National 'Two-Invoice System' for Pharmaceutical Procurement Officially Launched After Six Years of Preparation

On the morning of January 9, the National Health and Family Planning Commission held its first regular press conference of 2017. The State Council Office for Healthcare Reform, in conjunction with the National Health and Family Planning Commission, the China Food and Drug Administration, the National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Commerce, the State Administration of Taxation, and the State Administration of Traditional Chinese Medicine, issued the “Notice on Issuing the Implementation Opinions (Trial) on Promoting the ‘Two-Invoice System’ in Drug Procurement by Public Medical Institutions” (hereinafter referred to as the “Opinions”). This marks the official release of the national version of the Two-Invoice System, which had been piloted at the grassroots level since 2010.

The “Opinions” state that public medical institutions should gradually implement the “Two-Invoice System” in drug procurement, while encouraging other medical institutions to adopt it. Public medical institutions in provinces designated as pilot zones for comprehensive healthcare reform and in cities participating in the public hospital reform pilot program shall take the lead in implementing the “Two-Invoice System.” Other regions are encouraged to promote this system, with the goal of rolling it out nationwide by 2018.

To ensure a smooth transition for all pharmaceutical enterprises, the "Opinions" set forth special provisions for the following four scenarios:First, in alignment with the development trends of modern pharmaceutical enterprises, wholly-owned or holding commercial companies established by drug manufacturers or integrated industry-trade-research groups that sell only their own (group’s) drugs (limited to one commercial company nationwide), as well as domestic general agents for overseas drugs (limited to one domestic general agent nationwide), may be treated as manufacturers. The allocation of drugs within drug distribution groups to wholly-owned (holding) subsidiaries, or between wholly-owned (holding) subsidiaries, shall not be counted as one invoice transaction, but no more than one VAT invoice may be issued.Second, to guarantee the effective supply of medicines at the grassroots level, it is stipulated that when drug distribution enterprises deliver medicines to township and village-level medical and health institutions in particularly remote areas with inconvenient transportation, they are permitted to issue one additional invoice for drug purchase and sale on top of the "Two-Invoice System."Third, to address special circumstances such as natural disasters, major epidemics, significant emergencies, and emergency (rescue) treatment of patients, special handling measures may be implemented for the urgent procurement of drugs or national pharmaceutical reserve stocks.Fourth, the circulation and distribution of narcotic drugs and Class I psychotropic substances shall continue to be governed by existing national regulations.

Liang Wannian, Director of the Department of Structural Reform under the National Health and Family Planning Commission, stated at a press conference that the implementation of the “Two-Invoice System” in drug procurement by public medical institutions is a significant measure to deepen healthcare reform and promote the healthy development of the pharmaceutical industry. It serves as a key approach to standardizing drug distribution channels, reducing intermediary links, and curbing artificially inflated drug prices. Furthermore, it is an effective means to purify the distribution environment, combat illegal invoice trading and money laundering, and strengthen market supervision in the pharmaceutical sector. This policy is essential for ensuring medication safety for urban and rural residents and safeguarding public health. As a targeted reform initiative that benefits the nation, the people, and enterprises alike, it holds profound significance.

The “Two-Invoice System” aims to “regulate the pharmaceutical distribution process and curb artificially inflated drug prices,” with pharmaceutical consumers undoubtedly being the ultimate beneficiaries. This aligns with the recently released “13th Five-Year Plan for Pharmaceutical Circulation,” which seeks to cultivate a group of large-scale pharmaceutical distribution enterprises with nationwide network coverage and a high degree of intensification and informatization. The plan sets targets for the top 100 pharmaceutical wholesalers to account for over 90% of the total wholesale market sales, the top 100 pharmaceutical retailers to capture more than 40% of the total retail market sales, and the pharmaceutical retail chain rate to exceed 50%. Large pharmaceutical distribution companies stand to benefit from the Two-Invoice System; industry leaders such as Sinopharm Group, Shanghai Pharmaceuticals, Jointown Pharmaceutical Group, and China Resources Pharmaceutical are expected to be among the first to reap these benefits.

