They Got the Same Shit Over There That We Got Here – Drug Prices

March 14, 2012

If you are one of those people who still buys into the old “monolithic China” myth, of the government working hand in hand with industry like a gigantic public works project, drug pricing is yet another example of how dynamic the political economy situation is over here. It’s also quite familiar in many ways.

The problem: Chinese folks need better access to health care. The (increasingly urban) population is aging rapidly, incomes are rising, and a social safety net is being cobbled together. But where are the resources going to come from?

The solution: there are many different ways that government can structure the provision of health care services, from wholly private sector systems to totally government-run institutions. But when it comes to the funding for all this, the money can only come from the government (from taxes/fees), from consumers, and the health care sector itself in the form of lower profits.

When it comes to drugs, we have the same choices. One way is to allow the free market to determine prices. But for some drugs, that means prohibitive expense that few can afford. Insurance can, but doesn’t always succeed, in solving that problem.

Another option is government-determined pricing. This can be through public-private negotiation (the U.S. Veterans Administration comes to my mind as an example), or through price controls. China’s system has aspects of both, and more reform is in the works:

Political leaders, wrapping up their annual National People’s Congress in Beijing today, pledged to make medical care more affordable and widen coverage of state-paid health insurance. The plan will be supported by a tendering system tested in Anhui province that encourages drugmakers to compete on price and quality for state contracts.

[ . . . ]

The government wants to broaden the use of the new procurement method, which led to price reductions of at least 30 percent on medicines on its essential drugs list in the past year, said Sun Zhigang, the top official overseeing the changes.

The government uses this procurement system as a cost containment measure. This system, and other types of price controls, are one reason why profit margins in this market are so low for Big Pharma as compared to other markets. But that’s okay, it’s a very big market, and the expansion of the reforms mentioned above will be accompanied by greater access. In other words, the pie is expanding, which means greater revenues long-term. Sounds like a win-win: government spends more and the private sector tightens its belt a bit as well.

But of course not everyone is happy:

“Health-care reform is basically about tendering to compete on prices, and I feel this is irresponsible to the drug industry,” said Guo Guangchang, chairman and co-founder of Fosun International Ltd., which controls one of China’s biggest drugmakers, Shanghai Fosun Pharmaceutical Co. “They need to prioritize on guaranteeing quality first, rather than focusing on just prices, or this will be very unfair to China’s drugmakers.”

This makes me smile. It reminds me of the overheated, insipid rhetoric from America’s health care debate over issues such as the U.S. government’s ability to negotiate drug prices with the private sector. Lobbying by Big Pharma in the U.S. is legendary, and incredibly effective.

While drug safety is of paramount concern, “fairness” to drugmakers is probably not very high on the list of potential problems. After all, China could have approached all this from the left side of the political spectrum and mandated even more draconian price controls. And these companies, although they might take a short term hit on profits, will continue to do very well in the long term. And Mr. Guo? Forbes has named him China’s 27th richest person. I think he’s doing just fine.

By the way, although Big Pharma despises price controls of any kind, you won’t hear that kind of criticism from the foreign guys in China. They’re too worried about pissing off the government. The stakes are too high, and the relationships that foreign companies can build with the government in China are (comparatively speaking) tenuous at best. It’s a good idea to let folks like Mr. Guo (i.e. domestic firms) make these arguments on behalf of all pharma companies.

The drug industry in China is huge, and the players are powerful. They have the ability to exert political influence and participate in policy making. It’s not exactly the same sort of lobbying that one is familiar with in the U.S. or in Europe (and is not as influential — not yet, anyway), but there are certainly common aspects of rent seeking that can be identified.

Despite what you may have heard, China’s government and private sector are not always locked in a tight nationalistic embrace. Private industry has its own agenda, its own criticisms of policy, and its own vision of the future that is often at odds with anticipated State reform measures.

3 thoughts on “They Got the Same Shit Over There That We Got Here – Drug Prices

  1. Mick

    A few observations:
    1. China already has very low prices for most essential medicines.
    2. Medicines usually account for only a small fraction of medical costs – say 10-20% of national health costs.
    3. China has a very serious problem with poor quality/fake medications.
    4. Doctor/hospital income is based on profits from drugs prescribed – so there is massive overprescribing of drugs and prescribing of unnecessarily expensive drugs instead of cheaper ones.
    5. Many people in China still prefer to use expensive and unproven Chinese remedies instead of/as well as western medicines, not to mention the massive market for ‘tonics’, sexual or otherwise.

    However, you are right about the tension between the Chinese pharma industry and government – this is one area where the government is not in control, and industry is setting the agenda. Maybe because regional government leaders have a financial interest in manufacturing/hospitals and their wishes over-ride those of local/national health department policy.

    There is a massive need for affordable, good quality basic medicines, but also also a cultural change is needed to encourage people to use such medicines in an appropriate way. You only need to see the number of people routinely hooked up to IV glucose drips in the waiting rooms to realise that Chinese medical practice has some very weird unscientific practices.