State Council Officially Promotes Sanming Medical Reform Model: Key Policy Highlights and Industry Implications

Recently, the Chinese government website published the “Notice of the State Council on Approving and Forwarding the National Development and Reform Commission’s Opinions on Key Tasks for Deepening Economic System Reform in 2016.” These Opinions (hereinafter referred to as the “Opinions”), put forward by the National Development and Reform Commission, highlight four key features: greater emphasis on supply-side structural reform, a stronger problem-oriented and goal-oriented approach, increased focus on grassroots practice and innovation, and enhanced efforts to ensure the implementation of reform measures.

In the context of the pharmaceutical industry, how can these four prominences be demonstrated? Please refer to the excerpts below from the "Opinions" that pertain to the pharmaceutical sector.

[The number of pilot provinces for healthcare reform expanded from 4 to 8, promoting the Sanming healthcare reform model, and the number of pilot cities for healthcare reform increased to 200]

Coordinate and promote the integrated reform of medical services, health insurance, and pharmaceuticals. Consolidate and improve the comprehensive reform of county-level public hospitals, increase the number of pilot cities for comprehensive public hospital reform to 200, expand the scope of provinces piloting comprehensive healthcare system reform, and accelerate the establishment of a modern hospital management system. Promote the healthcare reform practices and experiences of Sanming City, Fujian Province, in selected provinces piloting comprehensive healthcare system reform.

Commentary:The 200 pilot cities for healthcare reform account for 60% of the 333 prefecture-level and above cities in China. The scope of the pilots has doubled from last year’s 100 cities, featuring broad coverage and a significant increase in scale. From the perspective of drug centralized procurement, pharmaceutical companies must navigate 30 provincial-level procurement schemes across China as well as the independent procurement plans of the 200 pilot cities, while ensuring effective coordination between the two. This has resulted in a doubling of workload and increased complexity.

Promoting the Sanming Healthcare Reform Model in Selected Pilot Provinces: While It Remains Unclear Which Provinces Will Be Included, Several Key Features of Sanming’s Reform Relevant to Pharmaceutical Companies Warrant Reiteration:

1. The top leader takes charge and oversees the work.This means that, in the pilot provinces, the vice governor responsible for healthcare reform will personally spearhead and coordinate the integrated reform of medical care, health insurance, and pharmaceuticals, thereby increasing the difficulty for pharmaceutical companies in engaging in policy-related communications.

2. The three medical insurance schemes are merged into one and placed under the custodial management of the finance department.The consolidation of the previously fragmented payment structure—comprising two separate departments and three types of medical insurance schemes—into a unified payer system signifies a more centralized and stronger negotiating position. This shift will lead to intensified regulatory oversight over drug procurement, utilization, and reimbursement.

3. Reducing expenditures on pharmaceuticals and medical consumables to increase fees for medical services is referred to as “replacing the old with the new.”This is a structural adjustment, and the simultaneous decline in both volume and price for pharmaceuticals and medical consumables has become inevitable. A series of major measures to reduce drug prices will be frequently introduced, such as the normalization of secondary price negotiations, or the more potent “Sanming Plus” model (Joint Price-Capped Procurement Alliance), or adjustments to medical insurance payment standards—for example, Sanming’s approach of setting reimbursement benchmarks for certain high-cost drugs based on the lowest national price of their generic equivalents.

4. Implementation of the “Two-Invoice System” and even the “One-Invoice System.”To date, Fujian is the only province in China to have implemented the “Two-Invoice System,” and it has done so with remarkable thoroughness. As a result, market concentration among pharmaceutical distributors has reached an unprecedented level. Currently, only 11 distribution companies across the entire province are qualified to legally deliver drugs to public hospitals. Small-scale distributors throughout the province must either transform their business models, affiliate with larger companies by becoming local branches or subsidiaries, or cease operations entirely.

Following the recent exposure of a RMB 570 million vaccine scandal, Premier Li Keqiang issued direct instructions to strengthen regulatory oversight. The “Two-Invoice System” is likely to be fully implemented across pilot provinces. It is even plausible that the system could transition directly to a “One-Invoice System.” Last year, Zhejiang Province already outlined the operational mechanisms of the One-Invoice System in its documents on innovating medical insurance payment reforms and improving transparent drug procurement. As a newly added province for healthcare reform, is it feasible for Zhejiang to implement this system immediately? In my view, there is a high probability that it will.

[Medical Insurance Reform]Improve the basic medical insurance system, integrate the basic medical insurance systems and administrative agencies for urban and rural residents, accelerate reforms in medical insurance payment methods, and promote nationwide networking of basic medical insurance and settlement for cross-regional medical care. Achieve full coverage of critical illness insurance. Study and formulate pilot programs for the merged implementation of medical insurance and maternity insurance.