In addition, influenced by the “Two-Invoice System,” hospital drug distribution will become increasingly stringent, potentially creating opportunities for business adjustments in retail pharmacies. In particular, new formats such as DTP (Direct-to-Patient) specialty pharmacies, stores adjacent to hospitals, and cooperative pharmacies are expected to become highly sought-after models.

“The Two-Invoice System” has been discussed for many years. This round of policy was not introduced abruptly; the previously leaked drafts and local versions of the “Two-Invoice System” had already revealed the core framework of the national version. Moreover, taking into account the varying local conditions across China, the national “Two-Invoice System” has in fact left ample room for pharmaceutical manufacturers, distributors, and hospitals.

How to Adjust: The Primary Challenge Is ComplianceBoth local and national policy documents outline measures for handling enterprises that fail to comply with the “Two-Invoice System.” The “Opinions” state that pharmaceutical manufacturers, distributors, and medical institutions must ensure consistency among invoices, goods, and accounts during the transportation and use of drugs; if discrepancies exist, the goods shall not be accepted into inventory. To this end, the state has established a supervision and inspection mechanism, requiring food and drug regulatory authorities to include compliance with the Two-Invoice System within the scope of inspections conducted on pharmaceutical manufacturers and distributors, in addition to routine Good Supply Practice (GSP) and Good Manufacturing Practice (GMP) audits.

The local version directly stipulates penalty measures. Chongqing’s “Two-Invoice System” states that relevant authorities will impose severe penalties on entities violating regulations related to drug supervision and administration, tax management, and other pertinent rules; cases involving serious circumstances will be transferred to judicial authorities for handling in accordance with the law. Pharmaceutical production and distribution enterprises that provide false materials or intentionally circumvent the relevant provisions of Chongqing’s “Two-Invoice System” will be subject to strict disciplinary actions, including regulatory interviews, warnings, inclusion on the list of dishonest entities, suspension of trading privileges, and revocation of membership in the Drug Exchange Center, pursuant to the Drug Transaction Supervision and Evaluation Measures and other relevant regulations. Medical institutions that fail to strictly require invoices or disregard directives will face circulated criticisms, up to and including accountability for responsible personnel. This means that Chongqing’s “Two-Invoice System” will directly trace violations back to individuals within non-compliant pharmaceutical companies and medical institutions; more severely, the entire entities involved will be directly “disqualified.”

Adapting to the Two-Invoice System requires, secondly, an adjustment of the existing business framework. Pharmaceutical manufacturers may shift to a “high-invoice” pricing model; accordingly, they must transform their approaches to financial cost management and marketing operations. Pharmaceutical distributors need to strengthen their “last-mile” delivery capabilities. Although China’s pharmaceutical distribution landscape has become highly consolidated, some national distributors have limited penetration into terminal networks. In many cases, after establishing several regional warehousing and logistics centers, these national players delegate county- and district-level operations to downstream distributors, creating multi-tiered agency relationships. Under the Two-Invoice System, pharmaceutical distributors may acquire such entities for policy compliance reasons, using mergers and acquisitions to integrate and extend their reach into grassroots healthcare networks. For pharmaceutical retail businesses, efforts should likewise focus on M&A-driven consolidation and enhancing professional capabilities. Specific strategies include small-scale pharmacies forming alliances or joining leading national chains to achieve centralized procurement and distribution. To improve professionalism, retailers can draw on DTP (Direct-to-Patient) and hospital-adjacent pharmacy models, ensuring close integration with medical services.

The pharmaceutical industry, a unique sector closely tied to public health, possesses both public-welfare and commercial attributes. Striking a balance between these dual natures is particularly crucial. Under the influence of multifaceted policies, the pharmaceutical industry constantly feels the “shockwaves.” Whether it involves medical insurance cost containment, separation of prescribing from dispensing, the two-invoice system, the replacement of business tax with value-added tax (VAT), Document No. 94, or e-pharmacy regulations, each policy has the potential to “determine life or death” for industry players.

Regardless of the well-intentioned core objectives of the policy—namely, to establish mechanisms and strengthen systems—it aims to both meet residents’ health needs and foster a cohort of pharmaceutical and medical commerce enterprises with social value.

To conclude, let me adapt a line of dialogue for all healthcare professionals: “Though gains and losses are confined to this realm, they pale in comparison to the health and freedom of the public. Simply do your best.”