Behind the Scenes: Exploring the Roadblocks to Formulary Listing for NRDL-Negotiated Drugs in China Public Hospitals
China's National Reimbursement Drug List (NRDL) is increasingly incorporating innovative drugs. Once included in the NRDL, these drugs receive coverage from basic medical insurance (BMI). This not only significantly reduces their cost burden for patients but also opens up a much larger market through public hospitals, the primary providers of healthcare services in China.
However, implementing this process is not as straightforward as it seems. Some NRDL-negotiated drugs face challenges in being included in the public hospital formularies, leading to what is known as the "last kilometer problem."
Several recent studies reveal that most drugs negotiated between 2017 and 2021 covered less than 10% of approximately 3,300 Class 3 hospitals in China. For 49 cancer drugs, the average provision rate in tertiary hospitals was 16.8%, with 12 drugs having a provision rate below 10%. The challenge is most acute during the initial 1-2 years of NRDL inclusion.
Orphan drugs, specifically, face difficulties in being included in hospital formularies. Among the 17 negotiated orphan drugs between 2017 and 2021, the average number of drugs carried by the 33 leading hospitals in the National Network to Collaborate on Diagnosis and Treatment of Rare Diseases (NCDTR) was 5.4. The average admission rate across all 324 network hospitals was 13%. It is noteworthy that NCDTR member hospitals are obligated to include orphan drugs in their formularies. Additionally, hospital listing issues for orphan drugs tend to persist.
NRDL negotiations target areas with high unmet medical needs. Through expert evaluations, negotiated drugs demonstrate high clinical value and cost-effectiveness. Yet, hospitals have shown less enthusiasm than expected in including these negotiated drugs in their formularies.
The question is, why?
Clinical Needs and Uncertainty
Various factors influence the inclusion of NRDL-negotiated drugs in hospital formularies, with some directly related to clinical needs. For example, hospitals that do not specialize in oncology are more likely to prioritize antibiotics, anti-infective drugs, and medications for chronic diseases over cancer drugs. Another consideration is the presence of "me-too" drugs, which already have clinically comparable alternatives listed in hospital formularies.
Additionally, there are drugs approved in China through the Conditional Approval pathway, similar to the Accelerated Approval Pathway (AAP) in the US. These are often specialty, oncology, or orphan drugs targeting significant unmet medical needs. Conditional approval relies on surrogate endpoints, intermediate measures that reasonably predict clinical outcomes. Compounding this uncertainty is the growing use of single-arm studies to support conditional approval. Drugs granted conditional approval are subject to post-marketing requirements to verify their effectiveness and safety.
This weaker evidence base associated with conditional approval, combined with the absence of a post-marketing surveillance system aligned with the accelerated review, particularly the conditional approval process in China, presents a challenge for some NRDL-negotiated drugs during the listing process in hospital formularies.
Hospital Financing and Management
However, beyond clinical reasoning, the underlying factors explaining the reluctance of public hospitals in China to fully adopt NRDL-negotiated drugs are primarily rooted in how public hospitals are financed and managed.
First, there is a conflict between the inclusion of negotiated drugs in hospital formularies and the performance indicators set for medication management.
Healthcare governance in China follows a "dual stewardship" model, where the National Health Commission and its local branches regulate and oversee public and private healthcare facilities, focusing on service quality and safety. On the other hand, the National Healthcare Security Administration (NHSA) and its local departments manage social health insurance (SHI) funds, establish provider payment rules, and monitor provider behavior through financially-driven Key Performance Indicators (KPIs).
For instance, public hospitals face limitations on the number of drugs they can include in their formularies. Hospitals with more than 800 beds have an upper limit of 1500 drugs in their formularies, and many hospitals have already reached that limit. Consequently, an existing drug must be removed from the formulary to accommodate a newly negotiated drug. However, established drugs usually have strong support within the hospital, leading to fierce competition for inclusion. Over the past five years, the NRDL has added 618 drugs while removing only 197, illustrating the intense competition for access to public hospitals.
Additionally, hospitals are subject to various financial KPIs, including global budget control, per capita drug expenditure, and drug proportion control. In an effort to reduce the over-prescription of expensive drugs, the government has set a target of limiting the proportion of pharmaceuticals in total hospital revenue to 30%.
Furthermore, the ongoing Diagnosis-Related Group (DRG)/ Diagnosis Intervention Packet (DIP) payment reform transfers financial risk to hospitals. Given that pharmaceuticals and medical consumables represent the lion’s share of medical service expenses currently, the implementation of DRG/DIP has led to stricter utilization management of these costly resources.
Recognizing the conflict arising from the misalignment between legacy medication management measures and the inclusion of NRDL-negotiated drugs in hospital listings, several policies have been introduced at the national level. These policies aim to exempt or loosen constraints on certain NRDL-negotiated drugs from the global budget, drug proportion, per capita drug expenditure, and drug number controls. Furthermore, there is an ongoing pilot program in Beijing focused on exempting eligible innovative drugs/devices from DRG/DIP bundle payments.
However, the implementation of national-level policies can vary locally due to regional disparities in fiscal capacity and BMI administration, granting local health authorities significant policy discretion. As a result, despite the national-level loosening of budget controls for NRDL-negotiated drugs in public hospitals, many legacy metrics remain in place at the local level and within hospitals. For example, a tertiary hospital in Guangdong Province experienced lowered assessment scores after introducing over 40 negotiated drugs in 2022.
A recent study by the R&D-Based Pharmaceutical Association Committee (RDPAC) confirmed these concerns, with 90% of surveyed hospitals expressing apprehension about global budget control when listing NRDL-negotiated drugs. Between 60% and 88% of hospitals reported concerns about limitations on the total number of drugs in formularies, drug proportion control, and constraints imposed by DRG/DIP payment standards.
Second, hospitals face difficulties in managing the administrative costs related to negotiated drugs. Since the removal of medicine markups at public hospitals nationwide in 2017, drugs are no longer a profit center. Additionally, many NRDL-negotiated drugs are physician-administered and demand special handling and storage requirements. All these factors contribute to increased expenses for hospitals without generating any additional revenue.
Consequently, even when NRDL-negotiated drugs are excluded from a hospital's budget control metrics, hospitals have insufficient incentive to add many of these drugs to their formulary. Introducing many innovative drugs may lead to unsustainable financial losses for hospitals. However, selectively introducing innovative drugs can enhance patient loyalty. This explains why the RDPAC study indicated that 53% of hospitals only tend to introduce drugs with higher demand.
In response to these challenges, the Chinese government has implemented various policies to improve public access to NRDL-negotiated drugs. One notable effort is the Dual-Channel Policy, which aims to encourage the flow of prescriptions from hospitals to public insurance-designated retail pharmacies. The effectiveness of this policy in addressing the last kilometer problem will be further explored in the next article.
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