1960s, in the chemical-based medicine industry, anti-infection medicines, local
disease treatments, and widely-used analgesic medicines and vitamins were major
development points. From the latter part of the 1960s to the early 1970s, steroids and
contraceptive medicines, anti-tumor medicines, heart and blood medicines, and
semi-synthetic antibiotics saw a rapid development.
The production of Traditional Chinese Medicine also witnessed significant development.
The production of prepared Chinese medicine involving handwork operations in small
shops with a workspace in back developed in scope into a significant industrial system. In
1985, there were 544 ready-made medicine factories nationwide, and more than 2000
prepared medicine factories (processing departments). After the founding of the PRC, 600
new medicine products had been put into production, and there were more than 20 new
compounds. Compared to 1957, in 1985 the land are for the growing of home-grown
medicinal herbal plants involved in the production of traditional Chinese medicine raw
materials had more than doubled, and the total production volume of traditional medicine
materials had increased 1.9 times.
The increased speed of pharmaceutical production completely altered the reliance on
imports and the severe shortage of Traditional Chinese Medicine materials, and the
severe lack of pharmaceuticals was essentially improved. Several bulk pharmaceuticals
(such as vitamin C) were even exported overseas.
①
Because of data material （to be clarified）, data of 1985 is used rather than data of 1978
1.2.1.2: An integral supply network essentially ensured the urban and rural supply
of pharmaceuticals
As for the construction of the distribution and supply network, the number of commercial
pharmaceutical operations network nodes increased rapidly, forming a widespread
preliminary urban and rural social pharmaceutical commercial operations network with a
relatively complete product line, and open supply line channels, which basically met the
medical and social needs of the society. In 1978, national retail pharmaceutical sales
reached a total of 5.026 billion yuan, 10.4 times the 1953 total of 440 million yuan, with an
annual growth rate of 10.2%.
Through the three-tiered pharmaceutical wholesale network, pharmaceuticals could
basically achieve an appropriate distribution on a domestic scale. Urban and rural
pharmaceutical supplies could be basically guaranteed, and the lack of availability or
access to medicines among the vast majority of peasants came to an end.
--Holding the price of medicines to a low level, along with the implementation of
three-item medical safeguard system, basically ensured that the broad masses
could gain access to affordable medicines.
Due to the implementation of the principles of “low-profit medicine prices” and “lowest
medicine prices”, prices for pharmaceuticals continued to fall, solving the pre-Liberation
problem of inflated medicine prices and the inability of average citizens to afford
medicines. Figure 1 shows the price index for China’s pharmaceutical prices from 1952 to
1978 (with 1952 prices set at 100). From the figure it can be seen that by 1978 the total
price level for medicines was roughly half that of 1952.
100
Index of pharmaceutical prices
90
80
70
60
50
40
30
20
10
1978
1977
1976
1975
1974
1973
1972
1971
1970
1969
1968
1967
1966
1965
1964
1963
1962
1961
1960
1959
1958
1957
1956
1955
1954
1953
1952
0
Figure 1. Index of changes in Chinese pharmaceutical prices during the period of the
planned economy.
At the same time, rural cooperative medicalasystems, urban worker’s health insurance and
public health system gradually developed, basically achieving coverage for urban and
rural residents, and to a great extent realizing cost sharing. This extensive coverage
system, plus a devaluing and gradual decrease in the basic level of medicine prices,
began to guarantee the access of urban and rural citizens to affordable medicines.
--Medical services oriented toward the common good (or at least medical services
with no profit motivation) basically guaranteed appropriate access.
As described earlier, in the period of the planned economy, medicine and health belonged
to the social commonweal sector, and in organization and administration models,
accounting administration, and allocation, all were subject to strict planned administration.
Added to this the strict price controls on medicine at the time, and the result was that
medical service units and professional personnel had no motivation or opportunity to profit
from the sale of pharmaceuticals. Thus, the use of medicines was mainly determined by
the patient’s needs, thus basically guaranteeing residents an appropriate access to
pharmaceuticals.
1.2.2 The main problems
--The overall production capability, especially technological level, was relatively
low.
Although the pharmaceutical industry developed quickly, it was subject to the negative
influence of many factors such as a weak infrastructure. The overall scope of the
pharmaceutical industry was relatively small, and the production volume of some kinds of
medical products and medical devices were insufficient to satisfy demands. New product
development, especially the development of new medicines, was relatively slow. Many
prescription drugs and medical instruments and devices had to be imported.
Pharmaceutical technological production levels and quality levels for medicine production
and related facilities was relatively backward, and the automated production of
chemical-based medicines lagged far behind advanced foreign levels, all of which
negatively influenced the technological level of drug production and the raising of quality
control. Quality control and methods for Traditional Chinese Medicine were backward, and
uneven quality and lack of technical expertise in the preparation of herbal remedies were
quite common.
--In areas such as pharmaceutical production and distribution the efficiency of
micro-management was relatively inadequate
Under the influence of the rigidly planned administration system, in the areas of
production and distribution there was a common problem of inefficient micro-management.
Production companies and distribution companies all lacked any effective motivation
mechanisms or any awareness of investment control. These problems brought about a
disjunction between production and supply and demand in parts of the domain, and had a
clear negative impact on the development of the health sector.
--The instability of the administration system caused disruptions in production and
distribution in parts of the domain
At the lower level, the operational administration of different domains such as production
and distribution was always the burden of branch departments, and due to frequent
changes made it difficult to formulate a complete, unified pharmaceutical policy system. It
was difficult to elevate the level of sytematicity, and difficult to enact adequate adjustments
to major problems. Not only were administrative costs relatively high, it was also difficult to
standardize aspects such as pharmaceutical production and distribution. The efficient
allocation of resources was also negatively impacted. In addition, frequent changes in the
administration system had a negative impact on specific production and distribution
activities. For example, from the period 1958-1963 and 1966-1976, there emerged
problems such as the mismanagement of medicine factories and shoddy production of
medicine products, making it difficult to guarantee the quality of medicines, and giving rise
to frequent quality-control incidents.
2. Review and Evaluation of Pharmaceutical System Reform since
Implementation of Reform and Opening-up Policy
the
2.1 Basic trends and characteristics of the pharmaceutical system since the
implementation of the reform and opening-up policy
2.1.1 Pharmaceutical production overall moved in a market-oriented direction
--As to the main body of production, all kinds of capital could enter the
pharmaceutical production field, and the ownership structure developed from
single public ownership to coexistence of various kinds of ownership.
On one hand, the combined opening-up of the entire economic field, especially the
enterprise field, allowed other capital to gradually enter the pharmaceutical production
field. Since 1979, foreign capital was first allowed to enter this field. Under the guidance of
the principle of “new product types, new technology, and export-orientation”, foreign
capital was continually introduced, and the number of joint ventures steadily increased in
the 1980s. In 1990, the State Drug Administration issued the document Current Industry
Policy and Implementation Methods in the Pharmaceutical Industry to encourage “the
establishment of more joint ventures and solely foreign-owned enterprises in the forefront
of opening-up”. After 1992, foreign investment in China and the establishment of
Sino-foreign joint pharmaceutical enterprises accelerated. After the 1990s, with the
gradual development of non-governmental economic strength in China, domestic
non-governmental capital also began to pour into the pharmaceutical production field,
causing further diversification of the major investors in pharmaceutical production.
On the other hand, in the middle and late 1990s, based on the impetus of the reform of
State-owned enterprises, China actively further explored various kinds of realization
models of public ownership in the medicine industry, and declared that the development of
economy with different types of ownership was permitted in this field except for products
for which foreign investment was limited or prohibited by the State. The original various
kinds of publicly-owned enterprises went through various reconstructions and
restructurings, including cooperative ventures, joint ventures, revisions of the stock
system and the complete sale of domestic and foreign private capital, etc. The original
public ownership system was also completely transformed and segmented. Currently, a
pattern of coexistence of many kinds of ownership has been formed in the medicine
production field.
--The business objective of manufacturing enterprise has been completely
transformed, with profit becoming the central guiding principle
In the period of the planned economy, production adopted the single public ownership.
Due to the specific economic structures at that time, enterprises did not, and could not in
fact, take the profit motive into account. Since the reforms, this situation has been
transformed in a comprehensive manner. From the very beginning, foreign capital and
domestic non-governmental capital were profit-driven. In addition, following a series of
reforms, the traditional business objectives and business models of State-owned
enterprises have experienced an overall transformation, gradually becoming the main
body of the market with the profit objective as the core principle. In the early period,
enterprises were launched into the market mainly by means of transforming their
operation mechanisms and adjusting their accounting relationship with the government.
After the middle of the 1990s, the status of the enterprise as the main body of the market
was strengthened by means of property system reform.
--As to the specific goods produced and their respective output levels, the
decisions went from being totally planned to being market-governed, and the
relationship among the different enterprises moved towards the all-inclusive
competition.
