Pharmaceutical Policy in China: Issues and Problems

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Pharmaceutical Policy in China: Issues and Problems

Shenglan Tang1, Jing Sun, Gang Qu, Wen Chen


Since its launch of economic reform in the late 1970s, China’s economy has developed rapidly. The annual growth rate of GDP has been maintained at the average level of 14% over the past two decades or so (Bureau of Statistics of China, 2006). Living standards of the vast majority of the Chinese population have increased significantly and over 550 million people have moved on to above $ 1 per day. However, the access of most Chinese population to basic health care has not been improved in a way that matches its economic growth.  The problem has particularly become serious among the poor, owing largely to a rapid rise of medical care costs and lack of health insurance coverage (Dummer and Cook, 2007). In addition, the quality of care also varies a great deal among different service providers and in different areas.
The national health account studies show that China spent some 4.7% of GDP on health care in 2004, of which 44% of the expenditure was on pharmaceuticals. The proportion was one of the highest shares of pharmaceutical expenditure in total health expenditure in the world, compared to an average of around 15% in the OECD countries (Jacobzone, 2004). Patients who are treated in China tend to be treated in a highly costly way, and in some cases, it is apparent that the extra cost are not warranted from a medical perspective. Overuse of medicines at the Chinese hospitals is a well-known problem in China, since the revenues generated from pharmaceutical sale have been linked to the income of the Chinese hospitals in general, and the level of bonus payment Chinese doctors can get (Zhan, et al, 1997, Yan, et al, 2007). In other words, the more medicines doctors prescribe, the higher income they can earn. Such a perverse financial incentive has huge implications for quality and cost of health care. In one study of village clinics, it was found that less than one percentage of medicine prescriptions was actually reasonable (Zhang, et al, 2003). Over-provision of medicines by doctors has also placed an unnecessary financial burden on many poor families who do not have health insurance coverage.
Over the past two decades, China’s pharmaceutical industry has also greatly been developed. It has officially about 4,600 pharmaceutical manufacturers, 12,000 wholesalers and 270,000 retailers, producing and selling more than ten thousand western and traditional Chinese medicines. Both the central and local governments have seen pharmaceutical industry as one of key economic sectors driving its robust development of economy. These manufacturers are producing mainly generics and/or traditional Chinese medicines. In the meantime, some essential medicines, which are cheap and less profitable, are no longer produced and available at the Chinese market.

Over the past decade there have been many studies in China, looking at the rational use of medicines and socio-economic factors affecting irrational use of medicines (Dong, et al, 1999a; Zhan, et al, 1998). However, few international publications have comprehensively examined China’s pharmaceutical policy, which should cover pharmaceutical registration, production, distribution, and utilization and administration. Against this background, this paper aims to describe and examine main problems existed in the areas of pharmaceutical registration, production, distribution, and utilization and administration, and analyze critically main socio-economic and institutional factors associated with these key problems. The paper ends with several policy recommendations that can be adopted by the Chinese government to tackle the problems and challenges in developing healthy pharmaceutical sector.

Economic reform and implication for pharmaceutical sector in China

The economic reform in China has seen the transformation from a planned economy to a market oriented one. The funding from the government to Chinese hospitals and other health facilities has become less important since mid 1980s, representing the decreasing ratio of government funding in total hospital expenses. All the health facilities have increasingly relied on service fees charged to service users who may or may not be covered by health insurance. Over supply of diagnostic tests and medicines by service providers is one of key means that helps hospitals and other health facilities to reimburse the operational cost of health service provision, and increase the income of doctors, nurses and other staff in the health sector, via legal or illegal methods, such as bonus payment, medicine sales commission and kick back, e.g.. Using fee-for-service as a main provider payment method has been worsening the situation. As a result of these changes, the cost of health care in China has risen rapidly. The average annual growth rate of total health expenditure in China was as high as 18.2% over the period from 1991 to 2004, while the average growth rate of GDP was only 9.3% and the average GDP per capita growth rate was 8.2% in the same period (CFSSS, 2006).

