September 2019

When the Chinese government started to slash drug prices in 2018, it was only a matter of time before medical consumables would be affected. Then the payment reform – from the FFS payment model to DRGs is intended to change the providers’ behaviors in managing their finances by increasing their sense of cost ownership. Now the storms of direct price cuts on consumables initiated by local governments are expanding rapidly across the country.

The government-led price cut campaign started with Anhui province (a province in East China adjacent to Shanghai) in July where orthopedic implants (spinal implantation only) and ophthalmologic consumables (intraocular lenses) were chosen for applying the mechanism known as the “volume-based procurement”, which consolidates the annual volume from all the public hospitals in the province to only those tender winners. In the past, the provincial tendering process was merely a supplier and price registry process as procurement decision still largely sits with the individual hospitals.

It happened so quickly that many manufacturers didn’t have time to react. The news was released on July 3 and the results could be seen on July 30 with a dramatic price reduction of 53.4% on average with an estimated annual saving of RMB400 million (approximately $57 million USD). Further detail is provided in the table below.

The Jiangsu province has chosen a slightly different approach from the Anhui province that, in addition to products selected for a price reduction on a provincial level, such as stents and pacemakers, cities are also encouraged to create their own plans for the remaining products. For example, Nanjing, the capital city of the Jiangsu Province, has initiated a procurement alliance with two nearby cities for injection-based products such as disposable precision infusion sets, peripheral intravenous catheters and implantable venous access ports with an average reduction of 72.61% equivalent of estimated annual saving of RMB413 million (approximately $59 million USD).

Even as we write this article, more provinces are preparing to launch their initiatives.

This is certainly very disruptive to the device industry because the manufacturers must fight the sudden surge of provincial and local governments’ price negotiations and on most occasions, there is nothing to negotiate when payers are determined to slash prices by 30% to 50%. While the provincial payers are excited about the rigorous price cuts on disposables and consumables, the central government is also doing the groundwork to increase its scrutiny on healthcare spending. The NHSA (National Healthcare Security Administration) created a national database with a standardized coding system for medical services and products as well as providers such as hospitals, pharmacies, and individual healthcare professionals, nurses and doctors. Understandably this database is designed to enable the payer to have a direct look into the behavior down to the individual level through data sets.

Currently, the database is ready for the registry for medical consumables. Suppliers or their appointed agents are required to register and validate the information of their CFDA (now known as NMPA – National Medical Products Administration) approved products by end of September 2019.

Implications for Innovators

Be prepared for a period of turmoil given the local and central policymakers’ intention to cut prices on medical supplies as one of the many attempts to control ever-increasing health care expenditures while the Chinese economy is expected to slow down.

Key Takeaways
  • Innovators with existing products in the China market should make sure that they or their partners register the products with the NHSA’s database prior to the September 30, 2019 deadline.
  • Work closely with your local colleagues and business partners to develop pricing plans both tactically and strategically to handle local price reductions. To compromise, or not, in the price reduction negotiation, is the question.
  • Innovators, as individual companies or as a group, need to work on a strategic and innovative plan and engage the various stakeholders to influence future policy settings that still recognize and encourage medical innovation amidst the ongoing pressure on payment.

Veranex (formerly Boston Healthcare Associates) has a deep understanding of the evolving healthcare landscape in China. Please contact us to see how we can help.

Back to Blog