Shenzhen Public Hospitals to Launch Group Drug Procurement in July, Aiming for Over 30% Cost Reduction

1. Why is Shenzhen implementing centralized drug procurement?

Public hospitals in Shenzhen currently procure pharmaceuticals through the Guangdong Provincial Drug Trading Platform (hereinafter referred to as the “Provincial Platform”). However, while there are tens of thousands of drug varieties awarded bids on the Provincial Platform, public hospitals across the city commonly use only slightly more than 1,000 types. The broad range of available options not only fragments procurement volumes for the same drug but also leaves substantial room for pharmaceutical representatives to engage in disguised promotional activities. Furthermore, medical institutions throughout the province place separate orders on the Provincial Platform, with bidding conducted once a month. This results in fragmented single-order volumes, making it difficult to generate the negotiating leverage needed for “volume-based pricing” and “price control through volume.”

2. Pilot Objectives of Group Procurement Reform: A Reduction of Over 30% in Total Drug Expenditures

1) Through pilot reforms in centralized group procurement, drug supply prices shall be significantly reduced. During the pilot period, the total expenditure on centrally procured drugs shall decrease by more than 30% compared to the total cost of purchasing drugs with equivalent quantities and specifications on the provincial platform in 2015; 2) Improve the level of rational clinical drug use. By 2017, the proportion of drug revenue to total business revenue in public hospitals across the city shall be reduced to within 27%; 3) Standardize and streamline drug procurement, distribution, and clinical usage practices in public hospitals, and effectively curb commercial bribery in pharmaceutical sales and procurement; 4) Strengthen the capacity to guarantee drug supply, particularly for commonly used low-priced drugs, specialized drugs for women and children, emergency and rescue medications, and drugs facing market shortages.

3. How is the “group-buying” model specifically implemented?

According to the Plan, the model for centralized drug procurement involves entrusting a third-party centralized drug procurement organization (hereinafter referred to as the “Centralized Procurement Organization”) with the unified procurement of commonly used clinical drugs in public hospitals across the city. This approach implements volume-based procurement, organizes designated production and procurement, conducts negotiations and price bargaining, reduces distribution links, and lowers drug procurement costs.

1) The pilot centralized drug procurement program must first establish a unified procurement platform, organizing all public hospitals in the city to conduct centralized procurement on a single platform, thereby enhancing the scale and intensification of procurement.

2) Formulate the "Group Procurement Catalog" for all public hospitals in the city, appropriately reduce the total number of drug specifications procured by these hospitals, and increase the procurement volume for each individual drug.

3) During the pilot period, procurement expenditures for drugs listed in the Group Procurement Catalog accounted for more than 80% of the total drug procurement spending by public hospitals across the city. Based on the outcomes of the pilot, the scope of drug varieties covered by the Group Procurement Catalog will be gradually expanded to achieve comprehensive coverage.

4) For drugs not yet included in the "Group Procurement Catalog," public hospitals shall independently organize procurement, but must file records on the Municipal Drug Management Platform.

4. What Is the Role of Public Hospitals in “Group Purchasing”?

Public hospitals shall submit their annual procurement volumes and commit to purchasing at least 80% of the projected procurement volume. Following the consolidation of total centralized procurement volumes, the group procurement organization will arrange designated production and designated procurement, streamline pharmaceutical distribution channels, and reduce drug procurement costs. Under the group procurement model, all public hospitals in the city will have a single drug price, namely the procurement price (including distribution costs), which also serves as the hospital’s selling price for pharmaceuticals.

5. Who will serve as the third-party group purchasing organization?

Implement third-party specialized procurement with overall cost control. Specifically, a pharmaceutical company with qualifications and practical experience in drug distribution, as well as comprehensive insights into pharmaceutical market dynamics, shall be selected to serve as the third-party group purchasing organization (GPO). All medications required by public hospitals across the city for one year shall be bundled and centrally procured by this GPO, with a cap imposed on the total procurement expenditure. The GPO will conduct a one-year pilot program.

6. What Role Do Government Agencies Play in Drug Procurement?

The Plan specifies that the primary responsibilities of relevant government departments are to establish and improve the drug procurement system and to implement supervision and management, while group purchasing organizations are responsible for executing drug procurement. To this end, it is necessary to establish a new drug procurement system and trading platform to mitigate risks such as potential regulatory gaps, market monopolies, quality assurance issues, and untimely supply.

7. How to Establish a Regulatory System?

1) Formulate administrative measures for the Group Procurement Catalog to clarify the principles, procedures, and oversight mechanisms for drug selection. Establish a Municipal Public Hospital Pharmacy Expert Committee, which shall be responsible for compiling and adjusting the “Group Procurement Catalog.”

2) Formulate administrative measures for the group procurement organization, clarifying its basic requirements, selection procedures, job responsibilities, operational standards, and oversight measures; establish a Selection Committee for Municipal Public Hospital Drug Group Procurement Organizations to be responsible for selecting third-party group procurement organizations to carry out pilot programs.

3) Formulate group procurement operational standards to regulate activities such as pharmaceutical trading, distribution, settlement, and supply assurance risk control. If a group procurement organization fails to achieve the agreed-upon targets for pharmaceutical price reductions, its eligibility may be terminated, and it shall be barred from participating in the selection of group procurement organizations for public hospitals in our city for two years.

4) Implement online supervision of drug procurement, develop a municipal public hospital drug management platform, and conduct real-time monitoring of drug procurement volumes and prices, timeliness of supply assurance, and quality and safety in public hospitals.

8. How to Prevent Market Monopoly?

Drug trading rules shall adhere to the principles of openness, fairness, impartiality, and good faith. The group procurement organization shall determine the supplying brands and supply prices (including distribution prices) for each drug specification through transaction methods such as bidding and negotiation, while fully consulting the Municipal Pharmaceutical Expert Committee. The group procurement organization shall not directly engage in the production or distribution services of drugs listed in the "Group Procurement Catalog." The distribution enterprises for each drug specification shall be determined through consultation between the group procurement organization and public hospitals.

9. How to Ensure Procurement and Supply?

In terms of supply assurance, the catalog should cover low-cost drugs. If supply is not timely, procurement can be conducted through provincial platforms, and liability for compensation must be clearly defined. Should quality or safety issues arise with medicines supplied by the centralized procurement organization, it shall provide full compensation for both direct and indirect economic losses incurred by public hospitals.

10. How to Ensure Procurement Quality?

1) Experts determine quality standards while respecting the medication practices of physicians and the public. Group purchasing organizations are required to consider drugs across different quality tiers when selecting brands and must fully incorporate the recommendations of the Pharmacy and Therapeutics Committees of municipal public hospitals. 2) Strengthen adverse drug reaction monitoring; drugs with identified quality or safety issues shall be excluded from the Group Procurement Catalog. 3) Enhance market supervision of pharmaceuticals. Enterprises involved in the production or distribution of counterfeit or substandard drugs shall be placed on a blacklist, and hospitals are prohibited from purchasing any products manufactured or distributed by such entities. 4) Leverage big data on clinical drug utilization to conduct pharmacoeconomic evaluations, ensuring that high-quality, cost-effective medications are prioritized for procurement and use.

This reform has been launched, and preparatory work—including the formulation of supporting schemes and the selection of organizations to manage group procurement—is expected to be completed by the end of July, with the first round of centralized drug procurement then commencing.