PharmacoEconomics (2014) 32:293–303 DOI 10.1007/s40273-013-0099-5

ORIGINAL RESEARCH ARTICLE

Pharmaceutical Pricing: An Empirical Study of Market Competition in Chinese Hospitals Jing Wu • Judy Xu • Gordon Liu • Jiuhong Wu

Published online: 5 November 2013  Springer International Publishing Switzerland 2013

Abstract Background High pharmaceutical prices and over-prescribing of high-priced pharmaceuticals in Chinese hospitals has long been criticized. Although policy makers have tried to address these issues, they have not yet found an effective balance between government regulation and market forces. Objective Our objective was to explore the impact of market competition on pharmaceutical pricing under Chinese government regulation. Methods Data from 11 public tertiary hospitals in three cities in China from 2002 to 2005 were used to explore the effect of generic and therapeutic competition on prices of antibiotics and cardiovascular products. A quasi-hedonic regression model was employed to estimate the impact of competition. The inputs to our model were specific attributes of the products and manufacturers, with the exception of competition variables. Results Our results suggest that pharmaceutical prices are inversely related to the number of generic and therapeutic competitors, but positively related to the number of therapeutic classes. In addition, the product prices of leading

J. Wu (&) School of Pharmaceutical Science and Technology, Tianjin University, Tianjin, China e-mail: [email protected] J. Xu School of Public Administration, Southwestern University of Finance and Economics, Chengdu, China G. Liu National School of Development, Peking University, Beijing, China J. Wu Department of Pharmacy, 306 Hospital of PLA, Beijing, China

local manufacturers are not only significantly lower than those of global manufacturers, but are also lower than their non-leading counterparts when other product attributes are controlled for. Conclusion Under the highly price-regulated market in China, competition from generic and therapeutic competitors did decrease pharmaceutical prices. Further research is needed to explore whether this competition increases consumer welfare in China’s healthcare setting. Key Points for Decision Makers • Market competition still plays an important role in determination of regulated pharmaceutical prices in China. • A certain level of distortion resulting from market failure and government intervention may be reflected through a positive relationship between pharmaceutical price and the number of therapeutic classes. • Local leading manufacturers are at a competitive disadvantage compared with international and local non-leading manufacturers in China’s pharmaceutical market.

1 Introduction The Chinese healthcare system is facing many challenges: high healthcare costs, lack of access to services, and disparities in the level of care [1–3]. High pharmaceutical prices have attracted great attention from the public and government. In particular, hospital pharmaceutical prices

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have long been criticized for being much higher than prices for the same products sold at most local non-hospital pharmacies. Although policy makers have worked hard to correct the disproportionate hospital pharmaceutical prices, they have not yet found an effective balance between government regulation and market forces [4]. Moreover, few empirical studies on pharmaceutical price competition are available in China. To address this gap in the literature, we analysed the impact of competition under current government regulation in China’s pharmaceutical market, using hospital bidding price data from three cities from 2002 through 2005 in a quasi-hedonic price model. We addressed the following questions. First, under existing government intervention, does pharmaceutical price competition exist in hospitals? Second, if competition does exist, what are its features? Third, how do government policies and regulations influence the market?

2 Overview of the China’s Pharmaceutical System 2.1 Pharmaceutical Care Spending Pharmaceutical care is a major component of medical care in China [5]. As of 2011, pharmaceuticals accounted for more than 50 % of outpatient expenditure and more than 40 % of inpatient expenditure [6]. Thus, pharmaceutical policy looms large in any government effort to control health spending and keep healthcare affordable. 2.2 Price Regulations The National Development and Reform Commission (NDRC, or ‘the Commission’)1 sets maximum retail prices—that is, price caps—for drugs on the Urban Employee Basic Medical Insurance (UEBMI) reimbursement drug list.2 For drugs not covered by UEBMI, prices are determined by market forces. The urban reimbursement drug list covers about 20 % of all products by quantity on the market and 60 % by sales [7]. The maximum retail price is based on a mark-up of the average acquisition cost declared by manufacturers. However, 1

The NDRC (known as the National Development and Planning Commission [NDPC] before 2003) has been responsible for these price controls since 1997. 2 UEBMI is one of China’s three basic government-run medical insurance systems. It is designed to cover all urban employees—220 million as of 2007. In China’s universal basic medical insurance system, the other two government-run medical insurances are Urban Residence Basic Medical Insurance (URBMI) and New Rural Cooperative Medical Insurance (NRCMI). The reimbursement drug list for URBMI is almost the same as that of UEBMI, but with paediatric medicines added. To date, there is no national reimbursement drug list for NRCMI and every province develops the drug list with reference to that of UEBMI.

