Pharmaceutical companies are deeply trapped in the “second-round price negotiations” dilemma, with traditional Chinese medicines becoming a particularly hard-hit area.

　　During the "Two Sessions," a piece of news announced by the Ningbo Municipal Health and Family Planning Commission has sparked concern within the industry: Ningbo has completed joint price-capping procurement for traditional Chinese medicines, achieving an average price reduction of 15.5% based on the winning bid prices at the provincial level.

　　Ningbo is a national pilot city for public hospital reform and has been designated by the provincial government as a pilot city for centralized drug procurement. Starting this year, it has begun implementing joint capped-price procurement for traditional Chinese medicines. The “Ningbo Model” will undoubtedly guide the direction of healthcare reform nationwide.

　　However, what has remained largely unknown to the outside world is that the winning bid rate among participating companies was less than 20%. Most of the drugs that failed to win bids had already approached their cost price and were therefore unable to cut prices further, forcing them to withdraw from the bidding process.

　　Similar to Ningbo, last year the Bengbu Municipal Health and Family Planning Commission, in a centralized drug procurement tender worth up to 100.4 million yuan, required a 25% price reduction per item based on volume. As a result, eight pharmaceutical companies—including Baiyunshan—were banned by 94 hospitals in Bengbu for failing to meet the required reduction threshold.

　　Ningbo and Bengbu are implementing what’s known as “secondary price negotiation.” This refers to medical institutions, building on the results of provincial-level drug bidding, conducting a “second round of negotiations” with suppliers at the city level. Through this “secondary price negotiation,” they aim to drive down actual procurement prices.

　　As the initiator of the “second-round price negotiations,” the Bengbu Municipal Health and Family Planning Commission told media outlets—including 21st Century Business Herald—that the magnitude of the price reductions was the result of joint expert deliberations and remained entirely within the affordable range for pharmaceutical companies. “Before issuing the procurement announcement, the procurement consortium conducted expert reviews at both the provincial and municipal levels, widely soliciting input from representatives of medical institutions, representatives of pharmaceutical manufacturers and distributors, deputies to the People’s Congress, and members of the Chinese People’s Political Consultative Conference. Based on drug-use data from recent years, we ultimately determined that the prices of 30 drug varieties could be reduced by 25%,” said Liu Xuejie, Director of the Bengbu Municipal Health and Family Planning Commission. She added that to break the price alliances among pharmaceutical companies and prevent the Bengbu market from becoming an “orphaned” one, it is essential to establish a nationwide coordinated mechanism to jointly curb excessively high drug prices and truly promote a return to rational pricing.

　　On this issue, Lei Jufang, a deputy to the National People's Congress and Chairwoman of Qizheng Tibetan Medicine, directly pointed out that current high drug prices are being misinterpreted by the public and the government and are being outright demonized.

　　“Many domestic pharmaceutical companies already offer drugs at very low prices. Now, with this ‘second round of price negotiations’ directly slashing their profits, how can these companies survive—let alone afford to set aside funds for R&D? The drugs that truly command high prices are imported ones. Although these imported drugs incur substantial research costs, can their prices really be brought down to the same level as those in Hong Kong? Can we narrow the price gap between Hong Kong and mainland China—which currently stands at several times or even more than ten times—so that it’s no longer so stark?” Lei Jufang directly focused her criticism on expensive imported drugs.

　　“Second-round price negotiations” are expected to become industry standard.

　　Previously, the General Office of the State Council issued the “Guiding Opinions on Improving the Centralized Procurement of Drugs in Public Hospitals,” which explicitly stated that “in pilot cities undergoing public hospital reform, municipalities are permitted to independently procure drugs through provincial-level centralized drug procurement platforms.” On January 15, the National Health and Family Planning Commission issued a document announcing an intensified effort to reform the healthcare system, expanding the number of pilot cities to 200. This means that these pilot cities will be able to conduct independent bidding and also engage in “secondary price negotiations.”

　　This means that “secondary price negotiations” have been officially permitted by policy and are gradually becoming the new normal in the industry.

　　However, “secondary price negotiations” have long been a source of ongoing controversy within the industry. While proponents argue that secondary price negotiations can eliminate inflated drug prices, narrow down and ultimately eliminate room for kickbacks, and sever the chain of vested interests, opponents contend that such negotiations raise the compensation levels for medical institutions, which runs counter to basic commercial principles underlying tendering and bidding. The “lowest-price-only” approach in tendering is not advisable, and “secondary price negotiations” imply that the tendering and procurement system has, to some extent, been undermined. As a result, companies will need to devote more effort to negotiating with hospitals or medical consortia, and their previous pricing structures could easily be disrupted.

　　According to reports, in regions such as Ningbo, Fujian, and Anhui, “secondary price negotiations” have already forced many high-volume, clinically effective, and high-quality pharmaceutical products to withdraw from the market. Take the recent “secondary price negotiation” for traditional Chinese medicines in Ningbo as an example: Since bidders were required to further reduce prices by 15% on top of the winning bid prices set by Zhejiang Province, the tender catalog covered 1,263 drug varieties. In the end, only 244 varieties (337 specifications) won the bids, resulting in a winning bid rate of less than 20%. Most of the drugs that failed to win bids had already approached their cost price and could no longer be discounted further, thus being forced out of the market.

