Overview of China Reimbursement
Over the last seven years, it is now easier to register foreign drugs in China, but drug pricing has generally gone down. China has utilized several programs to reduce drug prices including their National Essential Medicine List (NEML), the National Reimbursement Drug List (NRDL), Volume-based Procurement (VBP), Designated Reimbursement Groups (DRGs), and Diagnostic Intervention Packet (DIP). On the other hand, to counter these drug price reductions, China has also put in place some new mechanisms to increase innovative drug prices, like adding more new drugs to the NRDL list, a multi-tier payment system, the growth of commercial insurance, etc.
Before we go into the details of each program, let’s first take a quick look at how drugs are paid for in China. The National Health Commission (NHC) is the most important agency for drug prices and reimbursement. The basic healthcare system is organized under the National Health Security Administration (NHSA). At the local levels, there are counterparts to these key agencies too. To get drug reimbursement, it is also crucial to be listed in the provincial NMPA bidding and procurement platforms. Prices are determined by safety and efficacy. While health economic data is becoming used more, the Chinese government is not obliged to follow such metrics.
The National Essential Medicine List (NEML)
The NEML generally lists essential drugs that have been in China for a while and are used frequently. The selected drugs must meet the needs of everyday common diseases. The benefit of being on the NEML is it will normally increase your China market share and drug opportunity. Drugs on this list are fully reimbursed. However, to be on the NEML, the drug must have a reasonable price. The list is determined, and drug prices are set by experts and the NHC. Public hospitals, which buy the vast majority of drugs, strongly prefer drugs that are listed on the NEML. The reason for this is public hospitals are graded on how many or what percentage of their purchases come from the NEML.
The National Reimbursement Drug List (NRDL)
The NRDL is the main reimbursement body for drugs in China and is determined by the NHSA. Drugs on the NRDL list are reimbursed by a certain percentage depending on whether they are on the Class A or Class B lists. Class A drugs are fully 100% reimbursed and are normally already on the NEML, whereas Class B drugs are only partially reimbursed since they are generally more expensive. The goal of the NRDL is to provide some reimbursement but also control drug prices and expenses. Inclusion on the NRDL means more Chinese will have access to drugs, but to be on the NRDL oftentimes requires price reductions. Over the last 6 years, many drugs listed on the NRDL saw their drug prices cut by between 25% and 65%. The bottom line is that the NRDL wants to make sure their money is well spent. Given the sharp price cuts on the NRDL, many foreign drug companies have decided not to participate and enter China primarily via sales to private hospitals or to try to get the remaining share of public purchases.
Inclusion in the NRDL occurs via two strategies. First, one way to get on the list is inclusion via a bidding scenario. Bidding normally occurs for non-exclusive drugs where the NHSA tries to pay a fair price but maybe only 75% of the price the sellers want. The second strategy to get on the NRDL is via negotiation – almost entirely for exclusive drugs. The NHSA looks at the prices of similar but less beneficial drugs and considers a variety of factors like – cost-effectiveness, cost-utility, pharma-co-economics, etc. If superiority can be proved, then the innovative drug will be priced higher.
Volume Based Procurement (VBP)
Perhaps the biggest way that the Chinese government has reduced drug prices is via VBP. VBP is geared toward a bidding process where the winner gets a large share of the government procurement in exchange for lower drug prices and smaller margins. VBP drug prices are determined by clinical need, competition, and the financial burden they will place on the Chinese healthcare system. Generally, VBP demands that there is competition between at least three drugs. VBP has reduced drugs between 50% to 90%. Normally, China will only look at VBP for drugs that are selling for more than about $65 million per year. In China, the government has had 9 rounds of VBP and in the future expects to have more VBP negotiation rounds that will eventually include 500 more drugs.
VBP is mainly stipulated at the national level, but provinces oftentimes use this strategy too. For example, if there are 3 or more drug companies trying to sell their products, prices will be determined by a bidding process. If there are only 2 drug companies trying to sell similar products, VBP will be determined by bargaining. And if there is only one company, pricing will be determined through negotiation. Generally, VBP starts when there are at least 3 similar drugs. Drugs are not likely to be selected for VBP if there is only one of its type unless the drug is priced very high. It is important to keep in mind that even if your drug is not subject to VBP, if your quasi-competitor’s drug is, serious price battles can exist. Again, similar to getting on the NRDL, many companies will accept the potential of smaller market share to maintain higher prices.
