Global Perspectives on the 'Two-Invoice System' in Pharmaceutical Distribution: Insights from International Experience

Pharmaceuticals are substances used to treat diseases, characterized by their life-relevance, public welfare nature, and high degree of professionalism. They are also commodities with significant economic value, capable of generating substantial profits. The conflict between public interest and commercial profit has become a common phenomenon in the pharmaceutical sector. Pharmaceutical distribution encompasses the entire process from manufacturers to consumers, serving as a chain for the allocation of economic value. It involves a series of transactions and acts as an arena where various stakeholders realize their interests. Streamlining distribution channels and improving efficiency represent the fundamental direction for the development of pharmaceutical distribution systems worldwide.

The objective of pharmaceutical distribution is to maintain a stable supply of medicines when demand arises and to ensure that resources are utilized in the most efficient manner. Costs associated with warehousing and transportation constitute the most significant components of operating a distribution system. Particularly when supplying remote areas, transportation costs can account for a substantial portion of the value of pharmaceutical products. An effective distribution system must not only provide an acceptable level of medicine supply services but also demonstrate cost-effectiveness in its own operations. Whether designing or adjusting a distribution system, cost-benefit considerations are essential to ensure that the system’s operation aligns with the overarching goal of medicine supply and, further, with broader public health objectives. In terms of distribution structure, a typical pharmaceutical distribution system generally features a three- to four-tier hierarchy, enabling medicines to reach patients from manufacturers through two to three stages of transportation.

Specifically, a well-functioning and efficient distribution system should be capable of maintaining a continuous supply of pharmaceuticals, ensuring that drugs remain in good condition, and minimizing losses caused by spoilage, expiration, and other factors. In particular, given the high volume of transactions in the pharmaceutical distribution chain and the susceptibility to gray-market activities, a robust distribution system should minimize fraudulent practices, theft, and gray-market transactions, thereby ensuring fair and reasonable value allocation. Streamlining the distribution process can help eliminate the conditions that foster corruption, meet patients’ medication needs more rapidly, and significantly reduce inventory costs and expenses associated with pharmaceutical circulation and turnover.

◆ In developed countries in Europe and the United States, government regulatory measures for the pharmaceutical distribution system generally include market access and institutional oversight, control over markup rates and profit margins, anti-monopoly policies to promote competition, and ensuring drug supply in remote areas along with promoting generic substitution. In particular, most countries exercise control over profit margins in the distribution sector by monitoring drug price information and using this data to adjust reference prices for government fund payments or health insurance reimbursements. This compresses profit margins in the distribution chain, compelling continuous reform and innovation within the sector. Under strict regulation and intense competition, distribution enterprises in Europe and the United States have undergone ongoing industrial consolidation, restructuring, optimization, and functional expansion. The industry has evolved into a flattened structure characterized by high concentration among a small number of players and more comprehensive extended service capabilities. In most countries, a few large wholesalers basically cover the majority of the national market, and drugs sold to hospitals or retail pharmacies are often supplied directly through a single wholesaler. Furthermore, direct sales from manufacturers to hospitals or pharmacies have been developing rapidly in recent years, and mail-order drug delivery from manufacturers directly to patients is also emerging as a significant trend.

◆ In the United States, France, and Australia, the top three wholesalers account for over 90% of the national pharmaceutical market share. In terms of the number of wholesalers, there are only about 70 pharmaceutical distribution enterprises nationwide in the United States; no state has more than 14 pharmaceutical distributors, and eight states each have only one wholesaler-distributor. In 2010, the United Kingdom had three full-line wholesalers and 50 short-line wholesalers. In Australia, all medicines listed in the Pharmaceutical Benefits Scheme (PBS) are distributed by three large nationwide companies and three smaller enterprises, which together account for over 95% of the total national sales volume. Due to mergers and reorganizations, the number of wholesale enterprises in Japan has halved compared to ten years ago, currently standing at approximately 147. Since 2012, Taiwan, China, has implemented an integrated wholesale and retail model in the pharmaceutical circulation sector, with a few wholesalers assuming the tasks and functions of logistics and distribution centers.

