How This Chinese Province Is Taking on Spiraling Drug Costs

How This Chinese Province Is Taking on Spiraling Drug Costs

Why you should care

Because the world looks for solutions to runaway health care costs wherever it can find them.

A Chinese city has taken on pharmaceutical companies and local doctors in the battle against health care cost inflation — and is now being touted as a nationwide model.

Health spending in China tripled in the decade to 2014, outpacing income growth, as an aging population became more susceptible to chronic diseases, and hospitals have made up for shortfalls in public funding by selling branded drugs at steep markups.

Since state-funded health care insurance is limited, patients pay more than a third of medical costs with their own money. China’s average life expectancy rose by three years to 76 over the same period.

Sanming, a city of about 2.5 million people in eastern China’s Fujian province, has shown one way out of the conundrum — switching from premium drugs made by multinationals to cheaper local generics and cracking down on physicians taking kickbacks from distributors.

A bottle of amino acid here sells for less than mineral water — would you dare use it?

Lin Xiaoqing, physician

After winning praise from China’s top health official and the World Bank, many of Sanming’s policies are being enacted nationally. Most provinces have banned hospital markups and secured aggressive price cuts from multinationals, hitting growth for those companies.

A dozen provinces are testing tough policies to curtail drug distributors. “The health ministry is trying to promote [Sanming’s reforms] nationwide,” says Jin Yi, an analyst at consulting firm Roland Berger.

The demographic challenges that are now afflicting China hit Sanming early. The city’s reputation for inaccessibility meant it was designated an industrial base under Mao Zedong, but as the Chinese economy opened from the 1980s, industry migrated to coastal areas, and many of the city’s young people followed.

Sanming’s ratio of workers to dependents — children, retirees and the unemployed — was half the national average by 2011. The municipal health insurance scheme’s $30 million deficit that year was equivalent to about a quarter of the city’s revenues.

In an attempt to tackle the problem, local bureaucrat Zhan Jifu combined the offices for hospital management, drug procurement and health insurance into a single agency, wresting control of hospitals by linking bosses’ salaries to how much they cut costs. He stopped big markups on drugs and cut down on middlemen profiting from the system.

Ignoring instructions that provinces set drug prices, Zhan began direct negotiations with drug companies, while the government insurance fund was ordered to set reimbursement rates by the price of generics. Prices plummeted. For example, the cost of exemestane, a drug used to treat breast cancer, fell from $108 to $22 per box between 2012 and 2014.

Sanming officials say the reforms have held medical expenditure inflation below GDP growth, while the city’s insurance scheme recorded a $23 million surplus as of September. Hospitals have raised fees for inpatient treatment, but out-of-pocket payments as a proportion of health spending in the city remain close to the national rate.

Zhan was promoted to Fujian’s top provincial health official in 2016.

It was not all plain sailing. Sanming suffered from medicine shortages after some drug-makers gave up on sales there. Many doctors left because of the crackdown on bribery, according to a 2014 finance ministry report. The reforms also alienated large pharmaceutical companies. “Multinationals are not so pleased … because of the very aggressive price cuts,” says Xuan Cui, head of the pharma working group of the European Union Chamber of Commerce in China.

Mistrust of local generic drugs began to spread, leading pharmacies to begin selling pricey drugs to patients who can no longer obtain them at hospitals, according to Lin Xiaoqing, a physician from Fuzhou, a city in Fujian province that followed Sanming’s model. “Sometimes I’ll ask a patient: ‘This drug is so cheap, do you really dare take it? If not, you can go to a pharmacy elsewhere.’ A bottle of amino acid here sells for less than mineral water — would you dare use it?” says Lin.

While drug prices have fallen in Sanming, “high-quality drugs are no longer supplied so a lot of drug representatives have changed professions and opened pharmacies,” says a former drug company representative who gave his name only as Zhou.

Some Sanming residents praise the success in reducing costs, but most say the drive has reduced state burdens at the expense of quality care. Local shopkeeper Lucy Chen, 47, complains about increased service fees. “It costs 48 renminbi [$7.50] to make an appointment, and only 18 renminbi is covered by insurance,” she says. “The more they reform, the more expensive it gets.”

Treatment in Sanming “is cheap but not effective,” says Amanda Li, who was leaving a hospital with her mother, who had reached a two-week limit on inpatient treatment. A government banner reading “Earnestly Lighten the Burden of Medical Care on Patients” fluttered behind her.

Yu Xiuqin, a city health care official, insists drug quality issues are unrelated to the city’s drug price negotiation process. Beijing, meanwhile, is rolling out a testing system from the end of this year that it says will ensure inferior-quality generics are taken off the market.

But the pushback from locals points to potential pitfalls in expanding the reforms to wealthier cities in China, says Alex Jingwei He, a health care expert at the Education University of Hong Kong. “The middle class and upper classes wouldn’t really want to compromise the quality of their care,” he says. “There is no one-size-fits-all model for the entire country.”

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By Tom Hancock and Wang Xueqiao

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