After 1984, upon the issuing of the document CPC Central Committee’s Decision on
Economic Structure Reform, China carried out comprehensive reform of the planning
system for medicine production, and the planning modle was gradually replaced by
market mechanisms. Since 1985, China has reduced bulk drugs under the mandatory
planned management from the original 12 categories and 292 kinds to 30 kinds, with the
remainder under the guidance planned management. In addition, 30 kinds of traditional
Chinese medicinal materials were reduced to 4 kinds. Medical appliances and
pharmaceutical products were no longer listed in the mandatory planned management.
With respect to the management of bulk drug distribution, among the 80 kinds of bulk
drugs that had been distributed by China National Pharmaceutical Industry Corporation,
30 kinds continued to be mainly distributed by the corporatin, and 30 kinds adopted a
bottom-up balance coordination model, with the distribution authority of the other 20 kinds
being delegated to the lower levels. After 1992, with the definitive establishment of market
economy, the mandatory planned management of all chemical bulk drugs was finally
abolished, upon which the products and output of all kinds of enterprises gradually
became market-governed, and the relationship among the enterprises moved towards
all-inclusive competition.
2.1.2 Pharmaceutical distribution moves towards overall market orientation.
The distribution gradually developed from planned unified purchase and sales to a
complete opening up. And the distribution structure gradually transformed from three-level
distribution wholesale system directly under the control of government to a structure
embracing diverse economic sectors. Various kinds of wholesale and retail institutions
could freely do business and freely compete. And the manner of distribution and trading
also became diversified in comprehensive manner.
The reform of pharmaceutical distribution system can be overall divided into three phases:
2.1.2.1 From the early period of reform and opening-up to the late 1980s: market
mechanisms introduced in a comprehensive way with priority on “opening up”.
First of all, various economic sectors, such as collective economy, private economy, and
private sector of the economy etc., were allowed to be incorporated into the
pharmaceutical distribution field. In 1984, four ministries and commissions, including the
State Drug Administration, jointly issued the regulation Opinions on Urban and Rural
Collective and Individual Enterprises Dealing in Pharmaceutical Products, according to
which urban and rural collectives and individuals, with the examination and consent of city
(county or banner) drug and health authorities, and the approval of the business
administration department, were allowed to deal in common medicines and health
materials. According to the provisions of the Pharmaceutical Administration Law of the
People’s Republic of China, which was executed in 1985, any enterprises meeting certain
qualifications can apply to become a pharmaceutical trading enterprise, and the
corresponding license for pharmaceutical trading shall be issued by the State.
Second, planned management methods were reformed. With the establishment of Drug
Production and Selling Planned Management Methods in 1981, the State Drug
Administration began to explore the reform of planned management methods for
pharmaceutical product distribution. From this point on, the range and number of the
product types under planned management were gradually reduced, and the mandatory
targets were changed to a guidance targets.
Third, the investment mechanism was reformed. The approval power of investment in
pharmaceutical industry was delegated to each province and municipality. The investment
model was also changed from a high degree of State centralization to decentralization,
and the investing body was now composed of the State, the locality and the enterprise,
where previously the State had been the sole investor.
Fourth, the three-level wholesale system was gradually broken apart. In 1984, the
pharmaceutical distribution system began to be reformed throughout the country, with
wholesale stations being transferred to the local authority. At the same time, the closed
business model of fixed supply division and fixed wholesale level was broken, and was
replaced by a business model involving open operations and purchasing according to
quality.
Fifth, State-owned commercial enterprises were reformed according to the widespread
refom measures for State-owned enterprises. State-owned pharmaceutical enterprises
could, within a range specified by the upper levels, and in compliance with the commodity
distribution law and reducing distribution links, enlarge the business and choose various
channels to purchase medicines according to market needs. In addition, according to the
principle of separation of property rights and management rights, more and more
decision-making power over distribution and financial system was granted to the
enterprises. With regards to business model, after 1984, at every locality and every level,
alliances between industry and commerce and between enterprises were actively
promoted to establish pharmaceutical trade centers. Various trading methods were
adopted, with the allocation of resources carried out according to the market changes.
With the above-mentioned reforms, distribution of pharmaceuticals became increasingly
dependent on the market, making the pharmaceutical market and business operations
more dynamic. At the same time, many disruptions occurred. First, there were too many
channels. Apart from State-owned commercial enterprises, the sales volumes for
industrial self-marketing, health authorities, supply and marketing cooperatives,
collectives, and individually-run marketing departments, were all relatively large. Second,
there was a sharp increase in the number of enterprises. According to incomplete
statistics, in 1990 the number of domestic enterprises engaged in wholesale medicine
was 33,857, an increase of over 14 times the 2253 that existed in the early 1980s. Among
these, collective and individual wholesale enterprises numbered 22,003, accounting for
65%; those falling short of the “two certificates and one license” requirement numbered
7658, accounting for 23%; and the number of enterprises with no license was 10,946,
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accounting for 32%. Third, there was the problem of disordered operations. The
increasing problem of “all walks of life deal in medicine” casued disruptions in the
wholesale sale and import of medicine products, resulting various kinds of unjust and
nonstandard business practices. And the production and marketing of bogus medicines
persisted despite repeated prohibitions. The market was flooded with false and inferior
medicine, which affected the health and safety of the public.
2.1.2.2 The late 1980s to the middle 1990s: market-oriention was retained, while
strengthening regulation and ordering
Addressing disordered business practices resulting from the reform and opening up policy,
in July 1989, the State Drug Administration issued the Notice on Strengthening the
Management of the Wholesale Pharmaceutical Market, which stipulated that the
wholesale medicine business should be carried out via the main channels of the State
pharmaceutical commerce, i.e. the qualified state professional wholesale pharmaceutical
company and the wholesale institution under it; and other industries, whether collective
and individual, shall by no means carry out such business. In May 1990, the State Council
approved the State Drug Administration document Notice on Further Regulating and
Ordering the Pharmaceutical Market. According to these documents, in 1990 the
regulation and ordering of the pharmaceutical market was carried out throughout the
country, with a priority on ordering the pharmaceutical wholesale link and cracking down
on the unlawful practices of producing and selling inferior medicines.
After 1992, the medicine market was completely opened again in some regions, and the
problem of “all walks of life deal in medicine” and disordered medicine distribution once
again emerged. According to the instructions of State Council at the time, the State Drug
Administration restated and stressed that it would continue strengthening the
①
From remarks by Qi Mojia, Director of the State Pharmaceutical Administration Bureau, at the National
Conference on the Regulation and Ordering of the Pharmaceuticals Industry, June 7, 1990. (excerpts)
management of the pharmaceutical market, and clearly indicated that the pharmaceutical
market could not be opened up in a blind fashion, and the medicine should not enter into
urban and rural trade fairs. In 1993, the State Drug Administration issued Numerous
Regulations on Opposing Unfair Competition in the Pharmaceutical Industry, which
stipulated that “pharmaceutical manufacturers may independently choose a lawful
wholesale pharmaceutical enterprise to sell its products, and are normally prohibited from
directly selling the products to pharmaceutical units or retail pharmaceutical enterprises.
Retail pharmaceutical enterprises can independently choose a lawful wholesale
pharmaceutical enterprise to purchase needed medicines, and are commonly prohibited
from directly purchasing products from pharmaceutical manufacturers.” In 1994, the State
Council issued the Urgent Notice on Further Strengthening the Administration of
Pharmaceutical Products, which provided detailed provisions for strengthening the
qualification inspection, the administration of the purchase and marketing of medicine and
the professional marketing of traditional Chinese medicinal materials, and research and
development of new medicines, as well as intensifying the activities of combating the
production and marketing of fake and inferior medicines, and legally strengthening
aspects such as administrative supervision. In 1996, the State Drug Administration issued
a document to implement the Notice on Continuing Ordering and Standardizing
Pharmaceutical Production and Operations and Strengthening Pharmaceutical
Administration issued by the General Affairs Office of the State Council, and required a
“strict ban on medicine fair trade markets, including various kinds of fair trade markets that
are ostensibly launched to set up medicine exhibition centers, medicine information
centers, and health product markets, etc.; a strict ban on unlawful administrators lacking
certificates or with incomplete certificates, and an intensification of activities to combat the
production and marketing of fake and inferior medicine to prevent the resurgence of such
problems after rectification.”
Though supervision was prominent in this phase, the market-oriented tendency remained
unchanged for distribution areas where pluralistic bodies dealt in medicine in a
competitive manner, the business contents and business model were self-determined,
and the market played the principal role in wholesale medicine and retail institutions
including state commercial enterprises.
2.1.2.3 From the middle 1990s to the present: the market-oriented tendency of
medicine distribution was promoted, while at the same time a technical level
system was constructed to address specific problems.
