In what many Western observers see as a misguided effort to contain rising healthcare costs, the State Development Planning Commission of China recently revived plans to institute price caps on the drug industry. The new regulations state that manufacturers may sell patented pharmaceuticals “for no more than 30% to 40% beyond” the production cost of a generic Chinese manufacturer. The price ceiling applies to both imported and domestically manufactured medicines.
Foreign companies have condemned price caps, saying they are harmful to all of the parties involved — both in the U.S. and China. Negative results of the price caps may include: 1) reduced income for manufacturers resulting from lower selling prices; 2) a decrease in high volume discounts (and therefore higher prices) to consumers (e.g. hospitals); 3) higher operating costs for manufacturers, resulting from the addition of new pricing departments and personnel for negotiating purposes with local organizations; and 4) widespread layoffs which may affect personnel worldwide (including in China), depending on the manufacturing location.
For several years, rising costs have plagued China’s health care system. According to the Ministry of Health, average healthcare fees rose from US$1.31 per outpatient in 1990 to US$9.54 in 1999 and US$57 per inpatient in 1990 to US$349 in 1999. A large percentage of the fees are spent on pharmaceuticals — in 1999, 60% of outpatient fees were spent on drugs. However, while drug costs have risen during this period, it is questionable whether price ceilings will do much to alleviate rising healthcare costs. A greater problem may be hospitals over-prescribing drugs. Lack of public funds has led many Chinese hospitals to rely on medicinal sales as a primary source of revenue. Up to 90% of all pharmaceutical sales in China take place at hospitals.