Diagnosis-related Groups (DRG) and Diagnostic Intervention Packet (DIP)
Another mechanism to reduce drug prices is the DRG system. Today, there are close to 500 DRGs in China. In this system, prices are fixed with no exceptions. Only age, gender, and discharge status are factored into the fixed prices. Since prices are fixed, innovative, higher-priced drugs cannot be used, which often denies Chinese patients the most state-of-the-art products to cure diseases.
In addition to the DRG system and its expansion, China has set up the DIP program too. DIP is a case-based payment system that is capped by a particular regional budget. DIP systems are now set up in close to 100 Chinese cities. The DIP system uses big data and has close to 14,000 groups, many more than the DRG system. In the DIP program, the hospital will allocate a number of points per patient and their treatment, but the value of each point is determined by competition between healthcare facilities in the same geographic region. Accordingly, the regional government can cap prices as they see fit.
Resistance from the Chinese Public Insurance Payer
Finally, while there have been meetings to discuss the pricing of innovative drugs, there has also been some resistance from the Chinese public insurance payer. For example, right now, the NMPA says innovative chemical drugs include drugs with a new compound or better clinical performance. This is a very wide and general definition. However, the Chinese public insurance payer wants to define innovative drugs differently. They claim that an innovative drug is only a small molecule drug that has a unique chemical platform or therapeutic type of action – a more specific and narrower definition. Furthermore, the public payer wants to cap the prices of innovative drugs at less than 2x the average annual income of Chinese citizens. But, with the average citizen making about $13,000 per year, a cap of $26,000 will not work for many innovative state-of-the-art therapies that are priced over that amount. As a result of this “outlook” by the public payer, both domestic and foreign drug companies claim they can never get a good return on their research investment.
While the above systems and programs have led to lower drug prices, many domestic and foreign drug companies have complained that they cannot be paid fairly for their innovative drugs. Current drug prices often do not account for the huge R&D expenditures drug makers have had to make to come up with these innovative products. Also, patients complain that they do not have the financial support to pay for high-priced innovative drugs. Thus, in an effort to balance benefits and costs, some new programs have emerged recently.
Recent Reimbursement Updates
Earlier this year, the NHSA started a new program to increase the prices of chemical drugs. Some innovative chemical drugs will be granted higher premiums than their standard counterparts. Another new program called the Measures to Diversify Payment Mechanisms was also set up to increase the prices of innovative drugs in Shanghai. This new program will rely on various types of commercial insurance to help pay for innovative drugs.
Commercial insurance is now booming in China. By early 2024, commercial insurance premiums were over $1 billion USD. Commercial insurance will help patients pay for innovative life-saving therapies and is now growing over 26% per year. Some Chinese doctors believe that in the future, a multi-tiered payment system will emerge in China. For example, recently, a new commercial program called the Million Yuan Medical Insurance program has been enacted. This program is geared toward very expensive new state-of-the-art drugs.
In addition to the above, to help cover the prices of drugs, China has begun adding more drugs to the NRDL. Earlier this year, over 125 new drugs were added. Of these 125 new drugs, about 30 cancer drugs were added, 17 drugs for chronic diseases like diabetes, 16 drugs for rare diseases, and 18 anti-viral drugs. For this list, over 25 drugs were for very innovative therapies, and the rare disease list included drugs for Myasthenia Gravis, Gaucher’s disease, etc.
Since China is keen to develop its innovative drugs in the future and is putting millions of dollars into drug and biotech companies for new R&D, it seems to follow that there will be some additional pricing help for innovative drugs in the future. Exactly how and when these new programs will be put in place is still a work in progress. Perhaps the best way to better understand what new pricing programs are available is to do face-to-face interviews with Chinese payors on your specific product.
Written by: Ames Gross – President and Founder, Pacific Bridge Medical (PBM)
Mr. Gross founded PBM in 1988 and has helped hundreds of medical companies with regulatory and business development issues in Asia. He is recognized nationally and internationally as a leader in the Asian medical markets. Mr. Gross has a BA degree, Phi Beta Kappa, from the University of Pennsylvania and an MBA from Columbia University.