WP/2004/CHN/HTP/5.1/001AC: 02.02.02.AW.02

Reform of the Chinese Pharmaceuticals System:

A Review and Evaluation①

The pharmaceutical production and distribution system is an important part of the medical and health system. An appropriate pharmaceutical system can effectively promote the healthy development of the health sector; if not appropriate, the pharmaceutical system can have serious negative effects on the development of the health sector. Viewed from the current situation in China, a series of blatant contradictions and problems appeared during the development of the health sector. Among these, the negative impact caused by problems in the areas of pharmaceutical production and distribution cannot be underestimated. Therefore, it is necessary to carry out a comprehensive reappraisal and analysis of the process, characteristics and problems of the reform of the pharmaceutical system in China.

1. A retrospective and appraisal of the pharmaceutical system during the period of the planned economy

1.1 The basic characteristics of the pharmaceutical system during the period of the planned economy

1.1.1 The basic goal of the State’s high-level emphasis on pharmaceutical development was to ensure basic medical access and to solve the lack of treatment and medicine

At the early period of the establishment of the New China, the foundation of the pharmaceutical industry could be said to be extremely weak. Only large cities such as Shanghai and Tianjin had a few small-scale medicine factories, with quite inferior production capability and technical levels. At that time, the yearly production volume of bulk drugs did not even reach 100 tons. Most medicine products relied on imports. At the same time, the commercial network for pharmaceuticals was quite sparse. A serious lack of basic medicinal materials along with extremely high prices was a contradiction facing the pharmaceutical sector at that time.

Based on the above-mentioned contradictions, the Central Committee took as their primary task in the medical area to quickly and efficiently organize the production and

① Here, “pharmaceutical” research mainly involves the cycle of production, distribution and consumption of chemical-based medicines. This report does touch on aspects of medical research, medical equipment and Traditional Chinese Medicine (TCM), but these are not the focus of the study.

supply of medicine, in order to satisfy disease prevention and treatment requirements of the military and of urban and rural areas. In a national pharmaceutical production industry meeting held at the beginning of the 1950s, a developmental policy was established stipulating “production of bulk drugs as the primary focus, and prepared medicine as secondary; Traditional Chinese Medicine should undergo a focused, planned reconstruction”. At the national commercial pharmaceutical industry meeting held in the mid-1950s, the primary duty of the commercial pharmaceutical industry was stipulated as “providing medicine for the masses, and satisfying the medicinal needs of the masses.”

1.1.2. The production, distribution and pricing of medicines adopted a rigorous administrative planning method

--In the production aspect, the producer, what was produced and the amount produced were all for the most part determined by government planning

In the early days of the founding of the PRC, aside from the few pharmaceutical plants in operation in the liberated areas, most pharmaceutical corporations were private corporations. At the beginning of the 1950s, the State, through socialist restructuring of national capital chemical production industries, gradually accomplished state ownership. At the same time, the State began to newly construct a set of state (run) pharmaceutical production enterprises. State-owned enterprises, along with a few collective enterprises that were also essentially state-owned, became the mainstay of medicine products production, especially chemical-based medicine products. Based on the basic organizational pattern of the State-controlled economy at that time, each State-run medicine factory carried out its production according to State planning; what kinds and what amounts of medicines produced were all controlled by state planning.

As for the production administration system, in the mid-1960s the China Pharmaceutical Corp. was established. This organization was responsible for the unified direction of the national pharmaceutical production sector, for arranging uniform production planning and scientific research planning, and for the uniform standardization and layout of the development of the pharmaceutical production sector.

The production of Traditional Chinese Medicine (Chinese medicinal herbs, prepared Chinese medicine and ready-to-use herbal forms of Chinese medicine) was also subject to planning, but the special nature of Chinese medicine made it different from chemical-based medicines. For the production of medicinal raw materials, the China Medical Raw Material Company was founded in 1955, and was responsible for drawing up a plan for the production of medicinal material (herbal plants). This unit was reported to by relevant commercial, agricultural, forestry and health departments or reported to by the administrative bureau in charge. In 1958, the State Department issued the “Directive Concerning Problems in the Development of the Production of Chinese Medicinal Raw Material”, which was a step in incorporating the production of Chinese medicinal materials into State-directed planning. As for the production of prepared Traditional Chinese Medicine and ready-to-use Chinese medicines, in the beginning of the 1950s,

especially after the socialization of all sectors had basically been completed, several large traditional medicine stores in each location took steps to separate the production of prepared Chinese medicine and herbal raw materials from the traditional stores, independently establishing special Chinese prepared medicine factories. The medicine production capabilities of these relatively small stores were centralized and organized to form relatively large-scale Chinese medicine factories. Administration of relevant production enterprises also adopted the planned administration method.

--As for distribution: for chemical-based pharmaceuticals, a centralized, unified, top-down three-level administrative allocation system was formed; for Traditional Chinese Medicine a method of “unified planning, hierarchical administration” and “balance allocation” was implemented.

As for the distribution of chemical-based pharmaceuticals, the 1958 national commercial pharmaceutical industry meeting stipulated that: “The allocation of medicine products shall be primarily provided to organized medical units, with allocations to the market being of secondary importance. The goal is to enable organizations with nationwide scope to not only achieve a high degree of unity, but also bring into play local activism, in order to unify the planning, unify the system and unify the policies.”

As for operation of the mainstay, by carrying out socialist reform of private commercial enterprises and constructing a new State-owned industry model, in 1956 a comprehensive State-run commercial pharmaceutical leadership position was set up.

As for the organizational framework, under the leadership of the China Pharmaceutical Corp. as the national administrative organ for commercial pharmaceuticals, a large administrative region and provincial-level pharmaceutical companies were established. At the same time, a central first-tier pharmaceutical purchase and supply station was established, along with second-tier provincial wholesale purchase stations and county-level pharmaceutical companies, forming a medicinal products distribution system that had “a uniform standard, three-tiered wholesale hierarchical top-down chain of command, and hierarchical allocation”. In the process of subsequent development, due to changes in the pharmaceutical administration system, relationships between the levels in the three-tiered wholesale system also changed. However, the Central Committee and the commercial pharmaceutical enterprises at the provinces, autonomous regions, and directly administered municipalities remained in close contact, planning and carrying out several related overall policies and important measures in a unified manner.

As for distribution of Traditional Chinese Medicine, in 1953, the State determined to carry out the administration of the grading of pharmaceutical products under uniform planning. According to the method of “uniform planning, graded administration”, Chinese medicinal materials in the category of agricultural sideline products were classified into two types, Type 2 and Type 3. Those classified as Type 2 (mainly the essential raw materials of traditional medicine) were administered by the State departments in charge; those materials classified as Type 3 were administered by the local region. For the administration of Type 2 planned products, a “balance of allocation” method was

adopted. Based on the population of the province, autonomous region or directly administered municipality, the local sales practices and medical usage, special consideration was given production units, minority regions and localities. For Traditional Chinese Medicine, aside from a small number of Type 2 products that used a quota allocation system, the exchange of other Type 3 medical materials was mainly subject to market regulation. The market regulation model involved (a) to convene various kinds of exchange fairs for Type 3 medicine materials, and (b) to open up Chinese medicine markets and country fair trading. Free markets for Type 3 Chinese medicine materials were also quite common.

--As for pricing, medicine production and the wholesale and retail prices of medicine products were all determined by the government.

As for the price of chemical-based pharmaceutical products, financial accounting was based on the specific planning system of the time and the uniform receipts and expenditures for State-owned enterprises. Whether raw bulk medicine materials or prepared medicines, whether wholesale or retail, prices were all determined by government planning, and most were determined by Central Committee government department in charge.

As for the pricing of traditional Chinese medicines, in 1956, the administrative departments in charge of the Central Committee carried out the administration of the purchase prices of 17 kinds of plant raw materials in 32 major production locations, the wholesale prices for sales districts of large- and middle-sized cities, and prices for imports and exports. The standardization of other Type 3 medicinal materials was administered by the medicinal products companies of the provinces, autonomous regions, or directly-administered municipalities. In 1957, the number of product types administered by the State increased to 38, and in 1960 increased again to 65; the State also controlled the purchase prices of 111 principle production locations and the wholesale prices of several large cities. After 1961, the purchase categories of Type 2 products were expanded.

1.1.3 Emphasis was placed on the special role of medicine products in serving the health needs, and adherence to the principle of “lowest medicine prices”

In 1953, the 4th National Commercial Pricing Working Meeting proposed the pricing guideline slogan “low profits for the cities, a reasonable urban-rural ratio”. In 1958 the National Commercial Pricing Working Meeting also proposed the slogan “Commodity prices should be conducive to production, conducive to public consumption and to State fund accumulation, with all three in appropriate distribution.” Specifically with regards to pharmaceutical prices, four principles were raised: (1) Domestic production should adequately provide products that are depleted after discounting, resolutely retaining the low prices; (2) For high-profit imported medicinal products, the lowered price should be appropriate in that it doesn’t stimulate a large increase in sales volume; the lower price should not stimulate a large sales volume expansion that leads to increased consumption of foreign exchange; (3) Products with a low imported investment and a high domestic

investment should be priced with reference to the set price of domestic products, in order to spur the development of domestic production; (4) Pharmaceuticals for which supply does not meet demand, and which are still at a stage of supply-demand disequilibrium, usually should not be priced low. In the mid-1960s, to address the lack of affordable medicine in remote areas and minority areas, national unified out-of-the-factory prices and retail prices for pharmaceuticals were established, eliminating local pricing differences.

In the more than 30 years after the founding of the PRC, the nationwide total value of the price of chemicals dropped to 100 million only seven times, principally involving antibiotics, antipyretics and analgesics, vitamins and medicines for local ailments. According to calculations, the medicine products retail price index for 1950 was 100; by 1969 it dropped to 20.85; in 1983 it was 16.42; and in 1984 the pharmaceutical price index had fallen to 15.72, a total drop of 84.28%.

