Collective pharmaceutical procurement in China may have unintended consequences in supply and pricing

The collective pharmaceutical procurement was launched in China in 2018 to reduce the prices of 
selected drugs, by pooling the demands of member cities and granting the contract to the manufacturer with the lowest bid. We found the procurement significantly decreased the prices of most 
drugs. We also identified significant price increases on some drugs, indicating that manufacturers of these 
drugs may have strong market power to manipulate prices. The “winner-takes-all” principle applied in 
the procurement may further increase the market power of winning manufacturers by expanding their 
respective market shares. They may take the advantage of the market power to increase drug prices in the 
long-run. The continuously lowering price-caps may force the losing bidders to exit the market. A careful assessment of the unintended consequences of the collective procurement is warranted.

T he collective pharmaceutical procurement was launched in China in 2018 to reduce the prices of selected drugs, by pooling the demands of member cities and granting the contract to the manufacturer with the lowest bid. We found the procurement significantly decreased the prices of most drugs. We also identified significant price increases on some drugs, indicating that manufacturers of these drugs may have strong market power to manipulate prices. The "winner-takes-all" principle applied in the procurement may further increase the market power of winning manufacturers by expanding their respective market shares. They may take the advantage of the market power to increase drug prices in the long-run. The continuously lowering price-caps may force the losing bidders to exit the market. A careful assessment of the unintended consequences of the collective procurement is warranted.
In many provinces of China, hospitals and pharmacies have been conducting the group procurement of medicines since 2010s, to increase the bargaining power on price negotiation, as recommended by the then Ministry of Health, China. Provincial health authorities organized the group procurement and adopted price-caps to regulate the negotiations. While the public criticized the price-caps for being too high, the National Healthcare Security Administration launched in December 2018 a nationwide collective pharmaceutical procurement pilot trial with lower price-caps, coded as "4 + 7", where the demands for a certain drug of member cities across China were pooled and granted to the manufacturer with the lowest bid, if it was below the price-cap [1]. The code "4 + 7" comes from the initial group of cities that include four provincial-level metropolitans (Beijing, Shanghai, Tianjin, and Chongqing) and seven major cities (Shenyang, Dalian, Xiamen, Guangzhou, Shenzhen, Chengdu, and Xi'an).
To investigate the impact of the "4 + 7" procurement, we compared the list of medicines in the procurement plan and the final contracted list to assess the completion of the procurement. We then retrieved the prices of the contracted drugs in Shanghai before and after the procurement, to compare the price change [2]. We also collected the sales volumes of the manufacturers who gained the "4 + 7" contracts before 2018 as additional background information [3]. Shanghai was chosen for this analysis because of better data transparency and availability compared with other member cities. Since the previous procurement of drugs were contracted at differ-Collective pharmaceutical procurement in China may have unintended consequences in supply and pricing ent prices in different batches before the "4 + 7" pilot, we weighted the prices of each drug per batch by the purchased amounts to construct a weighted average composite price. The composite price was then compared with the agreement price in the "4 + 7" procurement ( Table 1).
Negotiation for 25 out of 31 drugs successfully resulted in a contract price, indicating a completion rate of 81%. The demand and supply sides failed to achieve an agreement on the remaining 6 drugs (ie, Amoxicillin, Azithromycin tablet, Tramadol, Alfacalcidol, Captopril, Azithromycin injection). We were able to retrieve the prices of 24 medications among the contracted ones except Dexmedetomidine, and found that the prices of 21 medications decreased, with a range from −11.6% to −97.8%. On the contrary, the prices of three drugs (ie, Enalapril, Pemetrexed, and Flurbiprofen) increased by 150.4%, 139.4%, and 71.3%, respectively. The weighted average of price change for the 24 medications was −40.0%.
The collective medical procurement decreased the drug prices significantly on average. However, we found that, in six cases of the 24 contracted medications (ie, Entecavir, Olanzapine, Fosinopril, Lisinopril, Enalapril, Flurbiprofen), the contract was obtained by the manufacturer with biggest market share (ie, largest sales volume proportion) in a separate market before 2018 ( Table 1). In some other cases, major manufacturers (eg, Huahai, Jingxin, Beite, Hansoh) obtained several contracts for multiple products. For example, Huahai gained contracts for Irbesartan, Paroxetine, Risperidone, Irbesartan/Hydrochlorothiazide, Lisinopril, and Losartan. Therefore, the impacts of the collective procurement need to be further evalu- The "winner-takes-all" principle may increase the market power of winning manufacturers. Winners may take the advantage of the market power to increase the drug prices in the long run.