　　“Threatening drug safety”

　　Enterprises participating in the second round of price negotiations must offer at least a 20% to 30% discount. Combined with the price reductions from previous rounds, the winning bid prices for these enterprises could drop by as much as 60%. As a result, many companies would rather withdraw from the bidding process altogether. “If we were to launch a tender at a low price in one particular region,” a chairman of a pharmaceutical company that withdrew from a tender in a certain city admitted frankly to a reporter from the 21st Century Business Herald, “it would mean that we’d have to submit bids at that same low price in all future tenders across the country—something our companies simply couldn’t afford.”

　　Yan Xijun, a deputy to the National People's Congress and Chairman of the Board of Directors of Tasly Group, told a reporter from the 21st Century Business Herald that “secondary price negotiations” in centralized drug procurement—or “secondary price negotiations” disguised as volume-based procurement—have forced many high-volume, clinically effective, and high-quality drugs to withdraw from the market, seriously jeopardizing public access to safe medications.

　　Shi Lichen, head of the Beijing Dingchen Pharmaceutical Management Consulting Center, previously told a reporter from the 21st Century Business Herald that if pharmaceutical companies are forced to cut prices indiscriminately, some may neglect product quality, and many others may simply stop producing low-priced drugs. This is one of the key reasons why many low-priced medications have disappeared from the market. Shi Lichen cited an example: Previously, a common medication—100 tablets per bottle—could be purchased for only 1 to 2 yuan. However, after being required to lower prices further, companies found themselves unable to turn a profit, so they changed the packaging. Now, the same medication sells for 7 to 8 yuan per box, with each box containing 20 tablets. Although there is still room for price reductions, consumers are actually bearing a greater financial burden.

　　Regarding the issue of drug price reductions, Lei Jufang frankly told a reporter from the 21st Century Business Herald that pharmaceutical companies and the entire pharmaceutical industry are currently misunderstood by both the public and the government, leading to an outright demonization of drug prices. “The drugs that truly have high prices are those imported ones—often costing tens of thousands or even over a hundred thousand yuan. These drugs drive up overall healthcare costs. Although they involve substantial R&D investments, their profits are also extraordinarily high. It’s precisely these imported drugs that should see their prices reduced—if not brought down to the same level as prices in their home countries, at least to match Hong Kong’s drug prices. On the other hand, some affordable, high-quality domestically produced drugs keep seeing their prices slashed again and again, until these inexpensive yet effective medicines eventually disappear from the market.”

　　On the evening of March 8, a chief physician from a top-tier Grade-III hospital—who had just come off the operating table—complained to a reporter from 21st Century Business Herald that nowadays, not only drugs but even surgical sutures are subject to secondary price negotiations, and their quality is deteriorating steadily. “Nowadays, with ‘secondary price negotiations’ bundled into one package, all costs are included in the surgery fee, yet hospitals aren’t allowed to charge extra for anything. So the only way left is to cut costs. Previously, sutures were strong, smooth, and didn’t damage tissues when threaded through; now, the surgical sutures we’re using are domestically produced and of very poor quality. We have to be extremely careful during surgeries, afraid they might break.”

　　Traditional Chinese medicine products have become a major disaster area.

　　Geng Funeng, a deputy to the National People's Congress and Chairman of Haoyisheng Pharmaceutical Group, pointed out that currently many hospitals are excluding traditional Chinese medicine (TCM) from their bidding processes and refraining from using it altogether, effectively stifling TCM by setting up artificial barriers. In Lei Jufang’s view, this is due to misunderstandings about TCM among medical institutions and other stakeholders. “Currently, there’s a widespread perception that TCM is merely an auxiliary treatment—of little help in addressing patients’ clinical issues—and that it consumes hospital medical insurance resources, thus necessitating a substantial reduction in the number of TCM products listed on hospital formularies.”

　　The reason for this misunderstanding is that, in the pilot cities for the national healthcare reform, there is a shortage of expert resources, making it impossible to assemble experienced specialists to conduct scientific assessments of clinical value and cost-effectiveness of pharmaceuticals. As a result, traditional Chinese medicine has been treated in a simplistic and crude manner.

　　Lei Jufang believes that this practice is extremely detrimental to the development of traditional Chinese medicine (TCM) and will encourage enterprises to focus solely on cost-driven strategies. She suggests abolishing the practice of using pilot cities’ volume-based procurement to eliminate proprietary Chinese medicines, and instead establishing a provincial-level mechanism for clinical expert review of the proprietary Chinese medicine catalog. She also recommends maintaining the 15% hospital markup on proprietary Chinese medicines and providing support for the development of the TCM industry. At the same time, she proposes that the provincial health and family planning commission take the lead in organizing provincial experts to conduct clinical pharmacoeconomic evaluations of the proprietary Chinese medicine catalog, refine the catalog’s selection criteria, and phase out products with poor clinical cost-effectiveness. Only by ensuring that only those products with proven efficacy and high quality have a place in clinical practice can we truly promote innovation among Chinese medicine enterprises.

　　“The centralized drug procurement system, while helping to ease the financial burden of medication for the public, must also prevent situations where excessively low costs compromise the safety of medications for the people. We should promptly abolish the currently prevalent ‘secondary price negotiations’ and adopt a unified provincial-level bidding and procurement system. The government should also increase its investment in healthcare to make up for the funding shortfall hospitals face after implementing the zero-markup policy on drugs,” Yan Xijun told reporters from the 21st Century Business Herald.

　　Reporting media: 21st Century Business Herald

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