Bitter Pills

Despite government attempts to control rising drug prices,
people are still paying more for medicine

By LI ZI

HEALTH HELP: A drug supermarket in Changsha sells medicine at a price 45 percent lower than the government-designated level, encouraging other local drug retailers to cut medicine prices

When Jia Quanhe, a retired worker, caught a cold, he bought an over-the-counter (OTC) remedy instead of going to see a doctor. Last time he had a cold, the medicine alone cost 300 yuan, more than he could afford on his monthly pension of 1,500 yuan.

Chinese people encounter all sorts of difficulties in seeing doctors, and due to a complex health care system in dire need of reform, the price of commonly used medication, both prescription and over the counter, remains much higher than it should. Getting sick can be costly.

But Jia and others recently heard some good news. The National Development and Reform Commission (NDRC), a government organ that among other things regulates the prices of consumer goods, said it would be publishing a list of drugs to be made cheaper.

Prices of a variety of medications will be reduced by about 60 percent, with some cuts reaching 93 percent. This is the 17th price reduction since 1997, and the most significant.

In a recent interview with CCTV, Han Qide, Vice Chairman of the Standing Committee of the National People’s Congress (NPC), revealed that the Ministry of Health would abolish the 15 percent markup on drugs sold by hospitals to patients.

Meanwhile, Vice Premier Wu Yi said in a report on June 29 at the 16th Meeting of the NPC Standing Committee that the price of medication would be greatly reduced.

Wu explained that in recent years, the state has taken numerous measures to cut retail prices of more than 1,000 kinds of medicine, with a total price reduction of 30 billion yuan ($3.7 billion). She added further efforts would be made to greatly reduce unreasonable prices of drugs that are in great clinical demand.

In July, the NDRC worked out new rules for the pricing of OTC medicine. Under the changes, the right to manage pricing will be transferred by the NDRC to development and reform commissions in various provinces. This rule reportedly has been approved by the State Council, China’s cabinet, and will soon be put into practice.

Insiders believe it’s possible the NDRC will try to ensure more reasonable OTC drug prices through information acquired by local commissions about enterprises under their jurisdiction. Such a method shows the NDRC is adopting a pricing mechanism based on market competition, they commented.

Public Benefit?

HOT SPOT: Kaixinren, a low-price pharmacy in Yingtan City, Jiangxi Province, receives more than 5,000 customers a day

People around China have high expectations for the coming price reductions initiated by the NDRC, as it is seen as being in the interest of average citizens who currently face great difficulties paying for treatment when ill.

However, while people such as Jia Quanhe have high hopes for slashing drug prices, many experts doubt this move will benefit the public at large. Professor Li Lin at the Economic Research Center of Peking University warns it’s impossible the price cut will solve the fundamental problems people face in seeing doctors, despite the large scale of the price reductions.

Li said that in recent years, there has been much talk of high drug prices and price cuts to help the situation, but meanwhile many people have to pay more and more to visit a doctor.

In the past 20 years, China’s per-capita income has increased a dozen times, but drug prices have gone up 100 or even 200 times. In order to curb the soaring cost of treatment, there have been 16 price reductions over the past eight years, covering 1,500 kinds of medicine with an average reduction rate of 15 percent. However, the price cuts only affect a small fraction of retail drugs on the market while China’s pharmaceutical industry produces hundreds of thousands of types of medicine.

Moreover, some complain price reductions are empty words as there are often countermeasures that come into play when prices are lowered.

According to Professor Li, lowering drug prices means a loss of profits. Therefore, hospitals and doctors will offer such drugs less frequently, instead substituting other, more expensive remedies. According to Wang Wei, Secretary General of the China Nonprescription Medicines Association, in 2003, Amoxicillin ranked 58th in terms of most-used drugs, but after the price was slashed, it dropped to 105th.

