Drug Procurement Bidding

Drug companies must be able to navigate the procurement bidding process to successfully reach China’s market.by Chen Yang and Lei LiState-run, nonprofit healthcare institutions in China procure most of the drugs they use through a bidding process centralized at the provincial level. This means that healthcare institutions must purchase a large share of the drugs they use from an official list that is approved and implemented by provincial-level PRC government agencies. Other methods of drug procurement are permitted only in special cases—but centralized bidding procurement (CBP) is the most common method by which healthcare institutions purchase drugs. To be commercially successful in China, drug manufacturers must be able to navigate the CBP process.

Drug CBP in China began in 2000 with small pilot programs in four provinces. After nine years of continuous development, a stable regulatory framework has emerged. With the PRC government’s launch of long-anticipated healthcare reforms in March 2009, the CBP—an important component of the reforms—is expected to undergo further changes in the next couple of years. Companies that sell drugs in China must track changes to drug CBP regulations closely and adjust their sales approach if necessary.

How the CBP works

The operational details vary by province, but all provinces’ CBP processes follow the same general structure.

Scope of the drug CBP

Under PRC Ministry of Health (MOH) rules, all nonprofit healthcare institutions set up by governments above the county level must procure drugs through CBP. In 2008, China had 15,650 nonprofit hospitals, accounting for about 79 percent of all hospitals in China. CBP rules therefore apply to the vast majority of large and medium-sized hospitals in China.

As a general rule, healthcare institutions subject to the CBP rules must procure all drugs that they use through the CBP regime, except for narcotic, psychotropic, and radioactive drugs, as well as certain types of traditional Chinese medicines. For this purpose, each province in China has formulated its own CBP drug list.

In addition, MOH sets minimum thresholds on the amounts of drugs that healthcare institutions must purchase through the drug CBP. Healthcare institutions must submit a plan that lists the quantities of drugs they will procure through CBP. The quantity of each drug must be at least 80 percent of the actual quantity that the healthcare institution used in the previous year. This requirement ensures that most drugs used by covered healthcare institutions are purchased through CBP.

Drug CBP players

The drug CBP system involves three players: tenderee, bidder, and procurement agent. The tenderee is the healthcare institution that procures drugs through CBP. Healthcare institutions may procure drugs through the drug CBP process for the province they are located in or through other provinces’ CBP regimes. The bidder is the drug supplier—typically a drug manufacturer—that submits bids to the tenderee. Before 2009, drug manufacturers and non-manufacturer distributors could qualify as bidders. In January 2009, MOH and several other agencies jointly issued Opinions on Further Regulating Drug Centralized Bidding Procurement by Healthcare Institutions, which aimed to reduce distribution costs of drugs by clarifying that only manufacturers would qualify as distributors. In practice, however, non-manufacturers have found ways to avoid this restriction and continue to submit bids.

In most cases, a third-party, domestic procurement agent runs the bidding process. MOH and the State Food and Drug Administration (SFDA) require procurement agents to meet a series of qualifications before they are certified to provide agency services in drug CBP. Many provincial health authorities have set up their own firms to procure drugs.

Under China’s healthcare reform, MOH and SFDA plan to replace the procurement-agent system with a government-run, online CBP transaction platform so that healthcare institutions and drug manufacturers may enter into CBP purchase contracts without using procurement agents or paying service fees. This will likely streamline the process further.

Drug CBP procedures

The drug CBP system allows for different bidding models. Competitive public bidding is required for drugs that are used widely in clinical treatment and for those that are procured in large quantities. This system may be supplemented by centralized price negotiation for other drugs, if certain conditions are met.

Competitive public bidding in drug CBP follows the procedures in a typical competitive bidding process, which includes the bid announcement, submission, and evaluation; determination of winning bid; and signing of a purchase contract.

Key issues in drug CBP

Criteria for bid evaluation

An expert panel set up by drug procurers evaluates bids submitted by drug manufacturers. Experts on the panel, the size of which may vary, are chosen at random from a database provided by local health authorities. To be chosen, an expert must specialize in relevant areas, such as pharmacology and clinical study.