Through planned adjustment of the purchase prices of medicine materials, the appropriate management of sales prices for Chinese medicine, implementation of “low-profit operations”, numerous revisions of the pricing method for traditional Chinese medicinal materials, and through two nationwide price reductions in 1960 and 1969, the price of traditional Chinese medicine fell continuously.

1.1.4 No beneficial relationship between medical services and pharmaceuticals

In the era of the planned economy, the service goals at every level and of every type of medical and health unit were very clear; namely to elevate the health of the masses, rather than any profit motivation. In their specific organizational model, medical services organizations basically all adopt a direct planning administration model, with accounting records and salaries all determined by the government or its associated economic collectives. At that time, there was no relationship between the income of medical and health services and units and the individual economic benefit of professional personnel. Medical service organizations and professional personnel had no motivation to benefit from profits derived from pharmaceutical sales, and in fact, there was essentially no opportunity to obtain such profits. In other words, at the time the system was such that the medical services and pharmaceuticals were separate.

1.1.5 The administration system for medicine products overall was centrally managed by the central government, but at the lowest level was always administered by branch departments.

As for vertical hierarchy, the administration of medical reference materials, standards and inspection, the chemical-based pharmaceutical industry, the medical instruments industry and commercial pharmaceutical industry, all adopted the top-down vertical administrative method of relevant departments of the Central Government.

At the lowest level, basically there was an adopting of separate department administration model for each separate area. That is to say, the operations for the various pharmaceutical production, circulation and medical administration domains were

administered by different governmental departments or their associated units. Among these, due to the influence of State organ departments and adjustments in function, the specific low level administrative systems also underwent numerous adjustments and changes. Along with administrative work allocation adjustments at the Central Government level, the local governments often also undertook related adjustments.

1.2 Positive results and problems of the pharmaceutical system during the period of planned economy

1.2.1 The main positive results

--The scope of pharmaceutical production rapidly expanded, with the distribution network increasingly covering the cities and countryside, basically solving the problem of lack of medical services and drugs, and realizing access to medicines.

1.2.1.1: Production of pharmaceuticals enjoyed a relatively large development, resulting in a clear improvement in the serious of lack of basic medicines.

Through more than 30 years of development after the founding of the PRC, China’s pharmaceutical industry production quotas, the types of pharmaceuticals, medicine production techniques, and pharmaceutical production volumes all saw enormous increases. As of 1985①, there were a total of 839 pharmaceutical factories in the chemical-based medicine industry system, machine-based medicine factories numbered 32, and there were 66 factories making pharmaceutical glass, auxiliary materials, and wrapping materials, producing a cumulative total of 1255 kinds of bulk medicines, and producing more than 3000 kinds of products. In 1985, the total gross product of pharmaceuticals reached 10.704 billion yuan (based on 1980 prices), more than 300 times that of the early part of the 1950s. The production volume of the 12 kinds of bulk medicines reached 5.76 tons, more than 600 times that of the year 1952. From the viewpoint of types, the chemical-based medicine industry is closely contingent on the needs of prevention and treatment. From the beginning of the 1950s to the early part of the 1960s, in the chemical-based medicine industry, anti-infection medicines, local disease treatments, and widely-used analgesic medicines and vitamins were major development points. From the latter part of the 1960s to the early 1970s, steroids and contraceptive medicines, anti-tumor medicines, heart and blood medicines, and semi-synthetic antibiotics saw a rapid development.

The production of Traditional Chinese Medicine also witnessed significant development. The production of prepared Chinese medicine involving handwork operations in small shops with a workspace in back developed in scope into a significant industrial system. In 1985, there were 544 ready-made medicine factories nationwide, and more than 2000 prepared medicine factories (processing departments). After the founding of the PRC, 600 new medicine products had been put into production, and there were more than 20 new compounds. Compared to 1957, in 1985 the land are for the growing of home-grown medicinal herbal plants involved in the production of traditional Chinese medicine raw materials had more than doubled, and the total production volume of traditional medicine

① Because of data material （to be clarified）, data of 1985 is used rather than data of 1978

materials had increased 1.9 times.

The increased speed of pharmaceutical production completely altered the reliance on imports and the severe shortage of Traditional Chinese Medicine materials, and the severe lack of pharmaceuticals was essentially improved. Several bulk pharmaceuticals (such as vitamin C) were even exported overseas.

1.2.1.2: An integral supply network essentially ensured the urban and rural supply of pharmaceuticals

As for the construction of the distribution and supply network, the number of commercial pharmaceutical operations network nodes increased rapidly, forming a widespread preliminary urban and rural social pharmaceutical commercial operations network with a relatively complete product line, and open supply line channels, which basically met the medical and social needs of the society. In 1978, national retail pharmaceutical sales reached a total of 5.026 billion yuan, 10.4 times the 1953 total of 440 million yuan, with an annual growth rate of 10.2%.

Through the three-tiered pharmaceutical wholesale network, pharmaceuticals could basically achieve an appropriate distribution on a domestic scale. Urban and rural pharmaceutical supplies could be basically guaranteed, and the lack of availability or access to medicines among the vast majority of peasants came to an end.

--Holding the price of medicines to a low level, along with the implementation of three-item medical safeguard system, basically ensured that the broad masses could gain access to affordable medicines.

Due to the implementation of the principles of “low-profit medicine prices” and “lowest medicine prices”, prices for pharmaceuticals continued to fall, solving the pre-Liberation problem of inflated medicine prices and the inability of average citizens to afford medicines. Figure 1 shows the price index for China’s pharmaceutical prices from 1952 to 1978 (with 1952 prices set at 100). From the figure it can be seen that by 1978 the total price level for medicines was roughly half that of 1952.

At the same time, rural cooperative medical systems, urban worker’s health insurance and public health system gradually developed, basically achieving coverage for urban and rural residents, and to a great extent realizing cost sharing. This extensive coverage system, plus a devaluing and gradual decrease in the basic level of medicine prices, began to guarantee the access of urban and rural citizens to affordable medicines.

--Medical services oriented toward the common good (or at least medical services with no profit motivation) basically guaranteed appropriate access.

As described earlier, in the period of the planned economy, medicine and health belonged to the social commonweal sector, and in organization and administration models, accounting administration, and allocation, all were subject to strict planned administration. Added to this the strict price controls on medicine at the time, and the result was that medical service units and professional personnel had no motivation or opportunity to profit from the sale of pharmaceuticals. Thus, the use of medicines was mainly determined by the patient’s needs, thus basically guaranteeing residents an appropriate access to pharmaceuticals.

1.2.2 The main problems

--The overall production capability, especially technological level, was relatively low.

Although the pharmaceutical industry developed quickly, it was subject to the negative influence of many factors such as a weak infrastructure. The overall scope of the pharmaceutical industry was relatively small, and the production volume of some kinds of medical products and medical devices were insufficient to satisfy demands. New product development, especially the development of new medicines, was relatively slow. Many prescription drugs and medical instruments and devices had to be imported. Pharmaceutical technological production levels and quality levels for medicine production

Figure 1. Index of changes in Chinese pharmaceutical prices during the period of the planned economy.

Index of pharmaceutical prices

and related facilities was relatively backward, and the automated production of chemical-based medicines lagged far behind advanced foreign levels, all of which negatively influenced the technological level of drug production and the raising of quality control. Quality control and methods for Traditional Chinese Medicine were backward, and uneven quality and lack of technical expertise in the preparation of herbal remedies were quite common.

--In areas such as pharmaceutical production and distribution the efficiency of micro-management was relatively inadequate

Under the influence of the rigidly planned administration system, in the areas of production and distribution there was a common problem of inefficient micro-management. Production companies and distribution companies all lacked any effective motivation mechanisms or any awareness of investment control. These problems brought about a disjunction between production and supply and demand in parts of the domain, and had a clear negative impact on the development of the health sector.

--The instability of the administration system caused disruptions in production and distribution in parts of the domain

At the lower level, the operational administration of different domains such as production and distribution was always the burden of branch departments, and due to frequent changes made it difficult to formulate a complete, unified pharmaceutical policy system. It was difficult to elevate the level of sytematicity, and difficult to enact adequate adjustments to major problems. Not only were administrative costs relatively high, it was also difficult to standardize aspects such as pharmaceutical production and distribution. The efficient allocation of resources was also negatively impacted. In addition, frequent changes in the administration system had a negative impact on specific production and distribution activities. For example, from the period 1958-1963 and 1966-1976, there emerged problems such as the mismanagement of medicine factories and shoddy production of medicine products, making it difficult to guarantee the quality of medicines, and giving rise to frequent quality-control incidents.

2. Review and Evaluation of Pharmaceutical System Reform since the Implementation of Reform and Opening-up Policy

2.1 Basic trends and characteristics of the pharmaceutical system since the implementation of the reform and opening-up policy

2.1.1 Pharmaceutical production overall moved in a market-oriented direction

--As to the main body of production, all kinds of capital could enter the pharmaceutical production field, and the ownership structure developed from single public ownership to coexistence of various kinds of ownership.

On one hand, the combined opening-up of the entire economic field, especially the enterprise field, allowed other capital to gradually enter the pharmaceutical production

field. Since 1979, foreign capital was first allowed to enter this field. Under the guidance of the principle of “new product types, new technology, and export-orientation”, foreign capital was continually introduced, and the number of joint ventures steadily increased in the 1980s. In 1990, the State Drug Administration issued the document Current Industry Policy and Implementation Methods in the Pharmaceutical Industry to encourage “the establishment of more joint ventures and solely foreign-owned enterprises in the forefront of opening-up”. After 1992, foreign investment in China and the establishment of Sino-foreign joint pharmaceutical enterprises accelerated. After the 1990s, with the gradual development of non-governmental economic strength in China, domestic non-governmental capital also began to pour into the pharmaceutical production field, causing further diversification of the major investors in pharmaceutical production.