China has maintained low prices for most health services through government regulation and the prices are not established in relation to cost, except for medicines and “new” high-technology services. For those items of services, the price can be set at a higher level than actual cost, to allow for a profit margin. For example, Chinese hospitals and other health service providers are allowed to mark up medicines by 15-20% above the wholesale price for western medicines and traditional Chinese medicines, and 30% for Chinese herbs (Dong, et al, 1999b). In addition, the use of fee-for-service, as a major payment method in the health sector, is another factor significantly linked to the supply-induced demand for health care in China. According to one study, the use of fee-for-service, as main provider payment method, has contributed from 85.5% to 90.3% of the total health service expenditure in two relatively well-off Chinese counties in 1992 (Bogg, et al, 1996).
China’s economic reform has also brought a good opportunity for pharmaceutical industry to develop in an impressive way. In the early 1980s there were only 839 pharmaceutical manufacturers operating in China, producing around 1200 Western medicines. In addition, about 540 traditional Chinese medicine manufacturers were making around 600 manufactured Chinese medicines in 1985. The number rose remarkably to over 4,600 pharmaceutical manufacturers which are responsible for the production of both Western and traditional medicines in 2005. About 3,731 manufacturers have got GMP accreditation in 2004. The total product value of the pharmaceutical manufacturers increased from some RMB 10 billions in 1985 to over RMB 446 billion in 2005 (DRC, 2006). They have played an important role in developing local economies and creating jobs for local people. Never the less, China has too many small/middle-size of pharmaceutical manufacturers, most of which can only produce a limited number of generics and traditional Chinese medicines.

Pharmaceutical policy

Prior to the economic reform in China, the government was responsible for making a production plan of pharmaceuticals (e.g. types and quantity of medicines) for all the state-owned pharmaceutical manufacturers. Likewise, the government also established a network for the supply and distribution of all pharmaceuticals made by these manufacturers. Under this system, the state-owned medicine distributors and companies at different levels sold medicines to hospitals and other health facilities across the country. At that time, manufacturers were not allowed to sell their products directly to service providers, generally speaking.

After the economic reform, China started to develop its comprehensive pharmaceutical policies on control assurance, production and distribution regulation, advertising control, promotion of R & D on new medicines, pricing control and management of pharmaceuticals produced in China and imported from overseas. Over this period, new regulations and decrees regarding the medicine production and distribution were also developed to help introduce more market mechanisms into the state-owned pharmaceutical manufacturers in order to promote and expand the industry. In September 1984, “The Drug Administration Law of the People’s Republic of China” was issued and acted effectively from 1 July 1985. All these aimed to ensure the quality, safety and efficacy of medicines under the context of transforming China’s planned pharmaceutical sector into a market-oriented one. Since the 1990s it has been found that the Law and other regulations and decrees on pharmaceutical policies had many shortcomings or could not adequately tackle emerging issues and problems related to pharmaceutical production and registration, distribution, and utilization. The following three sections are devoted to illustrate what main problems, how serious they are, and what factors are associated with.
Pharmaceutical registration, production and pricing

Under the market-oriented economy, Chinese pharmaceutical manufacturers have their autonomy to decide what products they would produce and how much they should produce, as long as they have got their products registered with the State Food and Drug Administration in China (SFDA), which was given mandates to be in charge of administrative and technical supervision on the whole process of R&D, production, distribution and use of medicines, after the restructuring of government agencies in 1998. It is not surprising to note that they develop their production plans, according to market demands and profit gains, although the production of some special medicines are still strictly regulated by the government. In China, SFDA is responsible for reviewing and approving the applications of new medicine registration on the ground of medicine safety and efficacy, while the National Development and Reform Commission (NDRC) is mandated to approve and regulate the prices of new products that are suggested by the manufacturers based on so-called self-reported production costs. According to the current policy, NDRC is responsible for pricing management for prescription medicines within national health insurance medicine list and provincial Development and Reform Commissions are in charge of pricing management for prescription medicines supplemented into and all OTC drugs within local health insurance medicine list. Actually all authorities for medicine pricing management have not sufficient human and technical resources to assess how rational the production costs provided by the manufacturers are. The prices of medicines, to great extent, are set at the level at which manufacturers wish to achieve at.