◆ From the latest developments in European and American markets, the pharmaceutical distribution system is still undergoing evolution characterized by further consolidation of segments, specifically through horizontal and vertical integration. In particular, vertical integration that combines wholesale and retail operations has had a significant impact. European countries typically prohibit vertical integration between wholesalers and retailers to avoid creating supplier monopolies and potential drug supply shortages. Integrating wholesale and retail operations allows companies to capture profits across the entire pharmaceutical distribution chain, thereby enhancing profitability and facilitating the development of private labels or flagship products. In countries where vertical integration is permitted, enterprises combining wholesale and retail operations have emerged rapidly. The most typical example of such vertical integration is the UK’s Walgreens Boots Alliance. Originally founded as Boots the Chemist in the UK, it gradually integrated with manufacturing and distribution entities to form Alliance Boots, achieving end-to-end integration across production, distribution, and retail. In 2015, it further merged with the US-based Walgreens pharmacy chain, forming Walgreens Boots Alliance, a new type of international pharmaceutical distribution enterprise.

Due to the high concentration of the pharmaceutical market, these countries are not only able to regulate the pharmaceutical market very effectively but also significantly reduce regulatory costs. In terms of drug price formation, in European and American countries, the manufacturing segment generally accounts for 60–70% of the total drug price, wholesalers account for approximately 5–10%, and pharmacies account for approximately 20–30%. This value distribution pattern encourages production and R&D. Pharmaceutical expenditures account for an average of about 1.5% of GDP. A 2009 EU survey covering 28 European countries found that in six countries, the listed prices for hospital drugs were ex-factory prices, while in 11 countries, they were ex-factory prices plus statutory or fixed hospital wholesale markups.

Since the beginning of the 21st century, corruption and unethical practices in the pharmaceutical sector have attracted significant attention from the international community. Organizations such as Transparency International assert that corruption in the pharmaceutical industry is particularly severe, and its governance remains a persistent challenge for governments worldwide. The high prevalence of corruption and related issues stems from the "high market value" attribute of pharmaceutical products and the difficulty in sharing information. Information asymmetry is widespread among pharmaceutical manufacturers, regulators, healthcare providers, and customers or patients, leading to the frequent occurrence of corrupt practices. These issues manifest at the industrial level through a lack of integration of conflicting interests, such as prioritizing investor interests over public welfare. They also include common practices such as gift-giving, bribery, and kickbacks, particularly during product registration, formulary listing, supervision and inspection, pharmaceutical promotion, and procurement and sales. Furthermore, a range of other problematic behaviors exists, including tax evasion, collusive interests, nepotism, and regulatory capture.

To address these issues, the World Health Organization (WHO) implemented the “Good Governance for Medicines” program in more than 30 member states, recommending reforms across six areas: leadership systems, public programs, government restructuring, strengthening the rule of law, public awareness, and anti-corruption agencies. Specific approaches include, first, a values-based pathway involving the establishment of ethical norms and codes of conduct, systematic socialization of these ethical standards and codes, and enhancement of leadership quality; and second, a disciplinary pathway involving the development of anti-corruption laws and whistleblowing mechanisms outside the pharmaceutical sector, the establishment of internal and external audit and management procedures within the pharmaceutical sector, and collaboration with anti-corruption agencies, civil society organizations, and the private sector.

Drawing on relevant theories and international practices, it can be argued that, within China’s current context, government intervention in the pharmaceutical distribution system to promote streamlining is an effective means of improving governance in the pharmaceutical sector. Compared with the direct control of distributors’ profit margins in many European and American countries, or the efforts of other nations to refine their pharmaceutical governance systems, the “Two-Invoice System” based on centralized procurement of pharmaceuticals by public hospitals does not constitute excessive intervention. Rather, it represents a policy exploration of significant importance and value under the overall framework of China’s healthcare system reform and the Healthy China 2030 vision. From a healthcare perspective, the Two-Invoice System, combined with public hospital reforms, helps rapidly dismantle the mechanism of subsidizing medical services with drug profits, thereby facilitating the return of public hospitals to their public-welfare orientation. From the standpoint of pharmaceutical supply, the Two-Invoice System contributes to establishing an efficient and cost-effective distribution system, accelerating the rationalization of drug prices, and restoring the fundamental role of medicines in treating diseases and saving lives. From an industrial development perspective, it facilitates the rapid adjustment of distorted industrial structures and organizational systems, shedding long-standing historical burdens, and accelerating the modernization of China’s pharmaceutical distribution system.

Author: Fu Hongpeng, Health Development Research Center of the National Health and Family Planning Commission