Market Access in China: Drug Listing, Bidding, Pricing and Reimbursement

This article was also published on RAPS

Market Access in China

The Chinese pharmaceutical market was worth about $76 billion in 2013. The market expanded 19% year after year during the past ten years and is expected to continue growing at the rate of almost 18% per year through the end of the decade. Currently the third largest pharmaceutical market worldwide, China is expected to overtake Japan and move into second place by 2020.

After a pharmaceutical product has been approved by the China Food and Drug Administration (CFDA), another year and a half may pass before it can actually be prescribed by a doctor. To shorten this process, some drug companies begin the pricing, bidding and listing processes before receiving drug approval.

This article focuses on the key Chinese government agencies determining drug pricing and reimbursement. It gives you the knowledge you need in order to better understand China’s pricing system and help you maximize your drug’s price.

CFDA ORGANIZATION AND KEY GOVERNMENT PLAYERS

The first step to understanding pricing and reimbursement in China is understanding the organization of the CFDA and key government players. Please see the following charts:

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DRUG PRICING

Drug pricing in China, an entirely separate topic from drug reimbursement, is the process to set the ultimate price a hospital pays for the procurement of drugs.

The process of determining the price of an imported drug is different from that of setting prices for domestically manufactured drugs. The price of an import drug is based on product cost, freight, insurance, shipment documents and invoices for duty and customs tax.

Since March 2007, a five-step price-setting process has been in place. First, regulators may visit the manufacturer or speak to the local representative to assess the cost of the product’s raw materials and then propose a price. Second, a new expert group on drug pricing will evaluate the proposed price. Third, a public hearing will be held to gain public comments on the proposed price. Fourth, group discussions will occur. Fifth, there will be a completion of the group examinations in order to create a final price determination. Overall, this revised system is intended to ensure the integrity of the pricing process, with expert groups and regulators selected at random and rotated on a five-year basis to minimize conflicts of interest.

Generally, an imported drug that has just entered the Chinese market will receive a price near its free market price, unless its original developer or patent holder is also selling the same substance in China. An imported generic drug is usually given a price lower than that of the imported patented product but higher than the price of locally made generics.

Government price cuts hit generic products the hardest. For instance, in 2012, price cuts for generic products made by joint ventures (i.e., original brand foreign products) had their prices cut by an average of 25%.

A significant development in December 2010 was a ceiling imposed by the National Development and Reform Commission (NDRC) on the retail prices of selected drugs. The prices of these drugs were previously fixed independently by their manufacturers. Most of these manufacturers were joint ventures and foreign-invested enterprises. More than 100 kinds of drugs affected by this price ceiling were produced by approximately 35 foreign pharmaceutical companies. Examples of affected drugs were Roche’s Cefatriaxone, GlaxoSmithKline’s Cefuroximeand Merck’s Simvastatin. This policy was expected to reduce China’s public healthcare expenditures by approximately $300 million.

ESSENTIAL DRUG LIST

Several years ago, China introduced its Essential Drug List (EDL). These drugs, chosen by the Chinese government, are judged to be essential to China’s healthcare system.

This list reflects treatments for at least 65% of the most common illnesses in China, and it includes Western drugs as well as traditional Chinese pharmaceuticals. Most small public clinics and healthcare centers are required to purchase only essential drugs from this list, and larger hospitals must operate under a ratio of essential to nonessential pharmaceuticals. China’s target was to have approximately one third of the grassroots state-owned health facilities stocked with the EDL medicines by the end of 2009. By 2020, all state-owned facilities are expected to be fully equipped with medicines from the list.

An updated EDL is issued by the Ministry of Health (MOH) every three to five years. The most recent, the 2012 EDL, was released in March 2013 and includes 520 products (up from 307). Of these, 317 are Western products (up from 205). Of the top 50 drugs imported from the West, 10 were added to the EDL, including Sanofi’s Plavix and Pfizer’s Norvasc.

This 2012 revision also includes a larger number of innovative products, covers a broader disease range and targets more-diverse patient groups than previous EDLs. There have been reports that future EDLs would expand to more than 800 drugs. However, analysts now believe that the list will not expand much beyond the current number of products.

The 2012 EDL also set new requirements for hospital revenues from EDL products: approximately 45% of Class II hospital revenues and 25% of Class III hospital revenues should be from listed products. One-third of China’s provinces already have passed legislation requiring implementation of these central government standards.

NATIONAL REIMBURSEMENT DRUG LIST (NRDL)

While reimbursement is very important in China, it is different than the ultimate sale prices of drugs. People are reimbursed for pharmaceuticals based on one price, but drugs are purchased at a higher price.

The National Reimbursement Drug List (NRDL) is set by central government agencies including NDRC, CFDA, Ministry of Human Resources and Social Security (MOHRSS) and Ministry of Finance.