As described above, the cost of health care in China has increased significantly since the economic reform. Over the past two decade, it was the individuals, not the government, have mainly born the financial burden emanating from the rapid rise of medical care costs. Part of increased spending was used to pay for high health technologies that have brought higher quality of care, but some of the increased expense was just caused by over-use of high tech diagnostic tests and medicines. Many studies found that there were increasingly a number of people who were unable to get access to basic health care and that equity in access to, and financing of, health services were worsening (Gao, et al, 2001). In order to help the vast majority of Chinese people remove financial barriers in seeking health care, NDRC has since 1997 issued guidelines on medicine pricing 20 times. Each time the prices for a number of selected medicines were cut down significantly. However, such good intention has not actually resulted in expected outcomes fully, although the service users did benefit from the price reduction of some medicines. Once they found that there was less profit of producing particular products, those manufacturers would immediately stop producing them. Therefore, it is not surprising to find out from a study that, among 1,500 essential medicines defined by the SFDA, one third of them could not be seen in the pharmaceutical market in Beijing. Of those not available in Beijing, some 30% of the products are no longer produced by any Chinese pharmaceutical manufacturers. Such a phenomenon is not uncommon in China nowadays.
While there is lack of essential medicines that are cheap and effective in the Chinese market, many pharmaceutical manufacturers in China are very much keen to register new products with the SFDA in recent years. Until end Aug. 2006, SFDA granted 176,000 medicine approvals (SFDA, 2006)2. The Chinese manufacturers tried to develop the products with just a modification on dosages and/or packaging in order to get so-called “new” products priced at a level at which they can make more profits than the “old” one. Over these new approved registrations, the majorities are generics. For example, until end Feb 2007, SFDA issued more than 200 approvals of Levofloxacin injection (SFDA website a). It implies that one chemical medicine can have several hundreds kind of products with different dosages or/and packaging, and, needless to say, different prices. Another typical example is that Vitamin D2 is a cheap and effective medicine for the treatment of thyroid deterioration. However, no Chinese pharmaceutical manufacturers would be willing to produce it because of very low profit margin. It has been replaced by two activated Vitamin D (Alfacalcidol and Calcitriol). As a result of the change, the daily treatment cost for the patients raised from less than RMB 1 to RMB 10-15, which means that the higher the medicine can get priced, the more likely it would be produced by the manufacturers in China.
Another important factor that has been affecting the production of the medicines in China is the medicine lists developed by a variety of health insurance schemes. The Ministry of Labor and Social Security has developed a reimbursable medicine list for the urban employee basic medical insurance (BMI). It consists of 1,901 medicines, of which 823 are traditional Chinese medicines. Other health insurance schemes, such as rural co-operative medical scheme, have also developed so-called essential medicine lists. Medicines included in these lists are more likely to be produced, since there is a relatively large market in China. On the other hand, the essential medicine list firstly developed by the MoH in early 1980s, and then revised by SFDA several times in 1990s and 2000s, following the advocacy of WHO’s Action Program for Essential Medicines, has not really influenced on the production and use of medicines in China, due to the lack of relevant policy support.
The quality of locally produced medicines in China has been improved gradually during the past decade since the reinforcement of the national drug regulatory authority in 1998. Given there are so many pharmaceutical manufacturers operating in China, however, a number of them still tried to produce fake or low quality products to make money. Counterfeit drugs are global public health problems causing death, disability and injury to adults and children, which plagues both developing and developed countries. Most developed countries with effective regulatory systems and market control currently have a very low proportion, i.e. less than 1% of market value. Many developing countries have areas where more that 30% of the medicines on sale can be counterfeit, overall, a reasonable estimate is between 10% and 30% (IMPACT Press, 2006). In China, 332, 000 counterfeit drugs and medical devices cases were investigated in the distribution chain in 2006, worth about RMB 0.57 billion; 4 manufacturers were revoked of their production licenses and 142 were requested to stop production; 160 distributors were revoked of their distribution licenses and 114 were shutout; 86 GMP certificates and 135 GSP certificates were withdrew; 440 venues of producing counterfeit medicines were eradicated (SFDA website b). Some new characteristics of counterfeit drugs cases in China are seen as increased cases in the process of research and development, and submission of fake dossiers; not following the SOPs to produce; too many channels in the distorted distribution system.

Heavy government regulation in the pharmaceutical chain is essential to safeguard the population against counterfeit drugs. Meanwhile, it also makes this sector particularly prone to corruption. If the drug regulatory authority enjoys unsupervised and unchecked power, loopholes would definitely arise in the drug supervision system, ranging from loose rules, which could be changed by some officials to suit their own interests to lax supervision. Such a situation has caused serious corruption and made the system inefficient. A chaotic registration process for new drugs and medical devices has been reported as a major cause for the rapid increase of medicine prices in China. In the past years, NDRC has reduced the prices of many medicines. However, because of power abuse by some SFDA officials, pharmaceutical enterprises just stop producing those drugs and change their names. Then they would apply to the SFDA for the approval of new medicines, which actually have the same functions as the old ones, and sell them at much higher prices. Bribery paves the way for these enterprises to easily get licenses to produce those drugs.