As well, big pharmaceutical factories have begun to change product names. Jiang Hua, a Beijing resident, said that in the past, if she suffered from stomach troubles, she turned to Cimetidine, which cost only 4 yuan ($0.5) for 100 tablets. However, since the end of last year, the factory changed the packing of the medicine and began calling it Tagamet. Although the composition remains the same, a box of 20 tablets now costs 42 yuan ($5), a 50-fold increase. Jiang wanted to buy the medicine in its original packing, but was told the factory has stopped production.

Gao Chunfang, a hospital head and member of the National Committee of the Chinese People’s Political Consultative Conference, has been quoted as saying there are too many hidden goings-on in the process of production, circulation and sale of medication, resulting in the excessively high prices.

According to Gao, in order to grab as much profit as possible, some pharmaceutical factories and pharmacists try to raise prices of cheap and therapeutic medicines in various ways--an open secret in pharmacology. In some cases, while the medicine composition and content remain unchanged, the packing and name are changed. In other cases, while the pharmacological action and the clinical indication are the same, dosages and specifications are altered for higher prices.

MEDICINE WALL: Patients consult drug prices in Nanjing No.1 Hospital. Nearly 3,000 kinds of medicine were recently listed for mandatory price cuts

A sales representative from a pharmaceutical wholesale company said that in response to government price cuts, some producers would try to avoid losses by cutting off the supply of certain medications. The fact that giant companies Bristol-Myers Squibb and Johnson & Johnson stopped supplying products, except in Shanghai, in December 2001 after the former State Development Planning Commission instituted price cuts is a typical example.

The situation reappeared when the Beijing Municipal Development and Reform Commission tried to lower prices of certain drugs not long ago. Reporter inquiries at a number of drugstores in Beijing’s Haidian District after the adjustment found that Amoxicillin, which was on the list of price cut, was out of stock.

As a result of price cuts, many drugs are no longer on the market. The main reason is that some factories are not willing to continue low-profit production, and instead turn to more expensive medicine. Nowadays, penicillin, which used to sell well, is seldom seen in big hospitals. After several adjustments, a unit of penicillin is worth 0.7 yuan. With such a low profit, some manufacturers have changed to other drugs or moved the supply to rural areas. Doctors have begun to replace penicillin with Ceftraxone, for example, which has a similar effect but is more expensive.

As a result, the 16 price cuts by government have had few positive results for consumers, with the real price continuing to increase, going up 20 percent in the last year alone.

“Although there is a lot of news about how medicine prices are to be cut down, medical costs in hospitals keep rising,” said a recent patient at Beijing Anzhen Hospital, standing in a queue to be registered.

Pharmaceutical Industry Profits

The 17th cut in the prices of certain medications has met strong opposition from the pharmaceutical industry.

From May 12 to 13, representatives of four national industry associations, namely the China Pharmaceutical Enterprise Management Association, the China Pharmaceutical Industry Association, the China Association of Pharmaceutical Commerce and the China Association of Traditional Chinese Medicine, as well as 20 associations at the provincial and municipal level, gathered in Tianjin for a discussion. They decided to write a collective petition to the State Council, demanding that the price reduction rate be kept within 20 percent.

The pharmaceutical industry said a variety of pressures of profits have made it difficult for companies to survive. In 2004, the profit margin of the pharmaceutical industry was below 0.6 percent, or 26.2 percent lower than the national industrial profit margin.

With such a low profit margin, the pharmaceutical industry in 18 provinces and municipalities suffered great losses, and the forced price cuts are an added disaster.

“A rough estimate is that if the current price reduction rate continues, our company will be hit by a loss of tens of millions of yuan,” Li Meng, General Manager of CSPC-Zhongnuo Pharmaceutical Co. Ltd. said in an interview.

According to Wu Xian, Deputy Manager of the General Pharmaceutical Factory of Harbin Pharmaceutical Group, the price reduction of antibiotics last year led to a loss of 400 million yuan ($49.32 million) for the company. This time around, prices of five or six of the company’s products will have to be cut, exerting heavy financial pressure on the company.