In deciding coverage and inclusion, the expert advisory board takes into account these criteria, in order of importance:

1.       Clinical need and utilization

2.       Safety and efficacy

3.       Reasonable pricing, compared to other products in the same therapeutic area

4.       Average total cost

5.       Number of years on the market

6.       Cost-effectiveness (health economics)

The NRDL is updated every four to five years through a four-step process. First, government officials from the agencies listed above create a list of candidate drugs for the NRDL — pharmaceutical companies do not apply for inclusion. Second, the expert advisory board, consisting of government and outside experts, will review this list. Third, expert committees vote regarding the inclusion of drugs on the NRDL. These committees are made up of pharmaceutical, clinical, health economics, disease and pharmacology opinion leaders. Established databases of experts are maintained at both the provincial and national levels, and committee members are selected randomly from these databases. The experts are “quarantined” until the review is finished. Fourth, MOHRSS finalizes and publishes the list, after which NDRC sets prices for the NRDL pharmaceuticals. Then, provincial MOHRSS offices work on their own Provincial Reimbursement Drug Lists (PRDLs). PRDLs will be discussed later in this article.

The NRDL is separated into two lists: List A, primarily composed of older, generic drugs that are 100% reimbursed by the national government, overlaps significantly with China’s EDL. List B includes premium and innovative drugs that are partially reimbursed (10%–90%) by the provincial or central governments. Pharmaceuticals on List B are categorized by the active ingredient, not by the brand name. This means one reimbursement is established for each active pharmaceutical ingredient, regardless of the product’s brand or total price. This policy makes many Western medicines more affordable to Chinese citizens, because the imported pharmaceutical and the Chinese-made generic receive the same percentage of reimbursement.

To illustrate this policy, suppose a local generic version of a drug costs $20 for a month’s supply, while the imported, off-patent version of the same drug costs $40. Additionally, the active ingredient of both products is on NRDL List B and is reimbursed at 75%, with a corresponding copay of 25%. In this situation, the copay would be $5 for the Chinese-made generic product and $10 for the imported drug. The remainder would be reimbursed. This policy substantially lowers the price differential between the original foreign version and the local generic, making Chinese patients more likely to choose the imported version. Of course, in general the Chinese prefer foreign made pharmaceuticals rather than locally made drugs.

Every two to three years MOHRSS proposes List B, which is then forwarded to the provinces. Each province is allowed to substitute other drugs for up to 15% of the items on their List B to align with local disease trends and needs.

The most recent NRDL, released in 2009, includes 987 traditional Chinese medicines (TCM) and 1,164 Western pharmaceutical products. Of the Western drugs, 349 are on List A and 791 are on List B. There are also 20 drugs for occupational injury as well as 4 drugs for contraception. This means that provincial committees could substitute for up to 119 of the Western drugs on List B as part of their 15% allowance. It is likely that an updated NRDL will be published in 2014.

In theory, drug companies are not involved in the NRDL review process. However, to get their products included on the NRDL, many drug companies try to influence the physicians and other experts chosen to make up the expert advisory board.

Drug companies should work with reimbursement experts and officials in pharmacology, clinical studies, specific disease areas, health economics and pharmaceuticals because there is no formal application process. This will ensure that no matter which opinion leaders are selected to review the NRDL, several will be familiar with and/or supportive of your product. Employing consultants who are experts in health economics and insurance, pharmacy and drug pricing, as well as reimbursement officials and doctors in your product’s disease area, is also important for getting drugs on the NRDL and PRDLs, because they can lobby on your behalf.

If your pharmaceutical product does not make it onto the NRDL, it can still be listed on the PRDLs; however, your company and advocates would need to lobby for inclusion in each province separately. If the product is manufactured locally, you could have an advantage with your plant’s host province. Reimbursed drugs can have a significant competitive advantage, so in many cases it is important to try to get your drug products reimbursed in China.

PROVINCIAL REIMBURSEMENT DRUG LISTS

PRDLs are important, too. This requires the manufacturer to get a product approved in some or all of China’s provinces.

Provincial governments draw up their own PRDLs for implementation of the reimbursement system. Provincial List A drugs are fixed nationwide, and provinces may not alter them. Provincial List B drugs, on the other hand, may be altered within the 15% limits mentioned above. PRDL revisions are generally made within 180 days of the NRDL revision and do not include the participation of drug makers.

In addition to substituting for drugs on List B, each province can use money from its own budget to support the reimbursement of additional drugs. For example, Beijing’s PRDL includes almost 250 more drugs than are listed on the NRDL. Each province has additional flexibility with their listed products: their PRDLs often restrict the ways or situations in which a drug can be used, such as only by a hospital of a certain size or only in certain therapeutic cases.

PRDLs are set by provincial government entities including the price bureau, the provincial financial bureau and the provincial bureau of MOHRSS. Provincial expert committees and advisory boards are set up to review the prices. These boards are composed of clinical key opinion leaders (KOLs), pharmacy KOLs, health economics KOLs and pharmacology KOLs. Experts are randomly selected to participate in reviews from established expert databases. As with the NRDL, as soon as they are selected, the experts are grouped together and stay “quarantined” until the meetings are finished.