On the other hand, in the middle and late 1990s, based on the impetus of the reform of State-owned enterprises, China actively further explored various kinds of realization models of public ownership in the medicine industry, and declared that the development of economy with different types of ownership was permitted in this field except for products for which foreign investment was limited or prohibited by the State. The original various kinds of publicly-owned enterprises went through various reconstructions and restructurings, including cooperative ventures, joint ventures, revisions of the stock system and the complete sale of domestic and foreign private capital, etc. The original public ownership system was also completely transformed and segmented. Currently, a pattern of coexistence of many kinds of ownership has been formed in the medicine production field.

--The business objective of manufacturing enterprise has been completely transformed, with profit becoming the central guiding principle

In the period of the planned economy, production adopted the single public ownership. Due to the specific economic structures at that time, enterprises did not, and could not in fact, take the profit motive into account. Since the reforms, this situation has been transformed in a comprehensive manner. From the very beginning, foreign capital and domestic non-governmental capital were profit-driven. In addition, following a series of reforms, the traditional business objectives and business models of State-owned enterprises have experienced an overall transformation, gradually becoming the main body of the market with the profit objective as the core principle. In the early period, enterprises were launched into the market mainly by means of transforming their operation mechanisms and adjusting their accounting relationship with the government. After the middle of the 1990s, the status of the enterprise as the main body of the market was strengthened by means of property system reform.

--As to the specific goods produced and their respective output levels, the decisions went from being totally planned to being market-governed, and the relationship among the different enterprises moved towards the all-inclusive competition.

After 1984, upon the issuing of the document CPC Central Committee’s Decision on

Economic Structure Reform, China carried out comprehensive reform of the planning system for medicine production, and the planning modle was gradually replaced by market mechanisms. Since 1985, China has reduced bulk drugs under the mandatory planned management from the original 12 categories and 292 kinds to 30 kinds, with the remainder under the guidance planned management. In addition, 30 kinds of traditional Chinese medicinal materials were reduced to 4 kinds. Medical appliances and pharmaceutical products were no longer listed in the mandatory planned management. With respect to the management of bulk drug distribution, among the 80 kinds of bulk drugs that had been distributed by China National Pharmaceutical Industry Corporation, 30 kinds continued to be mainly distributed by the corporatin, and 30 kinds adopted a bottom-up balance coordination model, with the distribution authority of the other 20 kinds being delegated to the lower levels. After 1992, with the definitive establishment of market economy, the mandatory planned management of all chemical bulk drugs was finally abolished, upon which the products and output of all kinds of enterprises gradually became market-governed, and the relationship among the enterprises moved towards all-inclusive competition.

2.1.2 Pharmaceutical distribution moves towards overall market orientation.

The distribution gradually developed from planned unified purchase and sales to a complete opening up. And the distribution structure gradually transformed from three-level distribution wholesale system directly under the control of government to a structure embracing diverse economic sectors. Various kinds of wholesale and retail institutions could freely do business and freely compete. And the manner of distribution and trading also became diversified in comprehensive manner.

The reform of pharmaceutical distribution system can be overall divided into three phases:

2.1.2.1 From the early period of reform and opening-up to the late 1980s: market mechanisms introduced in a comprehensive way with priority on “opening up”.

First of all, various economic sectors, such as collective economy, private economy, and private sector of the economy etc., were allowed to be incorporated into the pharmaceutical distribution field. In 1984, four ministries and commissions, including the State Drug Administration, jointly issued the regulation Opinions on Urban and Rural Collective and Individual Enterprises Dealing in Pharmaceutical Products, according to which urban and rural collectives and individuals, with the examination and consent of city (county or banner) drug and health authorities, and the approval of the business administration department, were allowed to deal in common medicines and health materials. According to the provisions of the Pharmaceutical Administration Law of the People’s Republic of China, which was executed in 1985, any enterprises meeting certain qualifications can apply to become a pharmaceutical trading enterprise, and the corresponding license for pharmaceutical trading shall be issued by the State.

Second, planned management methods were reformed. With the establishment of Drug Production and Selling Planned Management Methods in 1981, the State Drug

Administration began to explore the reform of planned management methods for pharmaceutical product distribution. From this point on, the range and number of the product types under planned management were gradually reduced, and the mandatory targets were changed to a guidance targets.

Third, the investment mechanism was reformed. The approval power of investment in pharmaceutical industry was delegated to each province and municipality. The investment model was also changed from a high degree of State centralization to decentralization, and the investing body was now composed of the State, the locality and the enterprise, where previously the State had been the sole investor.

Fourth, the three-level wholesale system was gradually broken apart. In 1984, the pharmaceutical distribution system began to be reformed throughout the country, with wholesale stations being transferred to the local authority. At the same time, the closed business model of fixed supply division and fixed wholesale level was broken, and was replaced by a business model involving open operations and purchasing according to quality.

Fifth, State-owned commercial enterprises were reformed according to the widespread refom measures for State-owned enterprises. State-owned pharmaceutical enterprises could, within a range specified by the upper levels, and in compliance with the commodity distribution law and reducing distribution links, enlarge the business and choose various channels to purchase medicines according to market needs. In addition, according to the principle of separation of property rights and management rights, more and more decision-making power over distribution and financial system was granted to the enterprises. With regards to business model, after 1984, at every locality and every level, alliances between industry and commerce and between enterprises were actively promoted to establish pharmaceutical trade centers. Various trading methods were adopted, with the allocation of resources carried out according to the market changes.

With the above-mentioned reforms, distribution of pharmaceuticals became increasingly dependent on the market, making the pharmaceutical market and business operations more dynamic. At the same time, many disruptions occurred. First, there were too many channels. Apart from State-owned commercial enterprises, the sales volumes for industrial self-marketing, health authorities, supply and marketing cooperatives, collectives, and individually-run marketing departments, were all relatively large. Second, there was a sharp increase in the number of enterprises. According to incomplete statistics, in 1990 the number of domestic enterprises engaged in wholesale medicine was 33,857, an increase of over 14 times the 2253 that existed in the early 1980s. Among these, collective and individual wholesale enterprises numbered 22,003, accounting for 65%; those falling short of the “two certificates and one license” requirement numbered 7658, accounting for 23%; and the number of enterprises with no license was 10,946, accounting for 32%.① Third, there was the problem of disordered operations. The increasing problem of “all walks of life deal in medicine” casued disruptions in the wholesale sale and import of medicine products, resulting various kinds ① From remarks by Qi Mojia, Director of the State Pharmaceutical Administration Bureau, at the National Conference on the Regulation and Ordering of the Pharmaceuticals Industry, June 7, 1990. (excerpts)

of unjust and nonstandard business practices. And the production and marketing of bogus medicines persisted despite repeated prohibitions. The market was flooded with false and inferior medicine, which affected the health and safety of the public.

2.1.2.2 The late 1980s to the middle 1990s: market-oriention was retained, while strengthening regulation and ordering

Addressing disordered business practices resulting from the reform and opening up policy, in July 1989, the State Drug Administration issued the Notice on Strengthening the Management of the Wholesale Pharmaceutical Market, which stipulated that the wholesale medicine business should be carried out via the main channels of the State pharmaceutical commerce, i.e. the qualified state professional wholesale pharmaceutical company and the wholesale institution under it; and other industries, whether collective and individual, shall by no means carry out such business. In May 1990, the State Council approved the State Drug Administration document Notice on Further Regulating and Ordering the Pharmaceutical Market. According to these documents, in 1990 the regulation and ordering of the pharmaceutical market was carried out throughout the country, with a priority on ordering the pharmaceutical wholesale link and cracking down on the unlawful practices of producing and selling inferior medicines.

After 1992, the medicine market was completely opened again in some regions, and the problem of “all walks of life deal in medicine” and disordered medicine distribution once again emerged. According to the instructions of State Council at the time, the State Drug Administration restated and stressed that it would continue strengthening the management of the pharmaceutical market, and clearly indicated that the pharmaceutical market could not be opened up in a blind fashion, and the medicine should not enter into urban and rural trade fairs. In 1993, the State Drug Administration issued Numerous Regulations on Opposing Unfair Competition in the Pharmaceutical Industry, which stipulated that “pharmaceutical manufacturers may independently choose a lawful wholesale pharmaceutical enterprise to sell its products, and are normally prohibited from directly selling the products to pharmaceutical units or retail pharmaceutical enterprises. Retail pharmaceutical enterprises can independently choose a lawful wholesale pharmaceutical enterprise to purchase needed medicines, and are commonly prohibited from directly purchasing products from pharmaceutical manufacturers.” In 1994, the State Council issued the Urgent Notice on Further Strengthening the Administration of Pharmaceutical Products, which provided detailed provisions for strengthening the qualification inspection, the administration of the purchase and marketing of medicine and the professional marketing of traditional Chinese medicinal materials, and research and development of new medicines, as well as intensifying the activities of combating the production and marketing of fake and inferior medicines, and legally strengthening aspects such as administrative supervision. In 1996, the State Drug Administration issued a document to implement the Notice on Continuing Ordering and Standardizing Pharmaceutical Production and Operations and Strengthening Pharmaceutical Administration issued by the General Affairs Office of the State Council, and required a “strict ban on medicine fair trade markets, including various kinds of fair trade markets

that are ostensibly launched to set up medicine exhibition centers, medicine information centers, and health product markets, etc.; a strict ban on unlawful administrators lacking certificates or with incomplete certificates, and an intensification of activities to combat the production and marketing of fake and inferior medicine to prevent the resurgence of such problems after rectification.”

Though supervision was prominent in this phase, the market-oriented tendency remained unchanged for distribution areas where pluralistic bodies dealt in medicine in a competitive manner, the business contents and business model were self-determined, and the market played the principal role in wholesale medicine and retail institutions including state commercial enterprises.

2.1.2.3 From the middle 1990s to the present: the market-oriented tendency of medicine distribution was promoted, while at the same time a technical level system was constructed to address specific problems.

In the middle 1990s, China explicitly resolved to establish a market economy system. With this background, the market-oriented tendency of the distribution system began to be accelerated.