Pharmaceutical distribution

There have been significant changes in pharmaceutical distribution systems in China, since the economic reform. As said above, the government previously organized a network for the supply and distribution of all medicines made by Chinese manufacturers. Prior to the reform, three levels of medicine wholesalers (province, prefecture and county) had been established to supply pharmaceuticals to hospitals at their levels usually. These state-owned wholesalers were responsible for purchasing medicines from these Chinese manufacturers. Almost all the medicines produced were distributed directly to the wholesalers at the three levels. Alternatively, the medicines first purchased by the provincial wholesalers which then distributed the medicines to lower levels. (Dong, et al, 1999) described a clear flow of the medicines in China under the old system in their article published in this journal. The advantages of this distribution network were to have effective control and monitoring of medicine quality and price. However, the disadvantage of the system, as pointed by (Dong, et al, 1999), was the lack of competition and had too many bureaucratic procedures, which might be associated with poor management and storage practices. Sometimes, the shortage and/or imbalanced supply, particularly in the remote rural areas, might occur.
After the reform, both the medicine distributors and manufacturers are allowed to sell medicines directly to hospitals and pharmacies. In other words, each of the 4,600 pharmaceutical manufacturers in China can also act as distributors apart from those 12,000 wholesales. Most distributors are small or middle size. Overall speaking, the development of pharmaceutical distribution system has ensured that the vast majority of the Chinese people can access medicines easily now. The lack of availability and accessibility of medicines, which was commonly seen in the 1960s and 1970s, has not been a problem since the economic reform. However, it appears to have too many distributors in the distribution system of pharmaceuticals in China. They are competing each other in the same marketplace, which is not well regulated by the State.
Most pharmaceutical manufacturers in China have been actively promoting their products, using a variety of ways including hiring numerous salespersons, sending medical representatives to promote prescription in hospitals, advertising at newspapers and TV for OTC products, etc. These salespersons and medical representatives often contact hospitals and doctors directly to sell their products. They have used sales commission, kick back, or gifts to hospital managers and/or doctors who purchased or prescribed their products. They sometimes also supported senior doctors to participate in international conferences as sort of rewards for the use of their products. Such activities have greatly influenced prescription behavior. The financial incentives given by the manufacturers to the hospitals and doctors might have resulted in hospitals purchasing less effective, but expensive medicines, improper prescribing, and polypharmacy. In addition, advertising has also affected the choices of medicines by both service providers and users, as found in other countries (Poulsen, 1992). As a whole, most of them are using legal or illegal means to promote the sale of medicines in order to maximize their profits. Since the mid 1990s, the relevant line ministries responsible for pharmaceutical policies have issued a number of regulations and decrees, banning illegal practices (e.g. commission fee, kick back, etc.) of promoting medicine sales. However, the effects of these regulations have not been so far significantly effective in tackling these problems.
The number of retail pharmacies set up across the country has increased greatly over the past two decades when the market-oriented economy was introduced. This has given a majority of the Chinese population, in both urban and rural areas, convenience of accessing medicines. It was estimated that some 270,000 retail pharmacies have registered with the drug regulatory authority (SFDA, 2006). According to the national health account study, about 20% of medicine expenditure was associated with these pharmacies in China. Although regulations on controlling the distribution system have been put in place, the implementation of the regulations is still problematic, especially at low levels. In practice, most pharmacies in the rural areas, particularly at the county and township levels, often do not have any technical supports from a qualified pharmacist, not alone a pharmacist being able to dispense the medicines according to doctor’s prescriptions or provide the clients with quality advices on which medicines they should buy based on their illnesses/symptoms. In other words, many unqualified persons in these pharmacies are selling medicines to the patients, which have great implications for the quality and safety of care.
In year 2004, SFDA issued a regulation requiring that antimicrobials cannot be purchased without prescription in any retail pharmacy. Such a policy aimed to improve the rational use of medicines (e.g. prevent the over-use of antibiotics). In fact, only a few numbers of pharmacies have well followed up the regulation. In most pharmacies, particularly in the rural areas, the patients still can buy whatever medicines they want, without having a prescription. Lack of capacity for monitoring and supervision on such a large number of pharmacies from the government agencies is one of many reasons why such a regulation failed to be effectively implemented. In addition, some county FDA in the poor rural areas also failed to review strictly the application for new pharmacy registration, because they were only keen to receive registration fees, as one of their main sources of revenue generation-no reference, suggest to delete this sentence). As a result, it is not uncommon to see that there are several pharmacies in one small town of the many rural areas in China, along side with township health centre where there is also a pharmacy. They are competing on the price of medicines, not necessarily the quality of medicines.