THREE STEPS TO GET YOUR DRUG ON THE MARKET IN CHINA

Please see the following chart to see the three steps that are required to get your drug on the market in China after registration:

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Step One: Drug Price Approval

After product registration, the first phase of the process to get your pharmaceutical product into hospitals is drug price approval. The retail price of a drug must receive official approval before the drug can be offered in any tendering or bidding process. This usually takes four to five months. The drug product’s price is set by NDRC if the drug is listed on the NRDL. If the pharmaceutical is not listed on the NRDL, each provincial government’s pricing bureau must approve the proposed retail price — meaning that a company needs to submit a separate application to the pricing bureau in each province where it hopes to sell the pharmaceutical product. In general, the first provincial price approval takes three months, while each subsequent province takes one to two months.

A company that is the original developer or patent holder may apply to NDRC in order to receive separate drug pricing. Firms that do this can be granted a higher official price than that of the drug’s generic competitors.

A manufacturer can propose its own retail price to the provincial government for drugs not listed on the NRDL during the process of pricing approval. However, local governments usually compare the drug in question with pharmaceuticals in the same therapeutic area to determine pricing. In the case of certain particularly expensive drugs that would likely receive a very low reimbursement on the NRDL, choosing not to seek NRDL product listing may be a better strategy for profit maximization. Thus, some foreign manufacturers elect to not be reimbursed and focus instead on patient self-pay.

NDRC has announced several potential changes to pricing. One is the future implementation of international reference pricing, which could lead to significant price cuts for off-patent drug products. Different payment schemes are also being piloted in some public hospitals to better control costs. Other proposed policies include regulating the acceptable markup percentage for imported drugs to control profit margins, mandating a 25% price cut after a pharmaceutical product’s patent has expired and setting the price of generics in order of their entry onto the market. All of these changes could lead to increased price pressure on foreign pharmaceutical companies.

Step Two: Provincial Bidding

The second step in the progression towards market access, provincial bidding, generally takes three to five months. Each province calls for drug manufacturers to participate in the bidding process drug tenders. The schedule for bidding is different for each province, though the process usually happens once or twice a year. Regardless of whether the pharmaceutical product is listed on the NRDL or a PRDL, it must take part in provincial bidding before it can be sold in a hospital. Like drug price approval, bidding takes place on a province-by-province basis.

After receiving bids, a tendering committee composed of local government officials, NDRC representatives and pharmacists and chooses among the bids and determines which drug companies can distribute their products in that province. Usually two to five suppliers of each drug (molecule, dosage form, dose strength) are selected. It is important to have an advocate, like a local distributor, who can promote your product and lobby the committee members to make sure your drug product is approved for provincial distribution.

Provincial governments have been reducing their reimbursement expenses by focusing on drug cost during the bidding process. For instance, Anhui Province adopted the now infamous “two envelope” procedure in 2010 that almost exclusively judged a pharmaceutical product’s bid on price. This led to an average 38% cut in tendered drugs compared with the NDRC price ceilings. The system was adopted by many other provinces — in some cases leading to average price cuts of up to 65%.

But in early 2012, China’s State Council announced that quality should be the first criterion in the tendering process. Many provincial governments have since adjusted their tendering protocols to place a bigger premium on drug quality. For example, Shanghai has a tender model that scores a pharmaceutical product’s bid based almost two-thirds on quality and one-third on price. Even Anhui Province, since 2012, has used a similar weighting in its tendering system.

The provincial bidding process is outlined below:

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Step Three: Hospital Listing

The final step in getting your drug on the market in China is hospital listing, which usually has a timeline of three to five months. After a pharmaceutical product has won a provincial bidding process, it must be listed by each individual hospital. Only then can the product be prescribed by physicians working in that specific hospital.

Once or twice a year, every large hospital creates a committee to approve any new drugs to be included in the hospital’s formulary. Only pharmaceuticals listed on the formulary can be purchased by the hospital and prescribed to patients by physicians. The committee, headed by the hospital’s pharmacy director, usually consists of department chiefs who recommend the drugs that their specialties and departments need. Decisions are based on consensus.

It is important to research in advance exactly which hospitals specialize in treating your product’s therapeutic area. Like the other steps in the process of getting your pharmaceutical product to market in China, it is critical to have key opinion leaders engaged beforehand. Administrators and physicians in each hospital who know about your drug can advocate for its inclusion in the formulary.

CONCLUSION

Drug registration in China is a complicated and lengthy process. However, registration is only the first step in getting your product onto the market. After registration, it generally takes a further 18 months to obtain market access. How a pharmaceutical company approaches the reimbursement drug lists, bidding process and hospital listing is crucial for success in the Chinese pharmaceutical market.

This article was originally published in the Regulatory Focus Features section of RAPS.org (http://www.raps.org/regulatory-focus/features/2014/06/19457/Pharmaceutical-Reimbursement-in-China/).