In 1996, in “Ninth Five-year Plan”, the State Drug Administration put forward the slogan of “accelerating the reform of the commercial pharmaceutical distribution system and establishing a new medicine distribution system meeting the requirements of the socialist market economy”. In 1997, The CPC Central Committee and State Council’s Decision on the Reform and Development of Sanitation was issued, which clearly indicated that the reform of the pharmaceutical production distribution system was one of the three tasks for the reform of medicine and health. According to the requirements of relevant documents, in 1999, the State Economic and Trade Commission produced the document Instructive Opinions on Deepening the Reform of Pharmaceutical Distribution System, stipulating the overall objectives of the reforms as the realization of “effective adjustment and control, scientific management, unified opening up, and ordered competition” in new medicine distribution system, through “three rectifications and one strengthening” of the State medicine distribution enterprise, gradually realizing the strategic reform of intensive pharmaceutical operations, perfecting the distribution network, modernizing the distribution means and establishing healthy market mechanisms.

As a whole, the advance toward a market-orientation during this phase had the following three characteristics:

First, restrictions were completely lifted on the management permissions, and all restrictions for various kinds of capital to enter the distribution field were gradually cancelled. In 2001, the State Drug Administration, in the 10th Five-year Plan”, in accordance with the reform direction of 1999 clearly stated the requirement of “strengthening the reform of the property system for pharmaceutical distribution enterprises and the reform of the business model, and resolutely break up local monopolies, ownership monopolies, and all kinds of administrative protections that block fair competition, while giving full play to the role of market mechanisms to create a fair

competitive environment and promote the formation of unified national market”. Not only could all kinds of domestic capital now enter the distribution field, but restrictions on foreign capital were also gradually lifted. After 2002, Sino-foreign joint retail enterprises began to emerge in the commercial pharmaceutical field. In 2003, foreign capital essentially entered the medicine distribution field, further diversifying the main body of the pharmaceutical distribution market. At the end of 2004, China completely opened the pharmaceutical distribution sector to foreign capital, marking the entry of the pharmaceutical distribution area into the stage of international competition.

Second, according to the unified plan for the reform of State-owned enterprises, reform of the system of State commercial pharmaceutical enterprises with property reform as the core was promoted, and the central role of the market for relevant enterprises was further strengthened. At the same time, the restructuring and merging of enterprises of different ownership types was also further promoted.

Third, restrictions on business methods, distribution and trade were further lifted. Apart from the conventional manner of entering the retail level and hospital pharmacies through wholesale, such methods as direct sales by the manufacturer, commissioned exclusive sales, on-line transaction, and fair trade markets emerged.

Further advances in market-oriented tendencies inevitably brought certain problems, such as market disruption, and the decline of rural markets and undeveloped regional markets. In view of these problems, while overall continuing to promote the direction of market-orientation, China also issued technological policies at specific levels in an attempt to standardize the market on the basis of adhering to the basic market-oriented direction.

First, there was a continued strengthening of the standardization of medicine distribution. In March 1997, six ministries and commissions including the State Administration of Industry and Commerce jointly issued a notice to elicit opinions on the rectification of illegal drug commissions. In 1998, five ministries and commissions including the State Drug Supervision Administration jointly issued the “Urgent Notice on Strictly Prohibiting the Establishment or Covert Establishment of Various Kinds of Drug Fair Trading Markets” requiring that “all kinds of drug fair trade markets must be banned according to the law”. In 2001, the General Affairs Office of the State Council issued the document “Opinions on Rectifying and Standardizing Drug Market”.

Second, construction of the rural drug supply network and supervisory network was carried out, addressing the problem of drug supply in rural regions. In 2003, the State Food and Drug Supervision Administration issued the Notice on Carrying Out the Strengthening of Rural Drug Supervision and Promoting Rural Drug Supply Network Construction Experiment. And in 2004, it issued the document Instructive Opinion on Carrying out Strengthening of Rural Drug Supervision Network Construction and Comprehensively Promoting the Rural Drug Supply Network Construction to carry out the construction of the rural drug supply network throughout the country.

Thirdly, a large-scale development aiming at the problem of too many links in distribution

field was constructed. In 2002, the State Food and Drug Supervision Administration stated that “the construction of a modern pharmaceutical distribution system is a necessity for deepening the reform of the pharmaceutical distribution system”. In 2005, the State Food and Drug Supervision Administration issued the document Opinion on Strengthening Drug Supervision Management and Promoting the Development of Modern Distribution of Medicines, and stressed “the development of modern medicine distribution is an important measure in deepening the reform of the medicine distribution system and promoting the scale and standardization of pharmaceutical trading enterprises and further standardizing pharmaceutical distribution.” In addition, it also carried out the experiments on purchasing medicines by bid invitation. In 2000, five ministries and commissions including the Ministry of Public Health issued the Notice on Printing and Distributing Numerous Regulations for Medical Institutions on Experiments on Purchasing Medicines by Bid Invitation, and initiated the experiment, which was subsequently carried out throughout the country. The purpose was to solve the problem of high drug prices by controlling the purchase link.

As a whole, after the reform and exploration of several phases, the unitary pharmaceutical distribution mode has been thoroughly broken. However, a new pharmaceutical distribution mode that meets the requirements of the socialist market economy system has not yet been formed, and the reform of pharmaceutical distribution system remains a very difficult task.

2.1.3 The price policy moves from overall control to complete opening up, except for certain basic drugs controlled in the retail link.

With regard to pricing, except for medicines listed in the State basic medical insurance catalogue, and certain kinds of special medicines controlled for the maximum retail price, the control on prices (including factory price, wholesale price and retail price) of (most) other kinds of medicines have been comprehensively opened up. According to the degree of State control over pharmaceutical price, it can be divided into three main phases:

2.1.3.1 From the early period of reform and opening-up to the middle and late 1980s: A gradual lifting of price controls.

Since the reform and opening-up, pharmaceutical price reform has kept pace with the reform of pricing in other fields, and the pattern of the State exerting overall control over medicine prices has been broken. According to the requirement that “the State adjusts the market, and the market guides the enterprise”, China carried out a series of reforms on the pharmaceutical price management.

First, the rate of purchase price to selling price and the pricing methods were adjusted. In 1980, the State Drug Administration issued a document to adjust the factory price and selling price of certain kinds of medicine whose prices were excessively higher than their value. In order to solve the problem of losses incurred in commercial operations, the rate of purchase price to selling price was revised again, including promoting the rate of purchase price to selling price of some kinds medicines and injections with great loss and

high price. In 1984, the State adjusted the price of 119 kinds of medicines and medical appliances. From then on, the State also adjusted the rules for the difference between the purchase price and the selling price of medicine. For example, a medicine directly in the charge of the State was only controlled with regards to its factory price, while the selling price was determined according to the factory price plus the real freight and miscellaneous charges, plus a comprehensive rate of about 5%. Another example is that the commercial internal allocation price was determined by the buyer and seller.

Second, the medicine price management method was improved. Domestic medical commodities adopt the administration method of combining prices fixed by the State, State guidance prices and market-regulated prices. In September 1982, the State Council approved and transmitted the report entitled On Gradually Lifting Price Controls of Miscellaneous Goods and Carrying out Market Regulation submitted by the State Price Control Bureau, according to which the control over the price of miscellaneous medical goods was lifted, and the pricing according to the coordination between industry and commerce and market regulation were adopted. After the second half of 1983, enterprises could flexibly fix and regulate the prices of 50 categories, such as tincture, ointments, powders, and patent medicines, as well as certain medical appliances, chemical reagents, and glass apparatus etc. according to the market supply and demand conditions and the production cost variation.

Third, the power of drug price management was delegated to the lower levels. In March 1984, in order to further expand the decision-making power of the local authorities and enterprises, the State Drug Administration gave full play to the initiative of local authorities at each level to overall reduce the range of unified pricing. The number of kinds of medicine whose prices were directly under the control of State Drug Administration was reduced from 1900 to about 250, and that of medical appliances was reduced from 54 to 9. The pricing power of relevant products was transferred to local authorities or enterprises. In the same year, these kinds of medicines were permitted to adopt floating prices according to the changes of market demand.

During this phase, the control over the price of some kinds of drug was lifted, and the rate of purchase price to selling price of some kinds of drugs was regulated according to the actual conditions. In comparison with the principle of “no flexibility allowed” operative in the past, great progress had been made in this phase.

2.1.3.2 From late 1980s to the middle 1990s: Further lifting of controls.

With the overall advance of reforms of the State price system in the late 1980s and the subsequent definitive establishment of a market economy system, the complete cancellation of control over drug prices was put on the agenda. The fixed basic direction was: the supply-demand relation determines the drug price, and then guides the allocation of resources to create conditions for further liberating and invigorating state-owned medicine enterprises.

At the beginning of 1992, the State Drug Administration issued the Opinion on Revitalizing State-owned Large-and-Middle-Sized Industrial Enterprise in the Medical

Industry, which stated “the enterprise is permitted to set prices according to the State’s unified pricing method and the supply-demand situation, in order to gradually reduce the range of products priced by the State, with the exception that those medicines related to the national welfare and the people’s livelihood must remain under the control of the State.” In July 1992, the State Drug Administration put forth detailed opinions on pharmaceutical price reform, namely “the state will manage the pricing policy, pricing principle and pricing methods instead of the price of specific medicines, and will reduce administrative intervention and enlarge the enterprise’s power to adjust and set prices. The State will control the retail price of a few kinds of representative preparations, while the other bulk medicines and preparations adopt the guidance price to reflect the characteristics of medical commodities. The State will also strengthen the guidance and coordination of medicine pricing according to changes in national production and marketing of medicine, and balance and dove-tail the prices of major types, if necessary, to ensure the practical requirements of the people.” ① In the same year, when reviewing “the reform and opening-up practice of Chinese medical undertakings in the past 14 years”, the State Drug Administration opined, “the medical price system formed on the basis of planned economy and welfare knowledge seriously affects the development of the medical economy”, and put forward six items of basic experience. ① Among these, “introducing the market supply-demand relation into the pricing principle to reflect the requirements of the market economy” and “realizing price-making by the enterprise within the State pricing principle and policy permission range” were two important items.