In the middle 1990s, China explicitly resolved to establish a market economy system. With
this background, the market-oriented tendency of the distribution system began to be
accelerated.
In 1996, in “Ninth Five-year Plan”, the State Drug Administration put forward the slogan of
“accelerating the reform of the commercial pharmaceutical distribution system and
establishing a new medicine distribution system meeting the requirements of the socialist
market economy”. In 1997, The CPC Central Committee and State Council’s Decision on
the Reform and Development of Sanitation was issued, which clearly indicated that the
reform of the pharmaceutical production distribution system was one of the three tasks for
the reform of medicine and health. According to the requirements of relevant documents,
in 1999, the State Economic and Trade Commission produced the document Instructive
Opinions on Deepening the Reform of Pharmaceutical Distribution System, stipulating the
overall objectives of the reforms as the realization of “effective adjustment and control,
scientific management, unified opening up, and ordered competition” in new medicine
distribution system, through “three rectifications and one strengthening” of the State
medicine distribution enterprise, gradually realizing the strategic reform of intensive
pharmaceutical operations, perfecting the distribution network, modernizing the
distribution means and establishing healthy market mechanisms.
As a whole, the advance toward a market-orientation during this phase had the following
three characteristics:
First, restrictions were completely lifted on the management permissions, and all
restrictions for various kinds of capital to enter the distribution field were gradually
cancelled. In 2001, the State Drug Administration, in the 10th Five-year Plan”, in
accordance with the reform direction of 1999 clearly stated the requirement of
“strengthening the reform of the property system for pharmaceutical distribution
enterprises and the reform of the business model, and resolutely break up local
monopolies, ownership monopolies, and all kinds of administrative protections that block
fair competition, while giving full play to the role of market mechanisms to create a fair
competitive environment and promote the formation of unified national market”. Not only
could all kinds of domestic capital now enter the distribution field, but restrictions on
foreign capital were also gradually lifted. After 2002, Sino-foreign joint retail enterprises
began to emerge in the commercial pharmaceutical field. In 2003, foreign capital
essentially entered the medicine distribution field, further diversifying the main body of the
pharmaceutical distribution market. At the end of 2004, China completely opened the
pharmaceutical distribution sector to foreign capital, marking the entry of the
pharmaceutical distribution area into the stage of international competition.
Second, according to the unified plan for the reform of State-owned enterprises, reform of
the system of State commercial pharmaceutical enterprises with property reform as the
core was promoted, and the central role of the market for relevant enterprises was further
strengthened. At the same time, the restructuring and merging of enterprises of different
ownership types was also further promoted.
Third, restrictions on business methods, distribution and trade were further lifted. Apart
from the conventional manner of entering the retail level and hospital pharmacies through
wholesale, such methods as direct sales by the manufacturer, commissioned exclusive
sales, on-line transaction, and fair trade markets emerged.
Further advances in market-oriented tendencies inevitably brought certain problems, such
as market disruption, and the decline of rural markets and undeveloped regional markets.
In view of these problems, while overall continuing to promote the direction of
market-orientation, China also issued technological policies at specific levels in an attempt
to standardize the market on the basis of adhering to the basic market-oriented direction.
First, there was a continued strengthening of the standardization of medicine distribution.
In March 1997, six ministries and commissions including the State Administration of
Industry and Commerce jointly issued a notice to elicit opinions on the rectification of
illegal drug commissions. In 1998, five ministries and commissions including the State
Drug Supervision Administration jointly issued the “Urgent Notice on Strictly Prohibiting
the Establishment or Covert Establishment of Various Kinds of Drug Fair Trading Markets”
requiring that “all kinds of drug fair trade markets must be banned according to the law”. In
2001, the General Affairs Office of the State Council issued the document “Opinions on
Rectifying and Standardizing Drug Market”.
Second, construction of the rural drug supply network and supervisory network was
carried out, addressing the problem of drug supply in rural regions. In 2003, the State
Food and Drug Supervision Administration issued the Notice on Carrying Out the
Strengthening of Rural Drug Supervision and Promoting Rural Drug Supply Network
Construction Experiment. And in 2004, it issued the document Instructive Opinion on
Carrying out Strengthening of Rural Drug Supervision Network Construction and
Comprehensively Promoting the Rural Drug Supply Network Construction to carry out the
construction of the rural drug supply network throughout the country.
Thirdly, a large-scale development aiming at the problem of too many links in distribution
field was constructed. In 2002, the State Food and Drug Supervision Administration stated
that “the construction of a modern pharmaceutical distribution system is a necessity for
deepening the reform of the pharmaceutical distribution system”. In 2005, the State Food
and Drug Supervision Administration issued the document Opinion on Strengthening Drug
Supervision Management and Promoting the Development of Modern Distribution of
Medicines, and stressed “the development of modern medicine distribution is an important
measure in deepening the reform of the medicine distribution system and promoting the
scale and standardization of pharmaceutical trading enterprises and further standardizing
pharmaceutical distribution.” In addition, it also carried out the experiments on purchasing
medicines by bid invitation. In 2000, five ministries and commissions including the Ministry
of Public Health issued the Notice on Printing and Distributing Numerous Regulations for
Medical Institutions on Experiments on Purchasing Medicines by Bid Invitation, and
initiated the experiment, which was subsequently carried out throughout the country. The
purpose was to solve the problem of high drug prices by controlling the purchase link.
As a whole, after the reform and exploration of several phases, the unitary pharmaceutical
distribution mode has been thoroughly broken. However, a new pharmaceutical
distribution mode that meets the requirements of the socialist market economy system
has not yet been formed, and the reform of pharmaceutical distribution system remains a
very difficult task.
2.1.3 The price policy moves from overall control to complete opening up, except
for certain basic drugs controlled in the retail link.
With regard to pricing, except for medicines listed in the State basic medical insurance
catalogue, and certain kinds of special medicines controlled for the maximum retail price,
the control on prices (including factory price, wholesale price and retail price) of (most)
other kinds of medicines have been comprehensively opened up. According to the degree
of State control over pharmaceutical price, it can be divided into three main phases:
2.1.3.1 From the early period of reform and opening-up to the middle and late 1980s:
A gradual lifting of price controls.
Since the reform and opening-up, pharmaceutical price reform has kept pace with the
reform of pricing in other fields, and the pattern of the State exerting overall control over
medicine prices has been broken. According to the requirement that “the State adjusts the
market, and the market guides the enterprise”, China carried out a series of reforms on
the pharmaceutical price management.
First, the rate of purchase price to selling price and the pricing methods were adjusted. In
1980, the State Drug Administration issued a document to adjust the factory price and
selling price of certain kinds of medicine whose prices were excessively higher than their
value. In order to solve the problem of losses incurred in commercial operations, the rate
of purchase price to selling price was revised again, including promoting the rate of
purchase price to selling price of some kinds medicines and injections with great loss and
high price. In 1984, the State adjusted the price of 119 kinds of medicines and medical
appliances. From then on, the State also adjusted the rules for the difference between the
purchase price and the selling price of medicine. For example, a medicine directly in the
charge of the State was only controlled with regards to its factory price, while the selling
price was determined according to the factory price plus the real freight and
miscellaneous charges, plus a comprehensive rate of about 5%. Another example is that
the commercial internal allocation price was determined by the buyer and seller.
Second, the medicine price management method was improved. Domestic medical
commodities adopt the administration method of combining prices fixed by the State, State
guidance prices and market-regulated prices. In September 1982, the State Council
approved and transmitted the report entitled On Gradually Lifting Price Controls of
Miscellaneous Goods and Carrying out Market Regulation submitted by the State Price
Control Bureau, according to which the control over the price of miscellaneous medical
goods was lifted, and the pricing according to the coordination between industry and
commerce and market regulation were adopted. After the second half of 1983, enterprises
could flexibly fix and regulate the prices of 50 categories, such as tincture, ointments,
powders, and patent medicines, as well as certain medical appliances, chemical reagents,
and glass apparatus etc. according to the market supply and demand conditions and the
production cost variation.
Third, the power of drug price management was delegated to the lower levels. In March
1984, in order to further expand the decision-making power of the local authorities and
enterprises, the State Drug Administration gave full play to the initiative of local authorities
at each level to overall reduce the range of unified pricing. The number of kinds of
medicine whose prices were directly under the control of State Drug Administration was
reduced from 1900 to about 250, and that of medical appliances was reduced from 54 to 9.
The pricing power of relevant products was transferred to local authorities or enterprises.
In the same year, these kinds of medicines were permitted to adopt floating prices
according to the changes of market demand.
During this phase, the control over the price of some kinds of drug was lifted, and the rate
of purchase price to selling price of some kinds of drugs was regulated according to the
actual conditions. In comparison with the principle of “no flexibility allowed” operative in
the past, great progress had been made in this phase.
