NHSA Strengthens Control Over Outpatient Spending
China's outpatient payment reform is still in its early stages, with most payments operating on a fee-for-service model. The introduction of DRG/DIP systems has prompted public hospitals to shift certain expenses from inpatient to outpatient settings, with drug costs being among the easiest to reallocate.
This shift has increased pressure on the National Healthcare Security Administration (NHSA) to manage outpatient spending effectively.
To improve fund efficiency, the NHSA has introduced two key initiatives to rein in outpatient spending primarily on insurance-covered drugs. The first, launched in late May, focuses on enhancing price transparency by comparing drug prices across distribution channels, particularly between offline and online retail pharmacies. The second, more recent initiative emphasizes standardizing the management of outpatient prescriptions, especially for high-cost drugs.
Taken together, these measures mark the onset of stricter outpatient payment oversight by the NHSA, with significant implications for drug manufacturers, particularly in shaping their pricing strategies, reimbursement approaches, and distribution channels in China.
NHSA's Drug Price Comparison Initiative
Historically, price disparities for the same drug—identical in manufacturer, generic name, dosage form, packaging, and specification—have stemmed from two primary factors: information asymmetry and differing pricing mechanisms. Information asymmetry, particularly between online and offline pharmacies, has resulted in offline retail channels often pricing drugs significantly higher than online platforms, sometimes with price differences reaching several times. Differing pricing mechanisms, meanwhile, explain the divide between hospital pharmacies, which typically follow nationally negotiated prices and benefit from government subsidies, and retail pharmacies, which operate with greater pricing flexibility but must cover their own costs independently.
To address these disparities, the NHSA launched a special initiative in late May to compare drug prices across various distribution channels. Using online pharmacies' same-day, same-city instant delivery prices as a benchmark, the initiative evaluates prices against those listed on provincial centralized procurement platforms, the winning prices from centralized procurement, and the prices at insurance-designated brick-and-mortar retail pharmacies. The goal is to eliminate significant price discrepancies for drugs with identical generic names, manufacturers (or brands), dosage forms, and specifications.
As a result, cities like Xi'an and Shenzhen have implemented systems that allow patients to compare drug prices across multiple pharmacies. These initiatives enhance price transparency, steer consumers toward more affordable options, and ultimately improve the efficiency of insurance fund utilization.
Measures to Standardize the Management of Outpatient Prescriptions at Retail Pharmacies for Insurance-Covered Drugs
Drug pricing is just one part of the challenge in controlling excessive healthcare spending. The other lies in the increasing prescription volume, driven by factors such as shifting drug costs from inpatient to outpatient settings, over-prescription under the fee-for-service model, and fraudulent activities like those recently exposed in Heilongjiang province.
To tackle the volume issue, the NHSA issued a notice in late October, calling for stricter oversight of outpatient prescriptions filled at designated retail pharmacies under basic medical insurance. The notice requires regional authorities to conduct targeted inspections by December 2024, with a focus on:
- Prescriptions for outpatient chronic and special disease programs, which often provide enhanced coverage for high-value innovative therapies.
- Medications included in the urban and rural "two-disease" (hypertension and diabetes) outpatient mechanism.
- High-cost or fraud-prone prescriptions.
Additionally, beginning January 1, 2025, "dual-channel" drug prescriptions must be processed exclusively through online prescription circulation centers before being dispensed at pharmacies, enhancing transparency and traceability.
The notice also limits reimbursement eligibility under outpatient pooling to prescriptions issued by BMI-designated medical institutions within the same risk-pooling region, ensuring greater oversight and accountability.
Implications for Manufacturers
The Need for a Well-Coordinated Pricing System Across Channels
In a previous article, I highlighted that more Chinese provinces are requiring public hospitals, including military facilities, to transition from offline procurement to centralized online purchasing. This shift applies to a growing range of medical technologies, including newly launched innovations, and private hospitals are encouraged to follow suit. The primary objective is to enhance price transparency and address regional price disparities.