Driven by the above-mentioned series of policies, the prices of most domestic drugs were to be fixed by the enterprise according to the market supply-demand relation, and the drug prices overall were opened up.

2.1.3.3 From the middle and late 1990s: Strengthening the control over the retail prices of some drugs.

While mobilizing the enthusiasm of the enterprise, the overall liberation of drug prices also resulted in the continual and rapid increase of the prices of most drugs, which brought many problems. Based on this practical situation, under the principle that the drug pricing was generally determined according to market supply-demand, the State began to strengthen the control over the retail price of some drugs.

First, the retail price of some medicines adopted government pricing and the guidance price, and the range of medicines priced by the government was continually expanded. In 1996, the State Development Planning Commission issued the “Provisional Measures on Drug Price Management” to adopt government pricing and the guidance price for three kinds of drugs. ② According to the “Opinion on Drug Price Management”, which was printed and distributed by the State Development Planning Commission in 2000, the

① Qi Moujia’s speech in a symposium of national directors-general of drug administration authority, Yearbook of Chinese Medicine, Chinese Pharmaceutical Science and Technology Press, 1993① Qi Moujia, “Some Thoughts about the Practice of Reform and Opening-up of Chinese Medical Undertakings in the Past 14 years”, Yearbook of Chinese Medicine, Chinese Pharmaceutical Science and Technology Press, 1993② Three kinds of drugs refer to drug whose production and operation are monopolized, a few curative and preventive drugs that are widely applied in amounts in clinic, and the special drugs such as Class-A psychotropic drugs and Class-A narcotics and prophylactics etc.

range of drugs priced by the government was extended to include State medical insurance catalogue. In the meantime, medicines priced by the government were controlled with regards to the maximum retail price. In 2005, the range of drugs priced by the government was further extended, for example, the dosage type belonging to prescription drugs but not listed in Medical Insurance Catalogue was also covered.

Second, drug pricing methods were changed. In 1997 and 1998, the State Development Planning Commission issued the “Supplementary Regulations on Provisional Measures on Drug Price Management” and “Notice on Perfecting Drug Pricing Policy and Improving Drug Price Management” respectively, which provided new regulations on the pricing methods of drugs priced by the state, and restricted the distribution rate. In the Notice on Carrying out Experiments on Setting the Price of Some Drugs from the Out-of-the-factory Link issued in 2005, the State Development and Reform Commission decided to make experiments on setting the prices of some drugs from the out-of-the-factory link. In the same year, it provided new regulations on the comparative price relation among the drugs whose prices were fixed and guided by the State.

Third, the maximum retail price of some drugs was reduced several times. From 1997 to 2005, the prices of some drugs listed in the pricing catalogue were successively reduced 17 times.

Currently, government control mainly centers on the basic medicines, mainly aiming at the duplicating medicines. The control is mainly aimed to solve the problem of the excessively rapid increase of drug prices to guarantee that the basic drugs are available to the public. The control link is also mainly aimed at the retail price. The prices in such links as out-of-the-factory and wholesale etc. are still determined by the market.

2.1.4 Comprehensive changes in conduct objectives of the medical service system had an increasingly clear effect on pharmaceutical production, distribution and pricing.

In contrast with common consumer items, drug consumption must be carried out under the guidance of medical service institutions and doctors. In the planned economy prior to reform and opening-up, because of the government control over conduct, the financial system and the doctor’s salary system, the medical service institution and the staff had neither motive nor opportunity to seek financial gain from medicine. Therefore, their conduct had little effect on drug consumption, much less on drug price.

After the reform and opening-up, the reform of medical service system thoroughly changed the above-mentioned situation. Judging from the public medical service institution, influenced by the adjustment on financial investment system, the financial management system and compensation manner etc., the institutions concerned gradually relied on service revenues to maintain operations. Furthermore, the receipts from medicines gradually became the most important revenue source and directly determined the financial status of medical service institutions, resulting in a situation characterized as “supporting the hospital with medicine”. With the further progress of the reform of the distribution system in the late 1990s, many practices of enterprise reform, especially

linking the service revenue to the personal income, were widely introduced, which made the relation between the drug consumption and the benefits to medical service institutions and doctors closer. Private medical service institutions had been profit-oriented from the very beginning, so it was natural for them to gain profit from the medicine. This situation, coupled with overall opening up of drug prices and the ample competition in the production and distribution field, resulted in medical service institutions gradually becoming the dominant factor in determining the consumption structure and consumption amount of a drug, which directly affected the product mix and distribution method, subsequently affecting drug prices in every link. To great extent, it even played a critical role.

2.1.5 The drug management system experienced a change from “centralization to decentralization to comparative centralization”.

With the change of production, distribution and pricing system, the drug management system has also experienced a series of adjustments since the reform and opening-up.

2.1.5.1 In the early period of reform and opening-up: Centralized management of medicine was carried out.

In the early period of reform and opening-up, in view of the problems resulting from the comparatively decentralized management system, a centralized management system was carried out for certain period. In June 1978, the State Council approved the establishment of the State Drug Administration (directly under the State Council, managed by the Ministry of Public Health) to carry out unified management over the production, supply and use of traditional Chinese medicine, Western medicine and medical appliances. Each province and municipality directly under the Central Government correspondingly set up a drug authority to carry out unified administration of different degrees and different methods over the medical enterprises and institutions, as well as their production and operation, scientific research and education, etc.

2.1.5.2 In the long period from reform and opening-up: The management system moved to decentralization.

At the horizontal level, with the deepening of the principle of “with economic construction as center” and a market-oriented process, medicine was managed mainly as a kind of economic industry with great profit potential that could develop independently.This was correspondingly reflected in the changes in the medicine management system. In May 1982, the State Chief Drug Administration was changed to the State Drug Administration, directly under the leadership of the State Economic Commission. Its task and scope of responsibility, as well as its work relation with each department and relevant unit of every region remained unchanged. In addition, it carried out international contacts on behalf of China. The Ministry of Public Health retained the functions of pharmaceutical administration and supervision. In July 1986, the State Administration of Traditional Chinese Medicine was established directly under the State Council, which was managed by the Ministry of Public Health. In May 1988, the State Administration of Traditional Chinese Medicine put out the traditional Chinese medicine part under the administration

of State Drug Administration, and was amalgamated with State Administration of Traditional Chinese Medicine to form new State Administration of Traditional Chinese Medicine, which was under the centralized management of the Ministry of Public Health. In August 1988, the State Drug Administration became a department directly under the State Council. Its main functions included: the functional department of the State Council that manages medicine (not including traditional Chinese medicine), taking charge of the management over medicine (not including traditional Chinese medicinal materials, traditional Chinese medicines prepared in ready-to-use forms, and Chinese patent medicine), medical appliances and medicine-production machines, and medicine packaging. The Ministry of Public Health was responsible for the national supervision and administration of medicines. In 1993, after the State Economic and Trade Commission was established, the State Drug Administration became a department managed by the State Economic and Trade Commission, whose main functions were guiding the industry plan and industry laws and regulations of medical industry and carrying out industrial management.

At the vertical level, with centralization of authority gradually moving to decentralization, the competent administrative department of local government was given increasing power. And the level-to-level management system was gradually formed in most aspects, such as planning, production, distribution, and market supervision.

2.1.5.3 Third phase: From the late 1990s to the current time: the medical management system moved to comparative centralization.

Because of the disorder in some fields resulting from overall market-oriented tendency of pharmaceutical production and distribution, another adjustment has been carried out on administration system since the middle and late 1990s. In 1997, the CPC Central Committee and the State Council jointly issued the Decision on Reform and Development of Public Health, which clearly put forth the principle of “actively probing into the reform of the pharmaceutical administrative system to gradually form a unified, authoritative and effective administrative system”. In 1998, the State Council carried out a reform of the organizational structure and approved the establishment of the State Drug Supervision Administration, which was based on medicine production and the distribution supervision functional department of the former State Medicine Administration, the traditional Chinese medicine supervision functional department of the State Administration of Tradition Chinese Medicine, and the former pharmaceutical administration and supervision functional department of the Ministry of Public Health. Moreover, it was established in the context of 40 ministries and commissions of the State Council being reduced to 29, which showed that the central government attached much importance to drug supervision. The new State Drug Supervision Administration carried out administrative supervision and technological supervision on the research, production, circulation, and use of medicines. The former State Drug Administration’s functions of establishing development strategy and long-term plan for the medicine industry, macro-control of the economic operations of the medicine industry, statistics and information affairs of the medicine industry, and the emergency deployment of drugs and medical appliances in the event of disaster,

epidemic, or war, were transferred to the Pharmaceutical Department of the State Economic and Trade Commission.

In the same year, the Central Staffing Office issued a notice proposing a suggestion for the provincial-level government drug supervision institution: “centralize the drug supervision management functions that are decentralized in the pharmaceutical administration and supervision, and production and distribution field of the departments concerned to the province (autonomous region or municipality directly under Central Government) drug supervision authority, and carry out unified management. In addition, the provincial-level drug industry management function will be carried out by the provincial (autonomous region or municipality directly under Central Government) economy and trade committee.” As to the drug supervision, the central government and the provincial government carried out comparatively vertical administration. Central finances and provincial finances were divided, and the upper-level officials took charge of the lower level. In addition, the central government carried out dual administration over the provincial government, with priority given to the local authority.

In 2003, the State Drug Supervision Administration was changed to the State Food and Drug Supervision Administration, with the drug supervision management function unchanged. And the functions of the former State Economic and Trade Commission (it was removed in 2003) with regards to medical industry planning, industry policy, economic operations adjustment, technological reconstruction, and investment management were brought to the new State Development and Reform Commission.

