A hard pill to swallow

China published its first EMs list in 1982, with 278 medicines, all of which were Western medicines; no traditional Chinese medicines (TCMs) were represented. The number of medicines listed in the EMs list increased to 2,033 in the version published in 2004. The unnecessarily long list adds a heavy burden to healthcare insurers and ultimately hampers the achievement of its intended goal of ensuring adequate medical coverage for the public.

The Scheme provides a much needed overhaul of the EMs regime in China. More specifically, the Scheme provides for the following four aspects which are to be implemented over the next three years:

Compilation of the EMs list

One priority is to establish a mechanism for selecting EMs and to compile an updated EMs list. The EMs list will continue to be revised regularly in the future. Originally, it was announced that the revised EMs list would be published in late April 2009. As of press date, it has yet to come out.

Benefits of being recognised as an EM

All retail pharmacies are required to carry and distribute EMs to satisfy the medical needs of patients. From 2009 on, all state-run community healthcare clinics must carry and use EMs. The Ministry of Health will set separate mandatory use rates of EMs for different levels of healthcare institutions. The Ministry of Health will also compile a clinical user guide and prescription book to assist and guide the use of EMs.

Furthermore, all EMs will be included in the national basic medical insurance catalogue (published in 2000), and as such are reimbursable by insurance companies. The reimbursement percentage of EMs should be significantly higher than that of non-EMs.

Sourcing and distribution of EMs

The Scheme sets out various requirements in relation to the sourcing and distribution of EMs, including:

• EMs used by state-run medical and healthcare institutions should be sourced by organisations designated by provincial-level governments through nationwide public tenders;

• where the quantity of an EM's use is limited, it is permissible to select a manufacturer through public tender and to commission that manufacturer to supply the EM; and

• establishing and improving a state EMs reserve system to secure basic patient needs.

The Scheme further encourages industry consolidation of EMs' manufacturers and distributors, and the opening of chain pharmacy stores.

Pricing of EMs

The Scheme provides that:

• the central government should set the recommended retail price for each EM;

• the individual provincial government should determine and unify the sourcing price within the permissible range recommended by the central government; the sourcing price determined by the provincial government should include transportation costs; and

• all state-run medical institutions should sell EMs at the prices at which they are purchased, without any mark-up.

A draft version of a document entitled Essential Medicines Pricing Methods was distributed at the beginning of May 2009 to a limited number of medical experts to seek comments. In that draft, there is an interpretation that the individual provincial governments will determine the sourcing prices of mainly generic medicines. For innovative medicines, their prices will not be determined by the provincial governments, so there is greater latitude in setting the price. Obviously, there is no guarantee that the provincial governments will source the medicines from the relevant innovative medicines manufacturers unless it is the only medicine listed for a particular disease.

A deep impact

The central sourcing of EMs by organisations designated by provincial-level governments through nationwide public tenders could greatly help to bring down healthcare costs. The requirement that these medical institutions sell medicines at their own costs will also have a profound impact. (See All change for healthcare on page 20).

Furthermore, the central sourcing of EMs also means the organisation entrusted by the provincial government will be a very important customer. Care and appropriate measures must be taken to prevent commercial bribery from taking place between the EMs manufacturers and the entrusted sourcing organisations.

The expected reduction in the prices of medicines that are chosen to be included in the EMs list also worries some manufacturers. There is a rumour that the reduction will be between 15% and 20%. As the average profit margin of Chinese medicine manufacturers is 8% to 10%, the prospect of a significant price decrease will prompt manufacturers to think hard about whether or not to try and get into the EMs list. They need to balance the likely price cut against the expected high order volume if chosen to be included in the EMs list.

The compilation of the EMs list could also result in many Chinese pharmaceutical companies going out of business. There are almost 6,000 pharmaceutical companies in China, many of which are small to medium-sized, and they rely heavily on low profit margin copycat medicines for their income. Group sourcing by provincial governments and fierce competition to get into the EMs Catalogue by competitive pricing could force up to 2,000 smaller players out of business.

It is also noteworthy that the EMs list will likely contain a significant percentage of TCMs. On April 21 2009 the Chinese State Council published Several Opinions on Supporting and Promoting the Development of Traditional Chinese Medicines, which explicitly describe TCMs as having “a clearly established efficacy profile, a unique function for disease prevention and health enhancement, a flexible treatment method and a relatively inexpensive cost”. The Opinions further state that policies on healthcare insurance and EMs must facilitate the provision and use of TCMs.

TCMs are distributed mainly through over-the-counter sales and only account for 25% to 30% of the sales revenue of the Chinese healthcare industry. In the 2004 version of the EMs list, there are 1,260 TCMs and 773 Western medicines listed. The timing of the publication of the Opinions could signal a significant TCMs presence in the upcoming EMs list. It is widely expected that the Scheme will benefit TCM manufacturers whose products have no competing products in the market.

The publication of EMs list was originally announced to be in late April 2009. However, as of press date it has still not been released. One reason for the delay is reported to be the State Council's objection to the inclusion of too many products as the only medicine for a particular disease or symptom. Listing only one medicine for any disease entails significant risks in cases where the manufacturer does not have sufficient manufacturing capability or even goes bankrupt.

Hongxu Qin, senior associate, Allen & Overy