Commentary:The Ministry of Human Resources and Social Security has issued a document requiring all regions to propose plans for integrating urban and rural medical insurance schemes by June this year. Upon completion of the integration, the 800 million participants in the New Rural Cooperative Medical Scheme (NRCMS) will benefit from an expanded scope of healthcare access (previously largely restricted to within their respective counties) and broader reimbursement coverage (now incorporating benefits from the Urban Resident Basic Medical Insurance). If nationwide cross-regional network connectivity and settlement mechanisms are effectively implemented, this will unleash substantial latent demand for medical services. Pharmaceutical companies should promptly study the reimbursement policies under both the integrated medical insurance system and the NRCMS to seize these emerging opportunities.

[Approximately 70% of prefecture-level cities have launched pilot programs for tiered diagnosis and treatment]Deepen the comprehensive reform of primary healthcare institutions, accelerate the establishment of a tiered diagnosis and treatment system, and launch pilot programs in approximately 70% of prefecture-level cities.

Commentary:Tiered diagnosis and treatment is a crucial policy for optimizing the allocation of medical resources and facilitating orderly and rational healthcare-seeking behavior, which will bring about structural changes in the medical and pharmaceutical markets. If implemented smoothly, outpatient volumes and prescription drug sales at large hospitals will be diverted to primary care institutions. In particular, the downward shift of chronic disease medications, such as those for diabetes and hypertension, will create favorable conditions for the primary care market. Pharmaceutical companies should promptly strategize their “tiered promotion” and “hierarchical sales” approaches based on product characteristics.

[Reform of Drug Supply and Distribution]Improve the drug supply and guarantee mechanism, advance reforms in drug distribution, and reduce artificially inflated drug prices.

Commentary:While lowering drug prices, it is also essential to ensure the normal availability of medications. Shortages of certain commonly used clinical drugs in recent years have drawn public attention. In some provinces, the exclusive emphasis on low prices has suppressed drug costs but also exposed medicines to risks such as disrupted supply chains and diminished quality of care, a situation that warrants close attention from relevant authorities.

[Supply-Side Reform of Drug and Medical Device Approvals]Comprehensively advance the reform of the review and approval system for drugs and medical devices, establish a review system guided by clinical efficacy, promote the consistency evaluation of quality and efficacy for generic drugs, and launch pilot programs for the Marketing Authorization Holder (MAH) system.

Commentary:How should the backlog of 21,000 pending drug applications be addressed? How should the consistency evaluation of generic drugs be conducted? Can more than 5,000 pharmaceutical manufacturers across China survive the crisis amid these new changes? This constitutes the “destocking” and “capacity reduction” aspects of supply-side reform in the pharmaceutical industry.

The pilot implementation of the Marketing Authorization Holder (MAH) system has decoupled drug approval documents from manufacturing enterprises, thereby unleashing productivity. However, supporting policies have yet to be introduced. For instance, while natural persons may hold approval documents, their capacity to withstand risks is limited in the event of adverse drug reactions or quality incidents. How should such liabilities be borne? Some industry experts propose leveraging mechanisms such as industrial funds and commercial insurance for risk mitigation. How these measures will be advanced remains to be seen.

[Compensation Reform for Medical Personnel]Promote the reform of the compensation system for medical staff in public hospitals, and establish a new operational mechanism that upholds public welfare, stimulates enthusiasm, and ensures sustainability.

Commentary:If healthcare reform fails to respect the demands of medical personnel, even the most vigorous reforms will struggle to address the systemic pain points. Is the goal of healthcare reform to achieve a Pareto optimum for stakeholders such as patients, healthcare workers, pharmaceutical companies, and the government? Relying on the suppression or sacrifice of one party to benefit others is likely unsustainable.

[Private Healthcare: Optimizing the Supply Side of Medical Services]Implement the policy measures to promote the accelerated development of private medical institutions.

Commentary:According to official data released by the National Health and Family Planning Commission, as of the end of September 2015, there were 13,304 public hospitals and 13,600 private hospitals across China. Compared with the figures at the end of September 2014, the number of public hospitals decreased by 37, while the number of private hospitals increased by 1,637.

Although the number of non-public hospitals has continued to rise in recent years, even surpassing that of public hospitals, public hospitals still absorb the vast majority of patient resources. Meanwhile, public hospitals are themselves overburdened. In addition to implementing tiered diagnosis and treatment to divert patients, encouraging private investment in healthcare and increasing resources in non-public hospitals is also a way to optimize the “supply side” of medical services.

[Supporting Policies for the Two-Child Policy Must Keep Pace]Guide localities in formulating and improving supporting policies for the adjustment and refinement of fertility policies.

Commentary:With the full arrival of an aging society, there is a need for a younger population to optimize the demographic structure, which also constitutes a “supply-side” reform in terms of population. The implementation of the two-child policy has promoted the development of related industries, and various entrepreneurship projects associated with this trend have emerged rapidly across society.

Source: PharmaCloud Information (WeChat Official Account: drugist) Author: Diancang He