2.2 Effects and problems resulting from medical system reform

2.2.1 Effects resulting from medical system reform

--The productive capacity for medicines increased greatly, and the public had more and more choices for medicines.

In the drug production field, with the change of investment body from unitary to pluralistic, and the continual advance of enterprise system reform, the productive capacity and scale of medicine increased rapidly. As shown in Chart 2, from 1980 to 2003, the average rate of increase of the total output value of the national medical industry exceeded 15%, higher than the average rate of increase for other industries, thus realizing the objective of doubling and quadrupling production value in 1990 and 2000, respectively.

Figure 2. Gross Output Value and Rate of Increase of the National Medical Industry from 1980 to 2003

全国医药工业总产值 Gross output value of the national medical industry

亿元 100 million yuan

比上一年增长率 Growth rate from the previous year

(P.S. The statistics of this chart come from the Yearbook of Public Health in China, Annual Report of Medical Statistics in China, and the Yearbook of Pharmacy in China etc., among which the data of 1981 and 1982 are estimated value. The data of 1980s take that of 1980 as reference, while the data of 1990s takes that of 1990 as reference.)

Currently China has become one of the largest producers of bulk drugs in the world. Among the over 2000 kinds of bulk drugs worldwide, China produces 1500 kinds, with the output reaching 800,000 tons, making China second only to America. Among these medicines, the output of the five kinds, terramycin, penicillin, vitamin C, cephalosporins, and doxycycline hydrochlocide, rank first in the world. At the same time, the number of types of drug has significantly increased, and the product mix has been greatly improved. China can now produce over 4000 kinds of specifications of preparation, 8000 kinds of specifications of Chinese patent medicines, and about 10,000 kinds of specifications of medical appliances. Therefore, the consumer has more and more choices.

--The drug distribution scale is enlarged and accelerated, and the contradictions between supply and demand have been comprehensively relieved.

Because of the overall increase of productive capacity and the overall opening of distribution field, gross sales of medicine has been on the continual increase since the reform and opening-up. Because drug production and supply has become increasingly dependent on market supply-demand relations and the competition tends to be gradually intensify, the pace of drug distribution increases significantly. In most of regions, with the rapid increase in the number retail enterprises, medicines become more easily available.

At the same time, foreign trade further has further developed, coupled with the increase of domestic productive capacity, so that the supply-demand contradictions existing in the planned economy have also been relieved considerably. Currently, the business scope of commercial medicine has extended from drugs, medical appliances, chemical agents and glassware to Chinese patent medicines, traditional Chinese medicinal material, and other relevant commodities. The total number of specifications has reached 27,000, including about 5000 kinds of drugs, 6000 kinds of medical appliances, 13,000 kinds of chemical agents, and 3000 kinds of glassware.

Figure 3. Gross Sales and Rate of Increase of National Commercial Medicine from 1980 to 2003

(P.S. The data of this chart mainly comes from the Yearbook of Public Health in China, among which the data of 1989 and 1994 are estimated values.)

医药商业销售总额Gross sales of medical commerce

亿元 100 million yuan

比上一年增长率 Growth rate from the previous year

--Micro-operation efficiency of medicine production and distribution enterprises show a general increase.

Whether in the production field, or in the distribution field, with the advance of enterprise reform, especially the overall intensification of the interest incentive system, the efficiency of micro-operations has increased markedly, and the service level and service quality have improved significantly.

--Medicine production technology level increases significantly, and the drug quality also improves significantly.

In addition to the great increase in overall output, with investment increases, intensification of competition, overall opening-up, and increase of the State’s requirements for the level of medicine production quality and technology, and especially with the advance of compulsory GMP authentication system, the overall technology level of medicine production enterprise has been greatly promoted, and overall drug quality has improved remarkably. As a whole, the security of drug is better ensured.

--The medical industry has made contributions to other aspects, such as increase in GDP and the employment rate.

In 2005, the production value of the pharmaceutical industry accounted for 4% of GDP. In many regions, the pharmaceutical industry has become the pillar industry, and has made contributions to the development of the local economy, increases in local fiscal revenue, and increases in employment opportunities.

2. 2.2 Problems occurring in the course of system reform

Although the market-oriented system reform has brought about many positive effects, problems in the medical treatment area are still quite prominent due to the impact and restriction of various factors.

--The problem of over-competition is prominent in the production area, thus the pharmaceutical production industry as a whole is still at a rough development stage.

Affected by multiple factors such as development planning, the number of pharmaceutical production enterprises increased rapidly; however, a considerable part of enterprises have redundant or similar product structures at the low level resulting in seriously redundant productive forces and service functions as well as a severe problem of over-competition. There are more than 6000 pharmaceutical factories at present, of which small enterprises account for over 75%, with productive forces having a low degree of concentration; moreover, there is a significant problem of product overlapping, and the percentage of single varieties of medicine with similar structures reaches 90%. One type of medicine might be produced by 70-80 different factories. Some medicines such as amoxicillin are manufactured by more than 200 medicine factories, Analgin is produced by more than 300 factories and more than 800 factories produce Nofloxacin. At the same time, most varieties of medicine are so vastly over-produced that the utilization rate of production equipment for the industry as a whole is less than 50%.

On the one hand, the serious problem of over-competition creates a common lack of innovation, and there are few medicines for which the company itself holds intellectual property rights. Statistics show that, for 837 Western medicines produced by China in recent years, 97.4% of them are duplications of existing medicines, and the medicines with self-owned intellectual property rights are less than 3%. For many years, investment in research and development for the entire pharmaceutical industry has fluctuated around 1% of the total sales amount, while the advertising expenses have accounted for 5%~10% of the sales amount. Whereas the top-ranking foreign enterprises in the global

market are all research & development-type pharmaceutical enterprises whose investments in research and development exceed 15% of total sales amount. On the other hand, the competition among productive enterprises is quite irregular, depending more on low-level price wars and changes in marketing tactics. This makes it impossible to form a “survival of the fittest” mechanism and it is also difficult to ensure the gradual improvement in the medicine quality.

--Distribution and business operations for medicines is quite chaotic.

On the one hand, analogous to the situation in the area of production, pharmaceutical distribution enterprises are characterized by “large quantity, scattered distribution and small scale”, with a quite low degree of market concentration. Currently, from the view of wholesale enterprises, though there are 16000-17000 throughout the country, less than 5% have annual sales totalling more than RMB 50,000,000 yuan, 10 have the sales amounts of RMB 1,000,000,000 yuan, and only 3~6 have the sales amounts of more than RMB 5,000,000,000; as for retail enterprises, the largest chain group has the turnover of just RMB 500,000,000 yuan. The low degree of concentration for pharmaceutical distribution increases the difficulty of supervising and managing pharmaceutical distribution and makes the healthy self-development of distribution enterprises more difficult as well.

On the other hand, the distribution of medicines involves many links, and the unlawful business practices are prevalent. According to statistics, medicines are distributed in 6~9 links from production to final sales, in which both legitimate open bargainers and under-the-table covert bargainers are involved. Legitimate open bargainers include over 6,000 pharmaceutical enterprises, more than 10,000 medicine agents, 16,000~17,000 wholesale pharmaceutical enterprises, 120,000~130,000 retail drugstores, more than 300,000 medical institutions and a number of medicine electronic business trade platforms and entry bargainers. In addition, there are more than 100,000 bid invitation agents, over 100,000 medicine representatives, more than 300,000 hospital pharmacies, 2,100,000 doctors with the right of prescription, some deans of hospital and directors of hospital pharmacies, and numerous private druggists engaged in cash transactions at illegal medicine markets. There are others who also participate in pharmaceutical businesses in a semi-open or covert manner. As far as the business model is concerned, the illegal commercial bribery, of which main method involves sales commission, is currently in vogue. General estimates show that the difference between the factory price and sales price of a medicine can be up to 10 times, or even more than several dozens of times. Relevant guilds estimate that the gross profit of productive links ranges from 15% to 30%; that those of wholesale medicine enterprises ranges from 10% to 15%; that those of hospitals and retailers ranges from 20% to 30%; and that nearly 20% of surplus profits are obtained by covert bargainers, a proportion of which is used as sales commissions in pharmaceutical purchases and sales.

In addition, counterfeit medicines have not yet been eradicated from the market, and medicine supply and supervision are comparatively weak in remote rural areas.

--The phenomenon of inappropriate medicine use is severe at the medicine consumption link.

As mentioned earlier, as for method of medicine consumption, the terminal medicine consumption structure and amounts are dominated by medical service institutions and doctors and affected by the increasingly intense profit motive. The final decisive factor of the medicine consumption structure is not the need for disease cure or the quality and cost performance of a product, but rather the economic benefits of the medicine’s use.

Inappropriate medicine use takes diverse forms; for example, no definite instructions for use, continued use despite contraindications, overdosage or underdosage, improper usage and so on, but the most outstanding problems are inappropriate use and incompatibility of the medicine in combination with other medicines. The abuse of such medicines as antibiotics, analgesics and and cortin are most worrisome the moment. The abuse of antibiotics and their improper use in combination with other medicines not only wastes medicine and money but also increases the side effects of antibiotics and resistant strains of bacteria. Serious abuse can even result in death of the patient. 1Data from retrospective case analyses show that the occurrence rate of inappropriate medicine use is about 19.6%~20% of hospitalized cases in China, that is to say, inappropriate medicine use exists in 1/5~1/4 of inpatients, resulting in frequent clinical incidents of iatrogenic diseases and drug-induced diseases.2 Furthermore, in order to increase profits, it is quite common for doctors to prescribe medicines where no disease is present, and excessive medication for patients with minor ailments.

--Price fixing mechanisms for medicines are distorted, exacerbating the problem of medicine prices deviating from medicine value.