2.1.3.2 From late 1980s to the middle 1990s: Further lifting of controls.
With the overall advance of reforms of the State price system in the late 1980s and the
subsequent definitive establishment of a market economy system, the complete
cancellation of control over drug prices was put on the agenda. The fixed basic direction
was: the supply-demand relation determines the drug price, and then guides the allocation
of resources to create conditions for further liberating and invigorating state-owned
medicine enterprises.
At the beginning of 1992, the State Drug Administration issued the Opinion on Revitalizing
State-owned Large-and-Middle-Sized Industrial Enterprise in the Medical Industry, which
stated “the enterprise is permitted to set prices according to the State’s unified pricing
method and the supply-demand situation, in order to gradually reduce the range of
products priced by the State, with the exception that those medicines related to the
national welfare and the people’s livelihood must remain under the control of the State.” In
July 1992, the State Drug Administration put forth detailed opinions on pharmaceutical
price reform, namely “the state will manage the pricing policy, pricing principle and pricing
methods instead of the price of specific medicines, and will reduce administrative
intervention and enlarge the enterprise’s power to adjust and set prices. The State will
control the retail price of a few kinds of representative preparations, while the other bulk
medicines and preparations adopt the guidance price to reflect the characteristics of
medical commodities. The State will also strengthen the guidance and coordination of
medicine pricing according to changes in national production and marketing of medicine,
and balance and dove-tail the prices of major types, if necessary, to ensure the practical
①
requirements of the people.”
In the same year, when reviewing “the reform and
opening-up practice of Chinese medical undertakings in the past 14 years”, the State Drug
Administration opined, “the medical price system formed on the basis of planned economy
and welfare knowledge seriously affects the development of the medical economy”, and
①
put forward six items of basic experience.
Among these, “introducing the market
supply-demand relation into the pricing principle to reflect the requirements of the market
economy” and “realizing price-making by the enterprise within the State pricing principle
and policy permission range” were two important items.
Driven by the above-mentioned series of policies, the prices of most domestic drugs were
to be fixed by the enterprise according to the market supply-demand relation, and the drug
prices overall were opened up.
①
Qi Moujia’s speech in a symposium of national directors-general of drug administration authority,
Yearbook of Chinese Medicine, Chinese Pharmaceutical Science and Technology Press, 1993
①
Qi Moujia, “Some Thoughts about the Practice of Reform and Opening-up of Chinese Medical
Undertakings in the Past 14 years”, Yearbook of Chinese Medicine, Chinese Pharmaceutical Science
and Technology Press, 1993
2.1.3.3 From the middle and late 1990s: Strengthening the control over the retail
prices of some drugs.
While mobilizing the enthusiasm of the enterprise, the overall liberation of drug prices also
resulted in the continual and rapid increase of the prices of most drugs, which brought
many problems. Based on this practical situation, under the principle that the drug pricing
was generally determined according to market supply-demand, the State began to
strengthen the control over the retail price of some drugs.
First, the retail price of some medicines adopted government pricing and the guidance
price, and the range of medicines priced by the government was continually expanded. In
1996, the State Development Planning Commission issued the “Provisional Measures on
Drug Price Management” to adopt government pricing and the guidance price for three
kinds of drugs. ② According to the “Opinion on Drug Price Management”, which was
printed and distributed by the State Development Planning Commission in 2000, the
range of drugs priced by the government was extended to include State medical insurance
catalogue. In the meantime, medicines priced by the government were controlled with
regards to the maximum retail price. In 2005, the range of drugs priced by the government
was further extended, for example, the dosage type belonging to prescription drugs but
not listed in Medical Insurance Catalogue was also covered.
Second, drug pricing methods were changed. In 1997 and 1998, the State Development
Planning Commission issued the “Supplementary Regulations on Provisional Measures
on Drug Price Management” and “Notice on Perfecting Drug Pricing Policy and Improving
Drug Price Management” respectively, which provided new regulations on the pricing
methods of drugs priced by the state, and restricted the distribution rate. In the Notice on
Carrying out Experiments on Setting the Price of Some Drugs from the Out-of-the-factory
Link issued in 2005, the State Development and Reform Commission decided to make
experiments on setting the prices of some drugs from the out-of-the-factory link. In the
same year, it provided new regulations on the comparative price relation among the drugs
whose prices were fixed and guided by the State.
Third, the maximum retail price of some drugs was reduced several times. From 1997 to
2005, the prices of some drugs listed in the pricing catalogue were successively reduced
17 times.
Currently, government control mainly centers on the basic medicines, mainly aiming at the
duplicating medicines. The control is mainly aimed to solve the problem of the excessively
rapid increase of drug prices to guarantee that the basic drugs are available to the public.
The control link is also mainly aimed at the retail price. The prices in such links as
out-of-the-factory and wholesale etc. are still determined by the market.
2.1.4 Comprehensive changes in conduct objectives of the medical service system
had an increasingly clear effect on pharmaceutical production, distribution and
pricing.
②
Three kinds of drugs refer to drug whose production and operation are monopolized, a few curative
and preventive drugs that are widely applied in amounts in clinic, and the special drugs such as Class-A
psychotropic drugs and Class-A narcotics and prophylactics etc.
In contrast with common consumer items, drug consumption must be carried out under
the guidance of medical service institutions and doctors. In the planned economy prior to
reform and opening-up, because of the government control over conduct, the financial
system and the doctor’s salary system, the medical service institution and the staff had
neither motive nor opportunity to seek financial gain from medicine. Therefore, their
conduct had little effect on drug consumption, much less on drug price.
After the reform and opening-up, the reform of medical service system thoroughly
changed the above-mentioned situation. Judging from the public medical service
institution, influenced by the adjustment on financial investment system, the financial
management system and compensation manner etc., the institutions concerned gradually
relied on service revenues to maintain operations. Furthermore, the receipts from
medicines gradually became the most important revenue source and directly determined
the financial status of medical service institutions, resulting in a situation characterized as
“supporting the hospital with medicine”. With the further progress of the reform of the
distribution system in the late 1990s, many practices of enterprise reform, especially
linking the service revenue to the personal income, were widely introduced, which made
the relation between the drug consumption and the benefits to medical service institutions
and doctors closer. Private medical service institutions had been profit-oriented from the
very beginning, so it was natural for them to gain profit from the medicine. This situation,
coupled with overall opening up of drug prices and the ample competition in the
production and distribution field, resulted in medical service institutions gradually
becoming the dominant factor in determining the consumption structure and consumption
amount of a drug, which directly affected the product mix and distribution method,
subsequently affecting drug prices in every link. To great extent, it even played a critical
role.
2.1.5 The drug management system experienced a change from “centralization to
decentralization to comparative centralization”.
With the change of production, distribution and pricing system, the drug management
system has also experienced a series of adjustments since the reform and opening-up.
2.1.5.1 In the early period of reform and opening-up: Centralized management of
medicine was carried out.
In the early period of reform and opening-up, in view of the problems resulting from the
comparatively decentralized management system, a centralized management system
was carried out for certain period. In June 1978, the State Council approved the
establishment of the State Drug Administration (directly under the State Council, managed
by the Ministry of Public Health) to carry out unified management over the production,
supply and use of traditional Chinese medicine, Western medicine and medical
appliances. Each province and municipality directly under the Central Government
correspondingly set up a drug authority to carry out unified administration of different
degrees and different methods over the medical enterprises and institutions, as well as
their production and operation, scientific research and education, etc.
2.1.5.2 In the long period from reform and opening-up: The management system
moved to decentralization.
At the horizontal level, with the deepening of the principle of “with economic construction
as center” and a market-oriented process, medicine was managed mainly as a kind of
economic industry with great profit potential that could develop independently.This was
correspondingly reflected in the changes in the medicine management system. In May
1982, the State Chief Drug Administration was changed to the State Drug Administration,
directly under the leadership of the State Economic Commission. Its task and scope of
responsibility, as well as its work relation with each department and relevant unit of every
region remained unchanged. In addition, it carried out international contacts on behalf of
China. The Ministry of Public Health retained the functions of pharmaceutical
administration and supervision. In July 1986, the State Administration of Traditional
Chinese Medicine was established directly under the State Council, which was managed
by the Ministry of Public Health. In May 1988, the State Administration of Traditional
Chinese Medicine put out the traditional Chinese medicine part under the administration
of State Drug Administration, and was amalgamated with State Administration of
Traditional Chinese Medicine to form new State Administration of Traditional Chinese
Medicine, which was under the centralized management of the Ministry of Public Health.
In August 1988, the State Drug Administration became a department directly under the
State Council. Its main functions included: the functional department of the State Council
that manages medicine (not including traditional Chinese medicine), taking charge of the
management over medicine (not including traditional Chinese medicinal materials,
traditional Chinese medicines prepared in ready-to-use forms, and Chinese patent
medicine), medical appliances and medicine-production machines, and medicine
packaging. The Ministry of Public Health was responsible for the national supervision and
administration of medicines. In 1993, after the State Economic and Trade Commission
was established, the State Drug Administration became a department managed by the
State Economic and Trade Commission, whose main functions were guiding the industry
plan and industry laws and regulations of medical industry and carrying out industrial
management.