Rational use of medicines

Irrational use of medicines is a major problem worldwide. WHO estimates that more than half of all medicines are prescribed, dispensed, or sold inappropriately, and that half of all patients fail to take them correctively. The overuse, under use, or misuse of medicines has resulted in wastage of scarce resources, poor quality and unnecessary costs of health care.

Irrational use of medicines has also been a serious problem in China. Many studies have since the early 1990s examined the issues of rational medicine use in different health facilities from different levels (Zhan, et al, 1998; Dong, et al, 1999a). Common problems witnessed in China include: too many medicines given in one prescription; inappropriate use of antibiotics and steroids, IV drips widely used as major medicine administration. In year 2005, a prescription inspection was conducted in 7 secondary and tertiary hospitals in Zhuhai area. The average rate of using injections in outpatient services is 58% and 61% for using antibioterial injections. The rates for using antibacterial injections even exceeded 80% in the Departments of Pediatrics, Respiration Internal Medicine, and Surgery (Zhuhai Health Buearu, 2005). The main factors attributed to these malpractices in medicine use include: 1) perverse financial incentive; 2) lack of clear official guidelines and corresponding review for treatment of common diseases; and 3) lack of knowledge of doctors or pharmacists, at the grassroots level.
The national essential medicine list developed by the SFDA in China has not been influential to the prescribing behavior of Chinese doctors. Instead, the medicine lists that have been developed for the purpose of insurance reimbursements have had greater impact on doctor’s prescribing medicines and patient choices. Many cheap and effective essential medicines may not be necessarily included in those lists for one reason or another. All this has not done any good in promoting the rational use of medicines-suggest to delete this sentence). There is another interesting phenomenon in China that inappropriate use of some first line antibiotics has resulted in serious medication errors (e.g. persist to use gentamycin with a large dosage for a long time, especially intravenous injections, led to the deaf of many children in China). The health authority then decided not to recommend the use of these medicines. In fact, if these medicines had appropriately been used by doctors, such negative consequences would have been avoided in most cases.


The above section has described and analyzed main problems associated with pharmaceutical registration, production, distribution and rational use. Apparently, many issues and problems need to be adequately addressed in order to establish an effective and efficient pharmaceutical sector in China in the near future. Given the limited space of the paper, this section will focus its main attention on the following issues.
Rebalancing economic development with health system development

In the past decades, China’s economy has developed very fast. Many provincial and municipal governments have seen the development of pharmaceutical sector as one of its main economic pillars to push a fast growth of local economy. A rapid development of pharmaceutical sector can be good to the growth of GDP, a very important indicator used for the performance assessment of local politicians until recently in China, but also help create jobs locally and thus improve the employment situation. Hence, it is not surprising to see that in the 11th five year plan by the DNRC, indicators related the total product values of the pharmaceutical sector and the jobs associated with the sector, among others, were included, while the safety, effectiveness and efficacy of pharmaceuticals were, to a large extent, neglected or at least not emphasized sufficiently in the national economic development plan. As a result of such policies coupled with the economic transition, there have been increasingly a number of pharmaceutical manufacturers, as reported previously in the paper, set up in different provinces of China. Most of them are small or middle size, and cannot reach an optimal level of scale of economy. Furthermore, most manufacturers often produce a limited number of generics that may or may not be of high quality.