The fact that medical service institutions and doctors determine which medicines are consumed and the amounts consumed, quite naturally affects the ultimate price of the medicine. The profit objective of service institutions and doctors is becoming increasingly intense Therefore, what ultimately determines the price of the medicine is not primarily product quality or the cost effectiveness of a product, but the profits earned by medical service institutions and doctors. This fact combined with over-competition in the areas of production and consumption, along with quite free price-fixing mechanisms result in an across-the-board distortion of the pharmaceutical pricing mechanism. The multilinked price increases, arbitrary and inflated high prices (even including prices determined by the State), various forms of profit sharing, sales commissions and other problems are increasingly intense, completely distorting medicine price mechanisms. Certain high-quality, reasonably-priced medicines are gradually abandoned, whereas the medicines that bring high profits are favored, regardless of their value.

As shown in Fig.6, from the mid-1980s to the mid-1990s, the average annual medicine

1“Summary of National Academic Seminar on Appropriate Medicine Use”, Chinese Medical Sciences Journal, 1985.52“Security Supervising Department of State Food and Drug Administration, Revaluation after Chinese Medicines Enter the Market and Current Situation and Development of Adverse Response Monitoring”, Seminar on Risk Management After Medicines Enter the Market, July, 2005, Xi’an.

markup exceeded 10% in China. Although the State has reduced the price of some medicines 17 times in succession as of 1997, the overall cost of medicines is still so high that such costs cannot be borne by average citizens.

Figure 4. Changes in the Chinese medicine price index since the period of reform and opening up

2.2.3 Some problems have a distinct impact on the medical health career and the development of pharmaceutical industry.

-- The healthy development of the health sector is severely impacted.

First, the product structure of medicines is distorted, and a proportion of basic medicine usage cannot be ensured.

As pharmaceutical production moved to a market-governed system, an inevitable result was that production became subject to the market demands. As mentioned earlier, the excessive pursuit of profits on the part of medical service institutions has a direct and even decisive effect on the consumption of medicines. Thus what specific medicine is used is increasingly based on the profit advantage. As a result, the consumption of medicines overall tends toward greater amounts, newer products and finer quality; by contrast, many safe and effective basic medicines are excluded due to low profits. This situation directly affects the product structuring in productive links via the conductive action. In consideration of economic benefit, general pharmaceutical producing enterprises tend to produce medicines higher grade, more expensive and more profitable medicines instead of more basic medicines that are low-priced and effective. The lack of supply for some commonly-used basic medicines is an increasingly common problem. In addition, a large number of traditional basic medicines have disappeared. It has also happened that certain medicines gradually disappear following a State-mandated price reduction, which causes a rise in the price of medical services, and to a certain degree threatens the public needs of disease control. As an example, Methylthioninium Chloride

recorded in the Catalogue of National Basal Medicines (2002 Edition) is an effective medicine for the cure of cyanide, nitrite, aniline medicine toxicoses, but domestic large-scale medicine purchase and supplying stations have no long-term stocks in their storerooms due to the impact of pricing and other factors, thus threatening the lives of certain patients such drugs became unavailable. As another example, the basic medicine Neostigmine is an effective treatment for Myasthenia Gravis, but China has a severe shortage of the drug due to a reluctance on the part of of producers to manufacture it. It was also reported in the Wuhan Evening News on May 31, 2002 that patient died because a type of medicine costing only 8 jiao was no longer being produced.

Secondly, the problem of the lack of affordable medicines is increasingly common due to inflated and continually rising medicine prices, such that the basic health rights of a significant proportion of people cannot be assured, and the construction and development of a medical insurance system is further impacted.

Driven by profit seeking at all links, pharmaceutical supply and consumption increasingly pursues new, high-quality and trendy medicines, which is to say, expensive medicines. At the same time, the problems of large prescription amounts, large dosages and redundant medicine use are increasingly frequent in the consumption link. Consequently, the consumer price of medicines is constantly rising, the direct result of which is a significant number of citizens are unable to afford the cost of seeing a doctor and buying medicine. The result of 3rd National Health Service Survey in 2003 indicates that: 48.9% of Chinese citizens do not see a doctor if they are ill; and 29.6% of patients who have been diagnosed as requiring hospitalization are not hospitalized, the main reason being the high cost of treatment. The reason for high medical service costs is largely due to the influence of high medicine prices. Statistics show that in China the consumption of medicines consistently accounts for the major proportion in total medicine and health expenditures. Influenced by various factors such as advancements in examination techniques and adjustments in the mechanism of fee compensation, the proportion between medicine expenditures and total health expenditures has reduced in the past few years, though it is still on the high side. For example, the proportion is 44.06%, 30% and 18% in China, the developing countries, and in OECD countries, respectively, of which the lowest proportion is in Denmark and Norway, with less than 10%.

Figure 5. Proportion of medicine expenses and total health expenses

A rapid rise in medical expenditures attributed to medicines and other problems results in a common problem that seeing a doctor is expensive, but it also has a very negative impact on the construction of other systems. For example, for the past few years the relevant departments of the State have been putting effort into expanding the coverage of medical insurance, but it has been difficult to achieve breakthroughs, precisely because of the lack of control over the behavior of medical service organizations, especially the lack of control over treatment costs due to the pursuit of profits from medicines.

Third, adverse medical and economic effects caused by inappropriate medicine use has become a social problem that can not be ignored.

It is widely recognized that inappropriate medicine use is a common problem resulting from various factors, but primarily from doctors’ instructions, and the problem is becoming increasingly evident. On the one hand, the problem has a severe negative impact on public health. Comprehensive research shows that drug-related deaths account for about 1/10 hospital deaths in China, and that patients with adverse reactions to medicines make up 10%~20% of medicine users3. The proportion of urban children developing a resistance to antibiotics has reached 1/3~1/24. Due to the extensive abuse of antibiotics, the human body and bacteria have developed resistance to certain antibiotics, resulting in a dangerous situation in which some diseases have no medicines to cure them.

On the other hand, with domestic health resources severely limited, and a significant number of citizens with no guarantee of basic medical access, inappropriate medicine use engenders serious waste. A report by the World Bank indicates that medicine expenditures in China accounted for 52% of total health expenditures in 2003, while the number for most other countries throughout the world was 15%~40% over the same

3 China Prescription Drug, Issue 9, Nov., 2002.4 Shao Xudong, et al. “Who should be responsible for the drug resistance of a half of children?”. Pharmaceutical Economy News, Apr 13, 2001.

Proportion

between

medicine

expenditures and

total health expenditures

period. By international standards, 12%~37% of total health expenditures have been wasted in China due to “large-dosage prescriptions”5.

--A quite significant impact on the self-development of pharmaceutical industry

First, it is difficult to enhance the competitiveness of pharmaceutical enterprises.

Whether production enterprises or distribution enterprises, they are generally small-scale, with a low degree of industrial concentration. Moreover, due to a number of factors, it is difficult to integrate them, thus it is hard to enhance their competitiveness.

In the production field, over-competition in the pharmaceutical area caused by over-dispersal of industrial organizations, disorder in the distribution market and consumption links along with distorted prices gives rise to a massive flow of pharmaceutical profits into medicine links and medical service institutions, making it difficult to guarantee the profit levels of production enterprises. Production enterprises are unable to maintain stable development due to a gradual decrease in profits. According to the statistical data from the China National Bureau of Statistics, pharmaceutical enterprises have a profit margin 26.24% below the national industrial level; profits of a considerable number of large-scale antibiotics production enterprises have decreased by approximately 50%, and nearly 2/3 of domestic pharmaceutical enterprises are confronted threats to their very survival, not to speak of technological innovation. Under these circumstances, it is almost impossible to expect them to compete internationally. For example, the total sales volume for all Chinese chemical-based pharmaceutical enterprises is less than that of one American enterprise, Pfizer. In the performance aspect, the difference is also enormous. Take Pfizer again for example: In 2004 alone its profits increased by 191% to USD $11,360,000,000, its sales rose by 17% to USD $52,510,000,000, and the percentage ratio between its profits and sales reached almost 22%.

There are also outstanding problems in the distribution field, where in 2004, the profit rate was only 0.55%. Since corporate profit levels are low and scale is small, the prospects of these enterprises are not promising, given a situation in which international capital has begun to enter the distribution field.

Second, distorted business practices of pharmaceutical enterprises seriously impacts healthy self-development and the standardization of market construction.

In both the production and distribution fields, commercial bribery, bogus price fixing, commercial fraud and other undesirable practices resulting from over-competition have become common phenomena, influencing the healthy self-development of pharmaceutical enterprises, directly influencing the healthy development of the pharmaceutical industry as a whole and seriously hampering the standardization of market order.

Thirdly, a series of other problems such as environmental pollution and waste of

5 China Prescription Drug, Issue 9, Nov., 2002.? Shao Xudong, et al. “Who should be responsible for the drug resistance of a half of children?”. Pharmaceutical Economy News, Apr 13, 2001.

? World Bank. China Rural Health Work: Multiple Challenges, 2004.

resources have also appeared.

Due to the redundant construction at the low level, medium- and small-scale enterprises have dominated the pharmaceutical field; moreover, their technical level is generally inferior, which gives rise to problems such as environmental pollution and waste of resources.

3. Problems encountered in the course of pharmaceutical system reform that require serious consideration

In a word, since the reform and opening up policy, the Chinese pharmaceutical system has undergone enormous changes, and has seen positive results, but concomitant problems and consequences have become even more evident. Many problems deserve serious consideration, whether from the aspect of development considerations or from specific design of the system. In summary, these problems center around the following aspects.

3.1 The guiding principles of pharmaceutical development overemphasize the needs of industrial development and its significance for economic growth.

Without a doubt, medicines have the attributes of common merchandise. At the same time, they possess special attributes different from common consumer items. Above all, medicines should be considered as necessary items for treating diseases and maintaining health, thus differing from common consumer products. For medicines, special emphasis must be placed on access, including the availabilty and affordability of the product. In other words, the development of medicines must first and foremost emphasize their importance for public health and the development of the health sector.