At the vertical level, with centralization of authority gradually moving to decentralization,
the competent administrative department of local government was given increasing power.
And the level-to-level management system was gradually formed in most aspects, such
as planning, production, distribution, and market supervision.
2.1.5.3 Third phase: From the late 1990s to the current time: the medical
management system moved to comparative centralization.
Because of the disorder in some fields resulting from overall market-oriented tendency of
pharmaceutical production and distribution, another adjustment has been carried out on
administration system since the middle and late 1990s. In 1997, the CPC Central
Committee and the State Council jointly issued the Decision on Reform and Development
of Public Health, which clearly put forth the principle of “actively probing into the reform of
the pharmaceutical administrative system to gradually form a unified, authoritative and
effective administrative system”. In 1998, the State Council carried out a reform of the
organizational structure and approved the establishment of the State Drug Supervision
Administration, which was based on medicine production and the distribution supervision
functional department of the former State Medicine Administration, the traditional Chinese
medicine supervision functional department of the State Administration of Tradition
Chinese Medicine, and the former pharmaceutical administration and supervision
functional department of the Ministry of Public Health. Moreover, it was established in the
context of 40 ministries and commissions of the State Council being reduced to 29, which
showed that the central government attached much importance to drug supervision. The
new State Drug Supervision Administration carried out administrative supervision and
technological supervision on the research, production, circulation, and use of medicines.
The former State Drug Administration’s functions of establishing development strategy
and long-term plan for the medicine industry, macro-control of the economic operations of
the medicine industry, statistics and information affairs of the medicine industry, and the
emergency deployment of drugs and medical appliances in the event of disaster, epidemic,
or war, were transferred to the Pharmaceutical Department of the State Economic and
Trade Commission.
In the same year, the Central Staffing Office issued a notice proposing a suggestion for
the provincial-level government drug supervision institution: “centralize the drug
supervision management functions that are decentralized in the pharmaceutical
administration and supervision, and production and distribution field of the departments
concerned to the province (autonomous region or municipality directly under Central
Government) drug supervision authority, and carry out unified management. In addition,
the provincial-level drug industry management function will be carried out by the provincial
(autonomous region or municipality directly under Central Government) economy and
trade committee.” As to the drug supervision, the central government and the provincial
government carried out comparatively vertical administration. Central finances and
provincial finances were divided, and the upper-level officials took charge of the lower
level. In addition, the central government carried out dual administration over the
provincial government, with priority given to the local authority.
In 2003, the State Drug Supervision Administration was changed to the State Food and
Drug Supervision Administration, with the drug supervision management function
unchanged. And the functions of the former State Economic and Trade Commission (it
was removed in 2003) with regards to medical industry planning, industry policy,
economic operations adjustment, technological reconstruction, and investment
management were brought to the new State Development and Reform Commission.
2.2 Effects and problems resulting from medical system reform
2.2.1 Effects resulting from medical system reform
--The productive capacity for medicines increased greatly, and the public had more
and more choices for medicines.
In the drug production field, with the change of investment body from unitary to pluralistic,
and the continual advance of enterprise system reform, the productive capacity and scale
of medicine increased rapidly. As shown in Chart 2, from 1980 to 2003, the average rate of
increase of the total output value of the national medical industry exceeded 15%, higher
than the average rate of increase for other industries, thus realizing the objective of
doubling and quadrupling production value in 1990 and 2000, respectively.
4500
50.00%
4000
40.00%
3500
3000
30.00%
2500
2000
20.00%
1500
1000
10.00%
500
全国医药工业总产值 亿元
2003
2001
2002
1999
2000
1997
1998
1995
1996
1992
1993
1994
1990
1991
1988
1989
1986
1987
1984
1985
1982
1983
0.00%
1980
0
比上一年增长率
Figure 2. Gross Output Value and Rate of Increase of the National Medical Industry
from 1980 to 2003
全国医药工业总产值 Gross output value of the national medical industry
亿元 100 million yuan
比上一年增长率 Growth rate from the previous year
(P.S. The statistics of this chart come from the Yearbook of Public Health in China, Annual
Report of Medical Statistics in China, and the Yearbook of Pharmacy in China etc., among
which the data of 1981 and 1982 are estimated value. The data of 1980s take that of 1980
as reference, while the data of 1990s takes that of 1990 as reference.)
Currently China has become one of the largest producers of bulk drugs in the world.
Among the over 2000 kinds of bulk drugs worldwide, China produces 1500 kinds, with the
output reaching 800,000 tons, making China second only to America. Among these
medicines, the output of the five kinds, terramycin, penicillin, vitamin C, cephalosporins,
and doxycycline hydrochlocide, rank first in the world. At the same time, the number of
types of drug has significantly increased, and the product mix has been greatly improved.
China can now produce over 4000 kinds of specifications of preparation, 8000 kinds of
specifications of Chinese patent medicines, and about 10,000 kinds of specifications of
medical appliances. Therefore, the consumer has more and more choices.
--The drug distribution scale is enlarged and accelerated, and the contradictions
between supply and demand have been comprehensively relieved.
Because of the overall increase of productive capacity and the overall opening of
distribution field, gross sales of medicine has been on the continual increase since the
reform and opening-up. Because drug production and supply has become increasingly
dependent on market supply-demand relations and the competition tends to be gradually
intensify, the pace of drug distribution increases significantly. In most of regions, with the
rapid increase in the number retail enterprises, medicines become more easily available.
At the same time, foreign trade further has further developed, coupled with the increase of
domestic productive capacity, so that the supply-demand contradictions existing in the
planned economy have also been relieved considerably. Currently, the business scope of
commercial medicine has extended from drugs, medical appliances, chemical agents and
glassware to Chinese patent medicines, traditional Chinese medicinal material, and other
relevant commodities. The total number of specifications has reached 27,000, including
about 5000 kinds of drugs, 6000 kinds of medical appliances, 13,000 kinds of chemical
agents, and 3000 kinds of glassware.
2500
45%
40%
2000
35%
30%
1500
25%
20%
1000
15%
10%
500
5%
医药商业销售总额 亿元
2003
2002
2001
2000
1999
1998
1997
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
0%
1980
0
比上年增长
Figure 3. Gross Sales and Rate of Increase of National Commercial Medicine from
1980 to 2003
(P.S. The data of this chart mainly comes from the Yearbook of Public Health in
China, among which the data of 1989 and 1994 are estimated values.)
医药商业销售总额 Gross sales of medical commerce
亿元 100 million yuan
比上一年增长率 Growth rate from the previous year
--Micro-operation efficiency of medicine production and distribution enterprises
show a general increase.
Whether in the production field, or in the distribution field, with the advance of enterprise
reform, especially the overall intensification of the interest incentive system, the efficiency
of micro-operations has increased markedly, and the service level and service quality
have improved significantly.
--Medicine production technology level increases significantly, and the drug quality
also improves significantly.
In addition to the great increase in overall output, with investment increases,
intensification of competition, overall opening-up, and increase of the State’s requirements
for the level of medicine production quality and technology, and especially with the
advance of compulsory GMP authentication system, the overall technology level of
medicine production enterprise has been greatly promoted, and overall drug quality has
improved remarkably. As a whole, the security of drug is better ensured.
--The medical industry has made contributions to other aspects, such as increase
in GDP and the employment rate.
In 2005, the production value of the pharmaceutical industry accounted for 4% of GDP. In
many regions, the pharmaceutical industry has become the pillar industry, and has made
contributions to the development of the local economy, increases in local fiscal revenue,
and increases in employment opportunities.
2. 2.2 Problems occurring in the course of system reform
Although the market-oriented system reform has brought about many positive effects,
problems in the medical treatment area are still quite prominent due to the impact and
restriction of various factors.
--The problem of over-competition is prominent in the production area, thus the
pharmaceutical production industry as a whole is still at a rough development
stage.
Affected by multiple factors such as development planning, the number of pharmaceutical
production enterprises increased rapidly; however, a considerable part of enterprises
have redundant or similar product structures at the low level resulting in seriously
redundant productive forces and service functions as well as a severe problem of
over-competition. There are more than 6000 pharmaceutical factories at present, of which
small enterprises account for over 75%, with productive forces having a low degree of
concentration; moreover, there is a significant problem of product overlapping, and the
percentage of single varieties of medicine with similar structures reaches 90%. One type
of medicine might be produced by 70-80 different factories. Some medicines such as
amoxicillin are manufactured by more than 200 medicine factories, Analgin is produced by
more than 300 factories and more than 800 factories produce Nofloxacin. At the same
time, most varieties of medicine are so vastly over-produced that the utilization rate of
production equipment for the industry as a whole is less than 50%.