It is quite common to find out that a substantial number of pharmaceutical manufacturers are producing the same medicines with different dosages and packing in China at the moment. The prices of these medicines, approved by the pricing authorities vary a great deal. Once the pharmaceuticals have been produced, the manufacturers would use a number of means, targeting medicine distributors, hospitals and doctors, to promote the sales of their products, as described previously. All these have intensified the irrational use of medicines (i.e. mainly over-use of, particularly expensive, but not necessarily quality medicines), which brings the cost escalation for medicines, the potential health risks to the individuals, the whole society, and even the international public health.
Needless to say, the development of pharmaceutical sector has significantly contributed to the economy and employment and improved the availability of medicines in many regions of China. However, vigorous development without appropriate plan always led to vicious competition, particularly in some provinces, has been one of main factors to indirectly push a rapid escalation of health care costs over the past decades. Such a situation might have also indirectly been associated with poor affordability and accessibility of health care by a majority of the Chinese population in recent years. This implies that senior politicians and policy-makers at both national and regional levels in China need to rethink the necessity and importance of rebalancing economic development with the health objectives, i.e. how would China reconcile social and industrial goals in its economic transition? They should start to ask difficult questions themselves: Does China have a robust and sensible strategy for pharmaceutical sector development? Does China need to set up over 4,600 pharmaceutical manufacturers, most of which cannot compete at international and national levels?
Strengthening the regulations and management of pharmaceutical registration, production and distribution

The registration, production and distribution of pharmaceuticals in China still need stricter and more robust regulations under the guidance of clear national goals and objectives for the pharmaceutical sector. The pricing system has not led to a sensible competition in the production of medicines, particularly generics. Twenty times of price cut for many medicines, regardless of the production cost, have not been very helpful in encouraging the production of cheap, but effective medicines in China. Government subsidies should be granted to the manufacturers of essential medicines with low profits, such as Vietnam D and Doxicycline, in order to ensure decent profit margins for pharmaceutical manufacturers. In addition, the current system that the registration of the same chemical medicines with different dosages and packing can be granted for better prices needs to be better regulated and managed under better coordination between the drug regulatory authority and pricing authorities. Cost-effectiveness analysis should be incorporated into the evaluation of new medicines and the comparison of different products.

The distribution system for pharmaceuticals in China, as described and analyzed above, has not been functioning well. Too many distributors/wholesales have been competing in medicine sale over at the moment. Such a competition has not been well regulated and managed by the government. In such a fiercely competitive market where government regulation and supervision is weak, most distributors/wholesales and medical representatives in China are using illegal means to increase the share of their products in the market. Recently, reports on corruption related to the pharmaceutical sector have been frequently seen in the Chinese newspapers, TV, radio, etc. Though the law and the regulations ban all these illegal practices in the promotion of medicine sale and use, the capacity of the government for monitoring the distribution system has not adequately developed. In other words, the enforcement of such laws and regulations has not been effective. Furthermore, the punishment and disciplines system has also not been appropriately developed to police these actors in the medicine distribution and service delivery system from using illegal means, although the government has started to strengthen the regulation and monitoring of the system over the past years or so.
There is another serious problem in the medicine distribution system in China, that is, the qualification of pharmacies, as we illustrated above. It is apparent that an increased number of pharmacies, particularly in the rural areas of China, have helped availability of the majority of Chinese people to pharmaceuticals. In this regard, the market mechanism introduced did help improve the availability and accessibility of medicines. However, the safety and appropriateness of medicine use has now become a serious issue concerned. Medicine salespersons from these pharmacies either put the maximization of profit as their top priority, or they are not qualified to provide professional advices on which medicine(s) should be used for the symptoms or illnesses and how. Due to perverse incentives, some prefectual and county FDAs, especially in the poor areas, have not strictly followed the national regulations and criteria to review and approve the registration applications for setting up new pharmacies in their areas. Nor were they willing and able to undertake technical monitoring and inspections of these pharmacies. The situation has to some extent gone out of control in some areas nowadays. Unless the government would take the problem very seriously and develop practical measures to tackle it, the problem may become worse before getting better.

Developing appropriate incentives for service providers to improve rational use of medicines

Mechanisms used for health care financing in China have not been helpful to the rational use of medicines. In recent decades, the government funding has accounted for a declined proportion of total revenues of hospitals and other health facilities in China. These service providers have increasingly relied on user fees either paid out of pocket from individuals or covered by health insurance schemes. In the meantime, the hospitals and other health facilities have got more autonomy to use any surplus for capital development and bonus payment to staff. As we described above, the more medicines doctors prescribe, the higher income hospitals and doctors can get. Such a perverse incentive has been one major obstacle in promoting and improving the rational use of medicines. If doctor’s income is associated with the volume of medicines s/he prescribes, the rational use of medicine is actually put in jeopardy.