Consideration must be given to the fact that the above-mentioned special considerations have been neglected to a great extent in the course of pharmaceutical development in recent years. Although the special niche of pharmaceutical was discussed during this period, overall the emphasis on the development of the pharmaceutical industry and its contribution to GDP have gradually taken on a guiding force in the discussion due to an over-emphasis on economic growth and GDP. Reference to documents on pharmaceutical policy over the past years reveals a clue, namely that “pharmaceutical industrialization” or “pharmaceutical modernization”, in its pursuit for “an increase in the production value of medicines” and “a realization of the transformation from a large-scale pharmaceutical nation to a powerful pharmaceutical nation” have gradually over a period of time become the sole objective of pharmaceutical development. However, the key problem, namely the public availability of basic medicines, has clearly been neglected. The ultimate result is that the public availability of basic medicines decreases while the production value of medicines is soaring.

The guiding principles of pharmaceutical development are distorted. One reason is that for quite a long time the development strategy of the country as a whole put too much stress on growth, such that the development of social sectors, including the medical

health sector, was ignored to a certain extent. In addition, the influence of other systems cannot be overlooked, of which one critical problem is the relationship between the central and the local. Since the implementation of the reform and opening-up policy, the decision-making system has evolved from one of centralized power to one of decentralized local power. The financial system has transformed from one of uniform receipts and expenditures to one of ownership of many levels, and local governments must now be responsible for local development and stability. Such systems mobilize the power of local governments and also add pressures, especially financial pressures, on local governments, such that local governments now pursue local economic growth and financial earnings with greater intensity. Many local governments have chosen to promote economic growth through the development of the pharmaceutical industry. The results of comprehensive research show that two-thirds of provinces and more than 80 regions and municipalities have taken the pharmaceutical industry as their “backbone industry” and have formulated relevant industrial support policies and developmental plans. In addition, many local governments have regarded pharmaceutical production as a new source of local economic growth, and have encouraged projects and products that will about short-term economic benefits. These measures have resulted in a disconnect between the developmental needs of the pharmaceutical sector and those of the health sector, and has led to such problems as the convergence of industrial structure as well as low-level redundant construction.

3.2 Excessive dependence is placed on market forces such that governmental functions are seriously weakened.

As mentioned, the reform of pharmaceutical production and distribution has tended toward overall market-orientation in recent years. Without doubt, under the backdrop of the entire economic system’s transformation from a planned economy to a market economy, the general trend of market mechanisms comprehensively being incorporated into the production and distribution of pharmaceuticals is entirely correct. The problem is that medicine is a special category of commercial product, one for which aspects such as availability and quality must be considered. It is obvious that many of these objectives cannot be achieved with total dependence on market mechanisms. Therefore, a governmental intervention function is indispensable. International experience tells us that governmental intervention in pharmaceutical development is a universal practice. But, Chinese practice in these years shows that governmental functions have been weakened in many aspects, as described below. First, governments lack necessary planning concerning future development, and thus this aspect is determined by the enterprises themselves according to the market supply and demand, which is the major factor in the disjunction between pharmaceutical product structure and pharmaceutical demand, as well as for the lack of availability for basic medicines. Second, there is a lack of effective control over industrial development so that the pharmaceutical production and distribution fall into a pattern of low-level redundant construction and over-competition. Third, there is no effective supervision over product quality and distribution. In principle, both a supervision system and a supervision instrument should co-exist, but actually the supervision is considerably less than ideal, resulting in longstanding problems of disorder

and disruption.

The first reason for the excessive dependence on the market and greatly weakened governmental functions is an unrealistic, blind faith in the market, and an inadequate awareness of the problems of market malfunctions that would inevitably arise in the pharmaceutical field.

The second reason is the influence of other systems. For example, the previously-mentioned relationship between the central and the local is a prominent factor. Neither planning nor supervision can be successfully achieved in a context where the relationship between the financial and business rights of the central and local are unfavorable, and the local governments exhibit excessive zeal for economic growth.

The third reason is problems with the administrative system and administrative methods. A feature of the administration system has always been decentralization. Viewed horizontally, such functions such as development planning, supervision and quality inspection of medicines have always been assumed by different departments; moreover, pharmaceutical administration and the medical service administration are also separate. The direct result of this situation is that it is difficult to formulate a national policy framework for the planning of pharmaceutical research and development, production, distribution, consumption, pricing and various links as a whole. The policies of different departments are diverse, lack internal cohesion, and sometimes even conflict with each other. In addition, not only is it hard to coordinate the policies themselves, a series of problems emerge in the course of policy implementation. Viewed vertically, the administration by levels has predominated since the reform and opening-up policy was launched. Although the administration system of pharmaceutical supervision has been regulated, at present, pharmaceutical supervision is still managed by different levels of the Central Government and the provinces. Other functions including planning continue to be administrated by multiple levels. Such a system of multi-level management clearly has many disadvantages where the mutually beneficial relationship between the central and the local has been severed. It is hard for local governing departments to avoid the influence of local interests, eliminate conflicts between policy objectives and practice, prevent various kinds of local protectionism, and form a fair, unified and open pharmaceutical market system.

The problem of backward administration modes and methods is extremely serious. As for administration methods, the construction of a legal system and administration in accordance with law have been emphasized in recent years, but in practice, the construction of the legal system is lagging. There are still gaps in policy and law with regards to such medicine links as production, distribution, pricing, advertisement, usage and supervision. In addition, though laws and policies exist for some aspects, the problem of out-dated laws, longstanding mutual contradictions and conflicts results in no applicable law to refer to, and leads to extremely lax administration. In the process of supervision there is clearly a lack of law enforcement and supervisory capability. At the same time, the lack of administrative transparency, under-the-table operations and even power-for-money deals continue to exist. It is difficult to curtail such improper activities.

3.3 Severe distortions have developed in medical service system reforms and in the hospital-medicine relationship, gradually becoming a core problem.

Another often noted characteristic of medicine products is that ordinarily consumers do not themselves make the decision to use the product, but use it only under the instruction of a doctor. It is this characteristic that determines the close relationship between the hospital and the medicine, which in turn can easily lead to mutually beneficial arrangements between the hospital and the medicine provider, resulting in various problems. Hence, an common method worldwide is to sever the mutually beneficial relationship between the hospital and medicine providers through a comprehensive system design including the establishment of specific investment and compensation mechanisms for medical service institutions, the establishment of a standardized allocation system and the separation between the hospital and medicine providers, etc.. As mentioned in previous paragraphs, during the process of the reform of China’s medical service system, under the influence of many factors, not only was the path of profit-motivation encouraged, but medical service institutions were also encouraged to gain profit from pharmaceutical consumption. In the early stages, income from medicines was used merely to help relieve the shortage of other devotions or compensations, namely so-called supporting a hospital through medicine. As the operational mechanism of medical service institutions was further regulated, and especially as the distribution system gradually developed to link up service earnings, the income from medicine sales in particular, along with the private earnings of medical service personnel, seeking profit through medicine became common practice among many medical service institutions and doctors. The above fact, in addition to over-competition in the production and distribution area, leads to a widespread distortion of the hospital-medicine relationship, and gradually forms a pattern in which doctors control the pharmaceutical market for their own interests. What and how much is consumed becomes determined not by actual needs of patients, but by whether medical service institutions and doctors can obtain economic benefit. The problem of over-competition exemplified by “large-dosage prescriptions” and commercial bribery exemplified by the so-called “sales commission” have emerged and becoming increasingly intense. Consequently, the economic benefits of the consumer are greatly harmed. At the same time, medicine abuse is also a serious health threat. In addition, the pharmaceutical production has a warped development, distribution is in disorder, and price fixing mechanisms are distorted.

The problems in medical service area and the distortion of the hospital-medicine relationship have been widely acknowledged for some time. Moreover, governmental departments concerned have also adopted certain measures to standardize the behavior of medical service institutions and to harmonize the hospital-medicine relationship. But in general, these efforts have attained no significant results. On the one hand, although governments have attempted to standardize the behavior of medical service institutions and doctors, their measures have focused on the supervision over daily practice, and have not touched on more critical and essential systematic problems such as devotion and compensation mechanisms, the financial system and the distribution system. The supervision of daily practice is often superficial owing to the influence of insufficient

formulation of laws and regulations, deficient supervisory capability and other problems. On the other hand, some practical policy designs are questionable per se. For example, the policy of collective bid invitations was executed in previous years in order to harmonize the hospital-medicine relationship, and particularly to standardize the distribution system, but the executor for bid invitations was the hospital itself. It is obviously inevitable that, where hospitals have a strong economic objective, it will consider as its goal the maximization of its economic benefits rather than the maximization the interests of the patients and public, and furthermore, economic benefits are still closely related to the medicine. Therefore, this kind of bid invitation fails to achieve its desired effect, which has been clearly proven in practice. Lately, in view of strong reaction of all circles to medicine prices, the government has applied a policy of reducing the highest retail price for a considerable proportion of medicines, but this policy has not had the effect it should have had, due to a situation in which the practice of medical service institutions and doctors has been completely distorted. It is common choice for medical service institutions and doctors to prescribe large dosages or avoid the use of depreciated medicines, resulted in serious consequences. To a large extent, the reform of medical service institutions and the distortion of the hospital-medicine relationship have become the core contradiction in the pharmaceutical system.

Brief conclusions: The Chinese pharmaceutical system has undergone systematic changes, from overall planning management to overall market-orientation; moreover, relevant medical service systems and service goals have also experienced an multifaceted transition. System reform has been effective, but it also has exposed some problems and has had an adverse impact on the development of the health sector, the public interest and the development of the pharmaceutical industry per se. Therefore, the manner and methods concerning reform should be summarized and reviewed. On this basis, principal contradictions should be grasped to choose the appropriate direction and measures for future reform.

Research group, Department of Social Affairs, Ministry of Development Research Center of State Council, P. R. China

Chief researcher: Ge Yanfeng

Authors of the report: Ge Yanfeng, Wei Jigang

Participants in discussion and revision: Ding Ningning, Gong Sen, Wang Liejun, She Yu, etc.

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