On the one hand, the serious problem of over-competition creates a common lack of
innovation, and there are few medicines for which the company itself holds intellectual
property rights. Statistics show that, for 837 Western medicines produced by China in
recent years, 97.4% of them are duplications of existing medicines, and the medicines
with self-owned intellectual property rights are less than 3%. For many years, investment
in research and development for the entire pharmaceutical industry has fluctuated around
1% of the total sales amount, while the advertising expenses have accounted for 5%~10%
of the sales amount. Whereas the top-ranking foreign enterprises in the global market are
all research & development-type pharmaceutical enterprises whose investments in
research and development exceed 15% of total sales amount. On the other hand, the
competition among productive enterprises is quite irregular, depending more on low-level
price wars and changes in marketing tactics. This makes it impossible to form a “survival
of the fittest” mechanism and it is also difficult to ensure the gradual improvement in the
medicine quality.
--Distribution and business operations for medicines is quite chaotic.
On the one hand, analogous to the situation in the area of production, pharmaceutical
distribution enterprises are characterized by “large quantity, scattered distribution and
small scale”, with a quite low degree of market concentration. Currently, from the view of
wholesale enterprises, though there are 16000-17000 throughout the country, less than
5% have annual sales totalling more than RMB 50,000,000 yuan, 10 have the sales
amounts of RMB 1,000,000,000 yuan, and only 3~6 have the sales amounts of more than
RMB 5,000,000,000; as for retail enterprises, the largest chain group has the turnover of
just RMB 500,000,000 yuan. The low degree of concentration for pharmaceutical
distribution increases the difficulty of supervising and managing pharmaceutical
distribution and makes the healthy self-development of distribution enterprises more
difficult as well.
On the other hand, the distribution of medicines involves many links, and the unlawful
business practices are prevalent. According to statistics, medicines are distributed in 6~9
links from production to final sales, in which both legitimate open bargainers and
under-the-table covert bargainers are involved. Legitimate open bargainers include over
6,000 pharmaceutical enterprises, more than 10,000 medicine agents, 16,000~17,000
wholesale pharmaceutical enterprises, 120,000~130,000 retail drugstores, more than
300,000 medical institutions and a number of medicine electronic business trade
platforms and entry bargainers. In addition, there are more than 100,000 bid invitation
agents, over 100,000 medicine representatives, more than 300,000 hospital pharmacies,
2,100,000 doctors with the right of prescription, some deans of hospital and directors of
hospital pharmacies, and numerous private druggists engaged in cash transactions at
illegal medicine markets. There are others who also participate in pharmaceutical
businesses in a semi-open or covert manner. As far as the business model is concerned,
the illegal commercial bribery, of which main method involves sales commission, is
currently in vogue. General estimates show that the difference between the factory price
and sales price of a medicine can be up to 10 times, or even more than several dozens of
times. Relevant guilds estimate that the gross profit of productive links ranges from 15%
to 30%; that those of wholesale medicine enterprises ranges from 10% to 15%; that those
of hospitals and retailers ranges from 20% to 30%; and that nearly 20% of surplus profits
are obtained by covert bargainers, a proportion of which is used as sales commissions in
pharmaceutical purchases and sales.
In addition, counterfeit medicines have not yet been eradicated from the market, and
medicine supply and supervision are comparatively weak in remote rural areas.
--The phenomenon of inappropriate medicine use is severe at the medicine
consumption link.
As mentioned earlier, as for method of medicine consumption, the terminal medicine
consumption structure and amounts are dominated by medical service institutions and
doctors and affected by the increasingly intense profit motive. The final decisive factor of
the medicine consumption structure is not the need for disease cure or the quality and
cost performance of a product, but rather the economic benefits of the medicine’s use.
Inappropriate medicine use takes diverse forms; for example, no definite instructions for
use, continued use despite contraindications, overdosage or underdosage, improper
usage and so on, but the most outstanding problems are inappropriate use and
incompatibility of the medicine in combination with other medicines. The abuse of such
medicines as antibiotics, analgesics and and cortin are most worrisome the moment.
The abuse of antibiotics and their improper use in combination with other medicines not
only wastes medicine and money but also increases the side effects of antibiotics and
resistant strains of bacteria. Serious abuse can even result in death of the patient. 1Data
from retrospective case analyses show that the occurrence rate of inappropriate medicine
use is about 19.6%~20% of hospitalized cases in China, that is to say, inappropriate
medicine use exists in 1/5~1/4 of inpatients, resulting in frequent clinical incidents of
iatrogenic diseases and drug-induced diseases.2 Furthermore, in order to increase profits,
it is quite common for doctors to prescribe medicines where no disease is present, and
excessive medication for patients with minor ailments.
--Price fixing mechanisms for medicines are distorted, exacerbating the problem of
medicine prices deviating from medicine value.
The fact that medical service institutions and doctors determine which medicines are
consumed and the amounts consumed, quite naturally affects the ultimate price of the
medicine. The profit objective of service institutions and doctors is becoming increasingly
intense Therefore, what ultimately determines the price of the medicine is not primarily
product quality or the cost effectiveness of a product, but the profits earned by medical
service institutions and doctors. This fact combined with over-competition in the areas of
production and consumption, along with quite free price-fixing mechanisms result in an
across-the-board distortion of the pharmaceutical pricing mechanism. The multilinked
price increases, arbitrary and inflated high prices (even including prices determined by the
State), various forms of profit sharing, sales commissions and other problems are
increasingly intense, completely distorting medicine price mechanisms. Certain
high-quality, reasonably-priced medicines are gradually abandoned, whereas the
medicines that bring high profits are favored, regardless of their value.
1“Summary
of National Academic Seminar on Appropriate Medicine Use”, Chinese Medical Sciences
Journal, 1985.5
2“Security
Supervising Department of State Food and Drug Administration, Revaluation after Chinese
Medicines Enter the Market and Current Situation and Development of Adverse Response Monitoring”,
Seminar on Risk Management After Medicines Enter the Market, July, 2005, Xi’an.
As shown in Fig.6, from the mid-1980s to the mid-1990s, the average annual medicine
markup exceeded 10% in China. Although the State has reduced the price of some
medicines 17 times in succession as of 1997, the overall cost of medicines is still so high
that such costs cannot be borne by average citizens.
350
300
250
200
150
100
50
0
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Figure 4. Changes in the Chinese medicine price index since the period of reform
and opening up
2.2.3 Some problems have a distinct impact on the medical health career and the
development of pharmaceutical industry.
-- The healthy development of the health sector is severely impacted.
First, the product structure of medicines is distorted, and a proportion of basic
medicine usage cannot be ensured.
As pharmaceutical production moved to a market-governed system, an inevitable result
was that production became subject to the market demands. As mentioned earlier, the
excessive pursuit of profits on the part of medical service institutions has a direct and even
decisive effect on the consumption of medicines. Thus what specific medicine is used is
increasingly based on the profit advantage. As a result, the consumption of medicines
overall tends toward greater amounts, newer products and finer quality; by contrast, many
safe and effective basic medicines are excluded due to low profits. This situation directly
affects the product structuring in productive links via the conductive action. In
consideration of economic benefit, general pharmaceutical producing enterprises tend to
produce medicines higher grade, more expensive and more profitable medicines instead
of more basic medicines that are low-priced and effective. The lack of supply for some
commonly-used basic medicines is an increasingly common problem. In addition, a large
number of traditional basic medicines have disappeared. It has also happened that
certain medicines gradually disappear following a State-mandated price reduction, which
causes a rise in the price of medical services, and to a certain degree threatens the public
needs of disease control. As an example, Methylthioninium Chloride recorded in the
Catalogue of National Basal Medicines (2002 Edition) is an effective medicine for the cure
of cyanide, nitrite, aniline medicine toxicoses, but domestic large-scale medicine purchase
and supplying stations have no long-term stocks in their storerooms due to the impact of
pricing and other factors, thus threatening the lives of certain patients such drugs became
unavailable. As another example, the basic medicine Neostigmine is an effective
treatment for Myasthenia Gravis, but China has a severe shortage of the drug due to a
reluctance on the part of of producers to manufacture it. It was also reported in the Wuhan
Evening News on May 31, 2002 that patient died because a type of medicine costing only
8 jiao was no longer being produced.
Secondly, the problem of the lack of affordable medicines is increasingly common
due to inflated and continually rising medicine prices, such that the basic health
rights of a significant proportion of people cannot be assured, and the construction
and development of a medical insurance system is further impacted.
Driven by profit seeking at all links, pharmaceutical supply and consumption increasingly
pursues new, high-quality and trendy medicines, which is to say, expensive medicines.