The recent price comparison initiative for outpatient drugs extends the NHSA’s efforts from the inpatient to the outpatient setting and from cross-regional price alignment to harmonization across distribution channels. Consequently, price variations are expected to diminish not only between regions but also across different channels.
That said, some price differences between channels are inherently structural. For example, hospital pharmacies are better positioned to handle zero markups on drug sales due to government subsidies, while retail pharmacies, which must cover their own operational costs, are more exposed to the pressures of such policies. How far the NHSA will accommodate these structural pricing differences remains uncertain.
What is clear, however, is that a discriminatory pricing strategy based on distribution channels or regions is becoming increasingly unsustainable. Manufacturers must invest in establishing a consistent pricing system across both regions and channels to mitigate the impact of price reductions stemming from the enhanced transparency now spanning both distribution channels and geographic areas.
Adapting to Expanded Outpatient Payment Reforms
Both the drug pricing comparison initiative and the tighter regulations on outpatient prescriptions can be viewed as transitional steps toward broader outpatient payment reforms.
While China’s provider payment reforms have largely focused on the inpatient setting, leading regions are beginning to roll out outpatient payment reform initiatives. Similar to DRG and DIP models, these reforms aim to transfer financial risk to providers, encouraging more efficient resource utilization.
For instance, in Guangzhou, expenses incurred by insured patients for prescription drugs at designated outpatient pharmacies are now included in the capitation-based payment settlements of the prescribing healthcare institutions. This policy marks China’s first application of a capitation payment system for designated outpatient pharmacies.
In Beijing, the 2024 priorities for the municipal medical insurance system include piloting capitation-based payments for certain chronic outpatient conditions, such as diabetes and hypertension, within select tightly integrated medical consortia.
Another example is Jinhua City in Zhejiang, which, in January 2020, became the first city in China to implement a combined capitation and APG (Ambulatory Payment Group) points-based payment reform for outpatient services. This reform significantly reduced the city’s annual outpatient fund expenditure growth rate from 19.4% to 10%. Building on this, Zhejiang Province’s Three-Year Action Plan for Comprehensive Reform of Medical Insurance Payment Methods aims to achieve full implementation of inpatient DRG and outpatient capitation/APG payment reforms by the end of 2024, covering all regions, expenditures, populations, and healthcare institutions.
Manufacturers should monitor these developments closely across different regions in China. Engaging proactively with policymakers and stakeholders will be critical to shaping payment policies that balance affordability with access to high-value, innovative therapies.
Rethinking Channel Strategies for Pharmaceutical E-commerce Platforms
Pharmaceutical e-commerce platforms have become increasingly essential for launching innovative drugs in China, thanks to their cost efficiency and integrated service models, which combine online consultations, electronic prescriptions, and offline medication dispensing.
However, these platforms often rely on aggressive pricing strategies to rapidly gain market share, leveraging supply chain efficiencies and economies of scale. The drug price comparison initiative has capitalized on these tactics to lower drug prices across all channels, potentially diminishing the pricing advantage of online pharmacies.
Furthermore, the newly issued Measures to Standardize the Management of Outpatient Prescriptions at Retail Pharmacies restrict reimbursement under BMI outpatient pooling to prescriptions issued by BMI-designated institutions within risk-pooling regions. This excludes most Internet hospitals and pharmacies. Together, the loss of pricing advantage and the reimbursement limitations may reduce online pharmacies' appeal to consumers and curtail opportunities for upselling higher-margin products, including newly launched innovative therapies.
At a broader level, a significant strength of online pharmacies lies in their ability to operate efficiently across time and space. However, this advantage conflicts with BMI’s regionally restricted nature. In contrast, commercial health insurance operates without geographical limitations, offering a distinct advantage.
To maintain the appeal of the online channel, particularly for innovative therapies, manufacturers may find value in strengthening collaborations with commercial insurers. Such partnerships can enhance the online channel’s attractiveness to consumers while offsetting challenges posed by BMI's regional restrictions and evolving regulatory landscape.
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