In a widely expected announcement, China's National Development and Reform Commission (NDRC) has stated that from 1st June 2015 the government- imposed price caps on the vast majority of medicines will be removed. The cap removal will apply to nearly all medicinal products except narcotic anaesthetic products and class-1 psychoactive drugs. The NDRC's announcement follows the recent 7th amendment to the Drug Administration Law and the removal of Article 55, which stated that pharmaceutical companies, distributors and medical institutions were required to adhere to the government's pricing mechanism.

Providing an affordable and accessible healthcare system is a key concern and priority for the Chinese government as it contends with rapidly increasing healthcare costs and demands on healthcare infrastructure. The announcement on pharmaceutical pricing follows similar historical announcements concerning relaxed price controls in several sectors, including air transportation, electricity and natural gas, and telecommunications.

Balancing market-oriented pricing with spiralling healthcare costs

The policy change is aimed at creating an environment to encourage 'reasonable' pricing and to help control costs in the state-run medical insurance schemes as well as preventing future drug shortages. Historically, the Chinese authorities have set prices based on the manufacturer-reported costs of producing drugs. However, this system has been open to abuse with the potential for manufacturers to inflate costs in order to obtain a higher price. On the other hand, as a result of very low caps, certain low-cost drugs have been squeezed out of the market as manufacturers cease their production over profitability concerns. Pharmaceutical pricing liberalisation began last year when China began to remove price caps on a limited number of medicines in April 2014, following concerns that price capping was contributing to a shortage of supply of certain products.

In China, urban populations are covered by the Basic Medical Insurance (BMI) system. Similar reimbursement schemes operate in rural areas. Currently, the central Beijing government and provincial-level governments decide which drugs the BMI will reimburse and at what price, and publishes the National Reimbursement Drug List (NRDL). China has a centralised competitive drug procurement bidding system run by local authorities. This latest market-oriented pricing amendment is expected to improve the purchasing mechanism for medicines. In particular, hospitals and manufacturers will be able to enter into direct price negotiations at the provincial level without reference to any price cap.  Although the NDRC has called for a transparent price negotiation mechanism to be established, with consideration to be given to funding and patient affordability, it is likely that the NDRC may issue further guidance.

The removal of price caps is expected to ease pressure on international pharmaceutical companies doing business in China, the world's second largest pharmaceutical market. Pricing reform is also expected to improve the quality of domestically produced pharmaceutical products and to help protect the interest of patients by ensuring the availability of high quality medicines. Even though without a formal price cap there is scope for pharmaceutical companies to negotiate more reasonable prices for their products, the NDRC does not, however, expect dramatic price increases across the board. This is because China's centralised competitive drug procurement bidding system should in practice help to keep prices low.

Price monitoring and investigations

The NDRC has stated that manufacturers must find a balance between operational costs and pricing and those monopolistic pricing policies will not be tolerated. Although the government will no longer fix prices, price setting must still comply with any pricing regulations or guidance issued by the competent authority under the State Council. Prices must be set according to the principles of fairness, rationality, honesty, and good faith. A price monitoring system will be implemented and should prices be set too high special investigations will be conducted if excessive pricing and profiteering is suspected.

Further amendments to the Drug Administration Law simplifying business operations and licensing

In addition to the deletion of Article 55, other amendments have been made to Article 7 and 14 of the Drug Administration Law, concerning the requirements for Drug Manufacturing or Distribution Licences.  Previously, manufacturers and distributors were required to obtain the relevant licences prior to obtaining their business licence from the Administration for Industry and Commerce (AIC). Due to a simplified process, following the amendments and the removal of the pre-approval requirement, manufacturers and distributors will be able to obtain a business licence before obtaining the operational licences. In a further significant amendment, following the deletion of Article 100 if a manufacturing or distribution licence is revoked, it is no longer a requirement for the China Food and Drug Administration (CFDA) to notify the AIC to amend the business licence or cancel the registration of the company.

These significant amendments to the Drug Administration Law, and in particular the removal of drug price caps, demonstrate the move to a more market-oriented system and underscores the Chinese government's intent to further reform its healthcare sector.