At the same time, the problems of large prescription amounts, large dosages and
redundant medicine use are increasingly frequent in the consumption link. Consequently,
the consumer price of medicines is constantly rising, the direct result of which is a
significant number of citizens are unable to afford the cost of seeing a doctor and buying
medicine. The result of 3rd National Health Service Survey in 2003 indicates that: 48.9% of
Chinese citizens do not see a doctor if they are ill; and 29.6% of patients who have been
diagnosed as requiring hospitalization are not hospitalized, the main reason being the
high cost of treatment. The reason for high medical service costs is largely due to the
influence of high medicine prices. Statistics show that in China the consumption of
medicines consistently accounts for the major proportion in total medicine and health
expenditures. Influenced by various factors such as advancements in examination
techniques and adjustments in the mechanism of fee compensation, the proportion
between medicine expenditures and total health expenditures has reduced in the past few
years, though it is still on the high side. For example, the proportion is 44.06%, 30% and
18% in China, the developing countries, and in OECD countries, respectively, of which the
lowest proportion is in Denmark and Norway, with less than 10%.
Proportion between medicine expenditures and total
health expenditures
51
50
49
49.59 49.73
48.81
48.61
48
47.56
47.97
47
46.88 46.87
46
45.94
45.91
45
45.58
45.4
44
43.83
44.06
43
42
41
40
1990
1991
1992
1993
1994 1995
1996
1997
1998 1999
2000
2001
2002
2003
Figure 5. Proportion of medicine expenses and total health expenses
A rapid rise in medical expenditures attributed to medicines and other problems results in
a common problem that seeing a doctor is expensive, but it also has a very negative
impact on the construction of other systems. For example, for the past few years the
relevant departments of the State have been putting effort into expanding the coverage of
medical insurance, but it has been difficult to achieve breakthroughs, precisely because of
the lack of control over the behavior of medical service organizations, especially the lack
of control over treatment costs due to the pursuit of profits from medicines.
Third, adverse medical and economic effects caused by inappropriate medicine use
has become a social problem that can not be ignored.
It is widely recognized that inappropriate medicine use is a common problem resulting
from various factors, but primarily from doctors’ instructions, and the problem is becoming
increasingly evident. On the one hand, the problem has a severe negative impact on
public health. Comprehensive research shows that drug-related deaths account for about
1/10 hospital deaths in China, and that patients with adverse reactions to medicines make
up 10%~20% of medicine users 3 . The proportion of urban children developing a
resistance to antibiotics has reached 1/3~1/24. Due to the extensive abuse of antibiotics,
the human body and bacteria have developed resistance to certain antibiotics, resulting in
a dangerous situation in which some diseases have no medicines to cure them.
On the other hand, with domestic health resources severely limited, and a significant
number of citizens with no guarantee of basic medical access, inappropriate medicine use
engenders serious waste. A report by the World Bank indicates that medicine
expenditures in China accounted for 52% of total health expenditures in 2003, while the
3
4
China Prescription Drug, Issue 9, Nov., 2002.
Shao Xudong, et al. “Who should be responsible for the drug resistance of a half of children?”.
Pharmaceutical Economy News, Apr 13, 2001.
number for most other countries throughout the world was 15%~40% over the same
period. By international standards, 12%~37% of total health expenditures have been
wasted in China due to “large-dosage prescriptions”5.
--A quite significant impact on the self-development of pharmaceutical industry
First, it is difficult to enhance the competitiveness of pharmaceutical enterprises.
Whether production enterprises or distribution enterprises, they are generally small-scale,
with a low degree of industrial concentration. Moreover, due to a number of factors, it is
difficult to integrate them, thus it is hard to enhance their competitiveness.
In the production field, over-competition in the pharmaceutical area caused by
over-dispersal of industrial organizations, disorder in the distribution market and
consumption links along with distorted prices gives rise to a massive flow of
pharmaceutical profits into medicine links and medical service institutions, making it
difficult to guarantee the profit levels of production enterprises. Production enterprises are
unable to maintain stable development due to a gradual decrease in profits. According to
the statistical data from the China National Bureau of Statistics, pharmaceutical
enterprises have a profit margin 26.24% below the national industrial level; profits of a
considerable number of large-scale antibiotics production enterprises have decreased by
approximately 50%, and nearly 2/3 of domestic pharmaceutical enterprises are confronted
threats to their very survival, not to speak of technological innovation. Under these
circumstances, it is almost impossible to expect them to compete internationally. For
example, the total sales volume for all Chinese chemical-based pharmaceutical
enterprises is less than that of one American enterprise, Pfizer. In the performance aspect,
the difference is also enormous. Take Pfizer again for example: In 2004 alone its profits
increased by 191% to USD $11,360,000,000, its sales rose by 17% to USD
$52,510,000,000, and the percentage ratio between its profits and sales reached almost
22%.
There are also outstanding problems in the distribution field, where in 2004, the profit rate
was only 0.55%. Since corporate profit levels are low and scale is small, the prospects of
these enterprises are not promising, given a situation in which international capital has
begun to enter the distribution field.
Second, distorted business practices of pharmaceutical enterprises seriously
impacts healthy self-development and the standardization of market construction.
In both the production and distribution fields, commercial bribery, bogus price fixing,
commercial fraud and other undesirable practices resulting from over-competition have
become common phenomena, influencing the healthy self-development of
pharmaceutical enterprises, directly influencing the healthy development of the
pharmaceutical industry as a whole and seriously hampering the standardization of
5
5
China Prescription Drug, Issue 9, Nov., 2002.
Shao Xudong, et al. “Who should be responsible for the drug resistance of a half of children?”.
Pharmaceutical Economy News, Apr 13, 2001.
5
World Bank. China Rural Health Work: Multiple Challenges, 2004.
market order.
Thirdly, a series of other problems such as environmental pollution and waste of
resources have also appeared.
Due to the redundant construction at the low level, medium- and small-scale enterprises
have dominated the pharmaceutical field; moreover, their technical level is generally
inferior, which gives rise to problems such as environmental pollution and waste of
resources.
3. Problems encountered in the course of pharmaceutical system reform that
require serious consideration
In a word, since the reform and opening up policy, the Chinese pharmaceutical system
has undergone enormous changes, and has seen positive results, but concomitant
problems and consequences have become even more evident. Many problems deserve
serious consideration, whether from the aspect of development considerations or from
specific design of the system. In summary, these problems center around the following
aspects.
3.1 The guiding principles of pharmaceutical development overemphasize the
needs of industrial development and its significance for economic growth.
Without a doubt, medicines have the attributes of common merchandise. At the same time,
they possess special attributes different from common consumer items. Above all,
medicines should be considered as necessary items for treating diseases and maintaining
health, thus differing from common consumer products. For medicines, special
emphasis must be placed on access, including the availabilty and affordability of the
product. In other words, the development of medicines must first and foremost emphasize
their importance for public health and the development of the health sector.
Consideration must be given to the fact that the above-mentioned special considerations
have been neglected to a great extent in the course of pharmaceutical development in
recent years. Although the special niche of pharmaceutical was discussed during this
period, overall the emphasis on the development of the pharmaceutical industry and its
contribution to GDP have gradually taken on a guiding force in the discussion due to an
over-emphasis on economic growth and GDP. Reference to documents on
pharmaceutical policy over the past years reveals a clue, namely that “pharmaceutical
industrialization” or “pharmaceutical modernization”, in its pursuit for “an increase in the
production value of medicines” and “a realization of the transformation from a large-scale
pharmaceutical nation to a powerful pharmaceutical nation” have gradually over a period
of time become the sole objective of pharmaceutical development. However, the key
problem, namely the public availability of basic medicines, has clearly been neglected.
The ultimate result is that the public availability of basic medicines decreases while the
production value of medicines is soaring.
The guiding principles of pharmaceutical development are distorted. One reason is that
for quite a long time the development strategy of the country as a whole put too much
stress on growth, such that the development of social sectors, including the medical
health sector, was ignored to a certain extent. In addition, the influence of other systems
cannot be overlooked, of which one critical problem is the relationship between the central
and the local. Since the implementation of the reform and opening-up policy, the
decision-making system has evolved from one of centralized power to one of
decentralized local power. The financial system has transformed from one of uniform
receipts and expenditures to one of ownership of many levels, and local governments
must now be responsible for local development and stability. Such systems mobilize the
power of local governments and also add pressures, especially financial pressures, on
local governments, such that local governments now pursue local economic growth and
financial earnings with greater intensity. Many local governments have chosen to promote
economic growth through the development of the pharmaceutical industry. The results of
comprehensive research show that two-thirds of provinces and more than 80 regions and
municipalities have taken the pharmaceutical industry as their “backbone industry” and
have formulated relevant industrial support policies and developmental plans. In addition,
many local governments have regarded pharmaceutical production as a new source of
local economic growth, and have encouraged projects and products that will about
short-term economic benefits. These measures have resulted in a disconnect between the
developmental needs of the pharmaceutical sector and those of the health sector, and has
led to such problems as the convergence of industrial structure as well as low-level
redundant construction.