De-linking the income of doctors with the revenues generated from medicine sale is therefore vital to improve the rational use of medicines. In recent years, several experimental studies taken in different areas of China have demonstrated this. With the support from DFID, UK and the Government of China, four Chinese cities (Chengdu, Shenyang, Yingchuan and Xining) have developed effective community health service system aiming to provide affordable and effective basic health care to the urban residents. Doctors working in these community health centers have been paid salary and bonus. The later payment is linked with his/her performance assessment, instead of revenue generation. As a consequence, the average medicine expenditure per prescription declined decreased. Apparently, the medicine use in these centers has been more rationalized after the separation of income from revenue generation (UHPP project documents). Another example is seen the community health centers at Changning District, Shanghai where the district government and the urban BMI scheme use global budget, plus indicators (e.g. capped expenditure per outpatient visit), to purchase public health/preventive services and essential clinical services, respectively. Doctor’s income is no longer associated with their revenue generation. The impact of such a reform is clear. The average expenditure per outpatient visit declined 25% to 10.7% in 2006 comparing with that of 2005 (Prof Liang Hong’s unpublished paper: Separating the management of income and expenditure in community health care centers). All this illustrates that appropriate incentives can be developed for service providers in China to improve the rational use of medicines.

Conclusions and policy recommendations

For the uninsured in China, access to healthcare is nowhere near guaranteed. Healthcare costs are 40 times higher than they were in the early 1980s, but 58 percent is financed by individual out-of-pocket payments.
The problem is exacerbated by a physician payment system that gives doctors an incentive to provide unnecessary treatment and drugs in order to bolster their meager incomes.

  • Medicine registration system and the medicine pricing system have not functioned well to serve a healthy development of the pharmaceutical sector. The production of medicines, particularly some essential medicines, has been problematic. Too many manufacturers are producing the same chemical medicines with different dosages and packing, and being sold at different prices, and the quality of medicines is sometimes a concern of the public esp. in rural and remote areas;

  • The medicine distribution system, after the introduction of market mechanisms, lack effective regulation and management by the government. Too many medicine distributors and salespersons/medical representatives use illegal practices to promote a variety of pharmaceutical products that may or may not be of high quality. Corruption and lack of transparency has been a key problem, among others;

  • The number of pharmacies, particularly in the rural areas, has increased significantly in the recent years. The qualification of these pharmacies is the serious issue of concern. Lack of robust regulations and monitoring for these pharmacies have compromised the quality of care, albeit the accessibility and availability of many medicines in the rural areas being improved greatly over the past two decades;

  • Irrational use of medicines, particularly in the low level health facilities of China, has been getting worse and worse, chiefly because of perverse financial incentives. Over-use of antibiotics and steroids, especially via IV drips, have already caused serious negative impacts on the quality of care. Furthermore, it has also significantly increased financial burdens, particularly on many poor families;

  • Lack of co-ordination and communication between various government agencies has been one of key issues required to address.

Policy recommendations

Before any reform decisions are made, at least an effort should be made to describe and quantify the problem. An indicator-based assessment should be followed by more detailed studies on individual drugs or specific diseases, and the availability/affordability of essential medicines. A time-series of such surveys is extremely useful to monitor performance with defined targets, and this can also serve as a baseline for planned interventions (Laing, 2001). Decision makers will benefit from getting these quantitative data to understand accurately the major problems, which could help to make appropriate reforms.