As well, making drugs cheaper still hasn’t managed to eradicate the problem of high medical expenses. An outdated medical and public health system with inadequate financial subsidies means that hospitals must supplement their revenue with income earned by selling medicine to patients, as well as money received from pharmaceutical companies in exchange for selling their products. All of this results in high medical costs for patients.

Because of this system, it doesn’t make sense to institute a price-cutting scheme based on low producer prices.

Why Price Cuts Fail

The NDRC is now reduced to an embarrassing position. Slashing drug prices has resulted in a collective petition to the State Council from the pharmaceutical industry. At the same time, the move hasn’t brought any real benefits to the public, as prices remain very high.

Insiders say the expensive medication should be attributed to poor price regulation, with the real problem found in the system.

Vice Chairman Han of the NPC Standing Committee admits that in China, retail prices of medicine are dozens of times higher than producer prices.

A sales representative who used to work for a transnational pharmaceutical company said, “Generally speaking, companies sell their products to middlemen at a price that accounts for 40 to 50 percent of the retail price and also have to pay hospitals rebates or expenses for public relations, which accounts for 15 percent of the retail price.”

According to Cai Renhua, Deputy Dean of the School of Management of Shanghai No.2 Medical University, the excessive number of intermediary steps have resulted in high drug prices, because every link demands profits and that drives prices higher.

China’s current pharmaceutical distribution system is made up of three parts--pharmaceutical companies, wholesalers, and hospitals, with the wholesaler controlling most of the distribution process.

Statistics show that there are six to nine steps from the production of a product until it reaches patients.

Wang Li (not his real name) has been engaged in sales supervision for many years and said there are major flaws in the way drugs are promoted by some pharmaceutical companies.

Wang, who would only speak under condition of anonymity, used to work in the pharmaceutical industry in the early 1990s and said he left the field because he felt sorry and for the sake of conscience.

He describes the pharmaceutical industry as a profiteering industry: A sales representative for a mid-sized pharmaceutical company can earn as much as 40,000 yuan ($4,932) a month from sales revenue, which means an annual income of 500,000 yuan ($61,652). In comparison, per-capita income for an ordinary worker in Beijing was only about 20,000 yuan ($2,466) in 2004.

Remedying the Situation

Professor Li said it’s impossible to solve the problem of high drug prices by imposing government-mandated price cuts.

Yu Mingde, Managing Vice Chairman of the China Pharmaceutical Enterprise Management Association, noted that despite the frequent price reductions, the problem of expensive medication remains. Even if prices are cut time and time again, the public will still have to pay too much for medicine.

Yu said that in theory, prices would drop due to the NDRC’s measures to reduce the price of antibiotics and the Ministry of Health’s measures to eliminate hospital markups. However, without financial subsidies and adequate supporting policies to reform the system, when the government removes the 15 percent markup, hospitals will try to compensate with other programs to regain the revenue, perhaps by charging extra for examinations. As a result, the public will have an impression that the cost of treatment has not changed.

Also, with companies taking countermeasures such as stopping the production of certain drugs or slightly adjusting the product mix to escape the price cut, in the end, the public at large still loses.

Some people hold the view that prices determined by the government are too high, and it’s necessary to reform the government’s price-setting mechanism. In their opinion, the government should establish a better-developed pricing mechanism in which the producer price and the final retail price should be set after a calculation and estimation of the cost. Such a pricing system would benefit both producer and consumer.

Yu said the permanent cure is to make more efforts to reform the current health system.

According to statistics, 80 percent of medicine in China is sold in hospitals. Drug income accounts for 40 to 80 percent of the annual income of a hospital. If the current 15 percent markup is cancelled, the health system will lose 33.24 billion yuan ($4.1 billion). Therefore, a compensation system must accompany the cancellation of drug markups.

Medical services should be separated from medicine selling, and hospital pharmacies should operate independently, like enterprises. Only in this way can it be ensured that hospitals and doctors do not prescribe medicine only for their own profits. Major reform is needed to help sick people afford the remedies they need.