3.2 Excessive dependence is placed on market forces such that governmental
functions are seriously weakened.
As mentioned, the reform of pharmaceutical production and distribution has tended
toward overall market-orientation in recent years. Without doubt, under the backdrop of
the entire economic system’s transformation from a planned economy to a market
economy, the general trend of market mechanisms comprehensively being incorporated
into the production and distribution of pharmaceuticals is entirely correct. The problem is
that medicine is a special category of commercial product, one for which aspects such as
availability and quality must be considered. It is obvious that many of these objectives
cannot be achieved with total dependence on market mechanisms. Therefore, a
governmental intervention function is indispensable. International experience tells us that
governmental intervention in pharmaceutical development is a universal practice. But,
Chinese practice in these years shows that governmental functions have been weakened
in many aspects, as described below. First, governments lack necessary planning
concerning future development, and thus this aspect is determined by the enterprises
themselves according to the market supply and demand, which is the major factor in the
disjunction between pharmaceutical product structure and pharmaceutical demand, as
well as for the lack of availability for basic medicines. Second, there is a lack of effective
control over industrial development so that the pharmaceutical production and distribution
fall into a pattern of low-level redundant construction and over-competition. Third, there
is no effective supervision over product quality and distribution. In principle, both a
supervision system and a supervision instrument should co-exist, but actually the
supervision is considerably less than ideal, resulting in longstanding problems of disorder
and disruption.
The first reason for the excessive dependence on the market and greatly weakened
governmental functions is an unrealistic, blind faith in the market, and an inadequate
awareness of the problems of market malfunctions that would inevitably arise in the
pharmaceutical field.
The second reason is the influence of other systems. For example, the
previously-mentioned relationship between the central and the local is a prominent factor.
Neither planning nor supervision can be successfully achieved in a context where the
relationship between the financial and business rights of the central and local are
unfavorable, and the local governments exhibit excessive zeal for economic growth.
The third reason is problems with the administrative system and administrative methods.
A feature of the administration system has always been decentralization. Viewed
horizontally, such functions such as development planning, supervision and quality
inspection of medicines have always been assumed by different departments; moreover,
pharmaceutical administration and the medical service administration are also separate.
The direct result of this situation is that it is difficult to formulate a national policy
framework for the planning of pharmaceutical research and development, production,
distribution, consumption, pricing and various links as a whole. The policies of different
departments are diverse, lack internal cohesion, and sometimes even conflict with each
other. In addition, not only is it hard to coordinate the policies themselves, a series of
problems emerge in the course of policy implementation. Viewed vertically, the
administration by levels has predominated since the reform and opening-up policy was
launched. Although the administration system of pharmaceutical supervision has been
regulated, at present, pharmaceutical supervision is still managed by different levels of the
Central Government and the provinces. Other functions including planning continue to be
administrated by multiple levels. Such a system of multi-level management clearly has
many disadvantages where the mutually beneficial relationship between the central and
the local has been severed. It is hard for local governing departments to avoid the
influence of local interests, eliminate conflicts between policy objectives and practice,
prevent various kinds of local protectionism, and form a fair, unified and open
pharmaceutical market system.
The problem of backward administration modes and methods is extremely serious. As for
administration methods, the construction of a legal system and administration in
accordance with law have been emphasized in recent years, but in practice, the
construction of the legal system is lagging. There are still gaps in policy and law with
regards to such medicine links as production, distribution, pricing, advertisement, usage
and supervision. In addition, though laws and policies exist for some aspects, the
problem of out-dated laws, longstanding mutual contradictions and conflicts results in no
applicable law to refer to, and leads to extremely lax administration. In the process of
supervision there is clearly a lack of law enforcement and supervisory capability. At the
same time, the lack of administrative transparency, under-the-table operations and even
power-for-money deals continue to exist. It is difficult to curtail such improper activities.
3.3 Severe distortions have developed in medical service system reforms and in the
hospital-medicine relationship, gradually becoming a core problem.
Another often noted characteristic of medicine products is that ordinarily consumers do
not themselves make the decision to use the product, but use it only under the instruction
of a doctor. It is this characteristic that determines the close relationship between the
hospital and the medicine, which in turn can easily lead to mutually beneficial
arrangements between the hospital and the medicine provider, resulting in various
problems. Hence, an common method worldwide is to sever the mutually beneficial
relationship between the hospital and medicine providers through a comprehensive
system design including the establishment of specific investment and compensation
mechanisms for medical service institutions, the establishment of a standardized
allocation system and the separation between the hospital and medicine providers, etc..
As mentioned in previous paragraphs, during the process of the reform of China’s medical
service system, under the influence of many factors, not only was the path of
profit-motivation encouraged, but medical service institutions were also encouraged to
gain profit from pharmaceutical consumption. In the early stages, income from medicines
was used merely to help relieve the shortage of other devotions or compensations,
namely so-called supporting a hospital through medicine. As the operational mechanism
of medical service institutions was further regulated, and especially as the distribution
system gradually developed to link up service earnings, the income from medicine sales in
particular, along with the private earnings of medical service personnel, seeking profit
through medicine became common practice among many medical service institutions and
doctors. The above fact, in addition to over-competition in the production and distribution
area, leads to a widespread distortion of the hospital-medicine relationship, and gradually
forms a pattern in which doctors control the pharmaceutical market for their own interests.
What and how much is consumed becomes determined not by actual needs of patients,
but by whether medical service institutions and doctors can obtain economic benefit. The
problem of over-competition exemplified by “large-dosage prescriptions” and commercial
bribery exemplified by the so-called “sales commission” have emerged and becoming
increasingly intense. Consequently, the economic benefits of the consumer are greatly
harmed. At the same time, medicine abuse is also a serious health threat. In addition,
the pharmaceutical production has a warped development, distribution is in disorder, and
price fixing mechanisms are distorted.
The problems in medical service area and the distortion of the hospital-medicine
relationship have been widely acknowledged for some time. Moreover, governmental
departments concerned have also adopted certain measures to standardize the behavior
of medical service institutions and to harmonize the hospital-medicine relationship. But in
general, these efforts have attained no significant results. On the one hand, although
governments have attempted to standardize the behavior of medical service institutions
and doctors, their measures have focused on the supervision over daily practice, and
have not touched on more critical and essential systematic problems such as devotion
and compensation mechanisms, the financial system and the distribution system. The
supervision of daily practice is often superficial owing to the influence of insufficient
formulation of laws and regulations, deficient supervisory capability and other problems.
On the other hand, some practical policy designs are questionable per se. For example,
the policy of collective bid invitations was executed in previous years in order to
harmonize the hospital-medicine relationship, and particularly to standardize the
distribution system, but the executor for bid invitations was the hospital itself. It is
obviously inevitable that, where hospitals have a strong economic objective, it will
consider as its goal the maximization of its economic benefits rather than the
maximization the interests of the patients and public, and furthermore, economic benefits
are still closely related to the medicine. Therefore, this kind of bid invitation fails to achieve
its desired effect, which has been clearly proven in practice. Lately, in view of strong
reaction of all circles to medicine prices, the government has applied a policy of reducing
the highest retail price for a considerable proportion of medicines, but this policy has not
had the effect it should have had, due to a situation in which the practice of medical
service institutions and doctors has been completely distorted. It is common choice for
medical service institutions and doctors to prescribe large dosages or avoid the use of
depreciated medicines, resulted in serious consequences. To a large extent, the reform of
medical service institutions and the distortion of the hospital-medicine relationship have
become the core contradiction in the pharmaceutical system.
Brief conclusions: The Chinese pharmaceutical system has undergone systematic
changes, from overall planning management to overall market-orientation; moreover,
relevant medical service systems and service goals have also experienced an
multifaceted transition. System reform has been effective, but it also has exposed some
problems and has had an adverse impact on the development of the health sector, the
public interest and the development of the pharmaceutical industry per se. Therefore, the
manner and methods concerning reform should be summarized and reviewed. On this
basis, principal contradictions should be grasped to choose the appropriate direction and
measures for future reform.
Research group, Department of Social Affairs, Ministry
Development Research Center of State Council, P. R. China
of
Chief researcher: Ge Yanfeng
Authors of the report: Ge Yanfeng, Wei Jigang
Participants in discussion and revision: Ding Ningning, Gong Sen,
Wang Liejun, She Yu, etc.
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China Health Yearkbook (1984~2004).
China Pharmaceutical Yearbook (1991~1997).
Qi Moujia. Pharmaceutical Career of Modern China. China Social Sciences Press, 1993.
Research Group of Development Research Center of State Council, P. R. China.
Evaluation and Suggestions on the Reform of China Medical Health System. China
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