Pharmaceutical sector is a complex sector, with many stakeholders and different interests involved, because of the special nature of the sector, a case-by-case solution targeting at individual problems often fails to achieve the expected results. The goals of individual policies may be somewhat inconsistent or even mutually conflicting. Moreover, the interests of different entities often interfere with each other. Therefore, many countries have chosen to develop national medicines policy (NMP) in order to integrate policies across different components and fields of the pharmaceutical sector, and to guide the whole process of drug research and development, production, distribution and consumption.
Given the current situation in China and the problems in its pharmaceutical sector, it is urgently needed and highly desirable to set up a comprehensive NMP, which can consolidate individual policies, and give clear direction for the development of pharmaceutical sector to serve the health and well being of the people. It can define and record national objective in pharmaceutical sector, address problems in an integrated way, set national priorities and strategies, and instruct different stakeholders work in a collaborative way. Based on this, concrete policies in specific fields can be reformed, adjusted and refined.
The government needs to develop a balanced policy in promoting the development of pharmaceutical industry and ensuring the access of a vast majority of its population to essential medicines. It should have appropriate policies that provide incentives for the pharmaceutical manufacturers to produce essential medicines that are easily accessible and available to service providers, pharmacies, and service users. This needs to reform the current pharmaceutical pricing system and the way in which the essential pharmaceutical products are distributed and purchased. Government agencies, such as SFDA and MoH, should play an active role in the selection of evidence-based essential medicines. Under the auspice of the State Council, NDRC, MoF together with MoH and MoLSS, should work together to establish effective and adequate mechanisms used for essential drug pricing, distribution and purchasing. To achieve these objectives, it is important to strengthen effectively its coordination among different line ministries and agencies.
However, if the perverse incentives (hospitals and doctors make money from selling medicines to maintain the running of the practices) could not be removed, even if the NMP is formulated, the rational drug use and other problems will not change. There are some actions that are needed over and above all others, changing the incentives inherent in the provider payment system. Policy actions, which are both politically and administratively feasible, could address some of the fundamental issues described -even if the whole gamut of policies that a NMP would contain cannot be articulated or implemented in the short run.
The regulation and management of pharmaceutical registration, production, distribution and utilization should also be strengthened. Lack of regulation enforcement and unethical practice have been the key sticking points which blocked the health development and good governance in the Chinese pharmaceutical sector. We understand that several government agencies, such as SFDA and MoH, have taken a number of measures to tackle the problems. They have not done enough. Rigorous regulations should be developed to ensure that any new pharmaceutical products that want to get registered and produced should be more cost-effective than existing ones. The regulation and management of drug distribution including licensing drug wholesales and pharmacies should also be tougher, particularly under the context of emerging market economy in China. Relevant policies and actions should be put in place to prevent any corruption and other illegal practices in pharmaceutical registration, distribution and utilization.
To improve the rational drug use (RDU) and reduce a proportion of drug costs in total health expenditure, the government needs to do at least four things urgently: de-linking the income of doctors from the revenues generated from drugs prescribed; establishing national agency/program to promote RDU; developing standard treatment guidelines (STGs) for common diseases; and monitoring and assessing prescribing behaviors. Doctors and hospital managers should be seriously punished if they continue to accept kick back, commission fees, and other illegal incomes, which are linked with their inappropriate selection and use of any pharmaceuticals. Improving the use of medicines through STGs developed for each level of care, should based on the prevalent morbidities and the competency of available prescribers (physician, nurse, medical assistant, Community worker). Substantial involvement and consultation of end-users helps to ensure the practicality of diagnostic and treatment recommendations, and the acceptability of guideline content and format (Graaf, Forshaw, 1995). As far as possible, the selection of treatments should be evidence-based and take into account local economic realities (Bero et al, 1998). STGs should be officially launched by the government following with intensive trainings at all levels of use around the country, and periodically updated based on the comments from the grassroots. EDL as a useful tool to promote rational use of medicines, it has been always selected from existing lists or formularies. It has been generally accepted that the selection of drugs should be based on a list of common conditions and complaints and the treatments of choice for these conditions as defined in STGs (Quick et al. 1997). Drug Therapeutics Committee (DTC) in hospitals should play an important role at grass root level in promoting RDU.
In short, we strongly believe that, without effectively addressing the pharmaceutical related issues discussed above, it would be formidably difficult to ensure the access of the Chinese population to basic health care, which the government of China aims to achieve in the near future.


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Last time, I asked Prof. Xianfa Li for the related data or articles on China’s drug price components. He told me The Department of Drug Pricing, National Development and Reform of Commission have been always doing this, but I can’t find anything useful on their website. Later, I asked my flatmate, who is working in National Development and Reform of Commission now. She told me it’s impossible to get this data, some of them are secret material, even after the expiration of the secret period; nobody would like to tell you about that. I am wondering if they are sunk data since then.

1 Corresponding author: Dr Shenglan Tang, WHO China, Email:

2 One medicine product may have a number of registration numbers approved by the SFDA for different manufacturers, different dosages and/or package, etc.

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