When evaluating bids, the experts focus on drug quality and competitiveness of the offered price. In most cases, the bid evaluation process is conducted in two phases:

• Quantitative evaluation  The experts on the evaluation panel grade each bid and select three to five bids that will move on to the next phase. Grading is based on several factors, such as drug quality, price, after-sales service, and manufacturer reputation. Drug procurers may make minor adjustments to the formula the panel uses for calculation of the factors to make it more suitable to their needs as long as the changes are consistent with MOH rules.
• Final selection  In the second phase, experts consider the patterns of drug use, brand recognition, and quality-price ratio and vote to select a final winning bid.

Price

Before the winning bid becomes binding, health authorities must review and ratify the price to ensure compliance with government price-control rules. The National Development and Reform Commission and its local-level branches have established guidance retail prices for more than 2,400 drugs, including those listed in the Basic Reimbursable Drug List and those protected by patents, and these price limits cover most drugs subject to the CBP. The bid-winning price plus a government-approved retail price markup may not exceed the allowed guidance retail price. Retail price markup rates for drugs are determined by provincial pricing authorities. In general, the lower the drug price is, the higher the markup rate (see Table 1).

Purchase contract

After the winning bid is selected, the procurement agent will notify the drug manufacturer that has won the bid. Healthcare institutions and the drug manufacturer shall enter into legally binding drug purchase contracts within 30 days after the notice is issued. Purchase contracts must follow an MOH-approved template. According to the template, purchase contracts must be valid for at least one year, and healthcare institutions must pay drug manufacturers within 60 days after receiving the drugs from the supplier.

The future of drug CBP

China introduced the drug CBP to increase the transparency and efficiency of drug procurement and reduce drug prices. Numerous problems still exist, however, and local-level implementation is inconsistent and varies from province to province.

Drug procurement is an important topic in China’s healthcare reform. Many changes to the procurement process have been proposed, including the rollout of a nonprofit, government-run online bidding platform that will streamline the distribution process, improvements to bid-evaluation criteria, and expansion of the CBP catalogue. Other key areas in China’s healthcare system, including drug pricing, the National Essential Drug List, and the public hospital system are expected to undergo changes that may significantly affect drug procurement. Companies that sell drugs in China should closely monitor such changes.

As China’s healthcare system changes, drug companies must evaluate and adjust their marketing strategies and practices in China to ensure compliance with regulatory requirements and maximize the effectiveness of their marketing activities. First, they must evaluate how the new changes will affect the supply, procurement, prescription, and consumption of drug products they sell and decide which drugs they want to introduce to the market. Second, drug companies need to formulate a flexible drug-pricing strategy so they can participate in the drug CBP while maintaining reasonable profit margins.

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China’s Drug Bidding Framework

China’s drug bidding process is regulated by the PRC Tendering and Bidding Law, which took effect January 1, 2000. The implementation details are laid out in numerous rules made by state- and provincial-level regulators.

From 2001 to 2004, PRC regulatory agencies released a series of drug centralized bidding process (CBP) rules. The Working Procedures on Drug Centralized Bidding Procurement by Healthcare Institutions, issued jointly by six agencies in November 2001, lay out the roles of various government agencies involved in drug CBP regulation. Based on the working procedures, several other agency rules and administrative notices have been released (see Table 2). Taken together, these documents outline the drug CBP responsibilities of various PRC agencies:

• The Ministry of Health (MOH) leads administration of drug CBP in China and supervises healthcare institution drug CBP activities, in collaboration with the State Food and Drug Administration.
• The National Development and Reform Commission administers drug CBP pricing-related matters.
• The State Food and Drug Administration supervises quality control of the drugs procured through CBP, examines and approves the qualifications of drug manufacturers that submit bids in the CBP, and jointly supervises procurement agents with MOH.
• The State Administration of Industry and Commerce oversees drug CBP to prevent unfair market competition, such as commercial bribery and contract fraud.

—Chen Yang and Lei Li
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[author] Chen Yang ([email protected]) is partner at Sidley Austin LLP’s Beijing office, where she heads the firm’s China Life Sciences Practice. Lei Li ([email protected]) is associate at Sidley Austin LLP’s New York office and previously worked at the PRC Ministry of Commerce. [/author]