J. Wu et al.

manufacturers may apply for independent pricing (or differential pricing)3 if they can present evidence that their product is of a higher standard or efficacy that would justify a higher price. This is easier for the original manufacturers, which are largely global, to document than it is for their local counterparts. As a result, most of the global pharmaceutical companies doing business in China enjoy the higher profit margins that independent pricing allows [8]. Another task of the Commission is to reduce the prices of drugs overall. The Commission has enforced significant price reductions 30 times since 1997; these have affected almost all of the drugs on the urban reimbursement list.4 In each round, the reductions have generally been about 15–20 %, but the prices of some drugs have been cut by 60 % [9]. 2.3 Pharmaceutical Manufacturers and Products Local, foreign and joint-venture manufacturers sell more than 50,000 pharmaceutical products in China [7]. The number of local manufacturers increased from 3,280 in 1998 to 4,700 in 2008 [10]. Most of these companies are small, and offer duplicate products of inconsistent quality [11]. These companies tend to face heavy price competition, and therefore their profit margins and market shares are low. One study showed that more than 70 % of these companies had annual sales of less than 50 million Chinese Yuan (CNY) (at the time of writing, $US1 & CNY6.2) [12]. Patent protection for pharmaceuticals became law in China in 1993. Currently, it is estimated that 97 % of pharmaceutical drugs on the market are generics.5 As of 2005, total investment in research and development accounted for about 1.02 % of total sales [13, 14]. The State Food and Drug Administration is in charge of registering new drugs; however, its drug registration is less stringent than the international standards observed in well developed markets [11, 15]. Drugs with changes in dosage, administration route, preparation or packaging can obtain new drug licences.6 In addition, the Administration does 3

Innovation-like medicines were given independent pricing power in 2000 in order to encourage research and development. That is, manufacturers that market medicines with higher efficacy and safety or with shorter treatment cycles and lower overall treatment expenses than other medicines with the same chemical molecule can apply for higher regulated prices. 4 These 30 rounds of price cuts involved 2,425 different drugs and a total reduction of nearly CNY40 billion ($US5.8 billion). 5 All generic drugs are sold under their brand names; consumers cannot distinguish between branded products and unbranded generic versions. 6 Roughly speaking, clinical trial evidence is only needed when changing a drug method of administration to injection. Corruption was also deemed a major issue contributing to looser registration. As a result, the former head of the SFDA was convicted of corruption and executed in 2007.

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not require locally produced generics to be the bio-equivalents of their originals in order to be approved [8]. As a result, local products are generally considered to have lower safety or efficacy than the original globally produced product. 2.4 Distribution and Prescription of Pharmaceutical Products China’s pharmaceutical distribution channel has multiple layers and many distributors. As of 2007, a total of 13,000 wholesale pharmaceutical enterprises, 341,000 retail and chain store enterprises and 554,000 rural supply outlets were in business [16]. Between six and nine supply-chain links exist from production to final sales to patients [15]. This complex distribution system, along with a lack of effective regulations, has been criticized as a contributor to China’s high retail drug prices [17, 18]. Medical institutions (tertiary, secondary and primary hospitals) are the primary distribution channel of pharmaceutical products, accounting for about 80 % of total sales. Stand-alone pharmacy stores account for the remaining 20 % of sales [13, 19]. The misuse of prescriptions by medical institutions is a serious problem. Government subsidies for healthcare are insufficient to meet operational expenses, so public providers turn to drug sales to generate income [1, 2]. Medical providers are allowed to apply a 15 % mark-up on pharmaceutical sales, which has resulted in over-prescribing of drugs, especially those with high prices, in order to subsidize medical services [20]. Kickbacks to physicians also act as an incentive to over-prescribe. In general, the higher the price of a product, the greater the kickback paid by the drug manufacturer to the prescriber [3]. 2.5 Institutional Bidding for Medications In the late 1990s, local governments led a major effort to regulate hospital drug procurement by introducing bidding and group procurement policies. This policy became standard in China in 2004; since then, local governments have explored various methods of group procurement, including online purchasing. Under this policy, all non-profit hospitals must purchase their drug products through a bidding system. Although these systems vary between cities, the policies that guide them are similar. The criteria for eligibility to bid are announced, and all manufacturers and distributors that meet these requirements may participate. Most products7 draw bids from three to six firms; however, some old therapies attract bids from as many as 30. Evaluation of the 7

A product is defined by its compound and formulation.

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bids usually begins with classification of the drugs according to three administrative classification levels: patented products, products entitled to independent pricing, and generic products that meet Good Manufacturing Practice (GMP) standards.8 Expert evaluators select at least two, and no more than seven, products9 per active ingredient at each of these three classification levels. If fewer than three firms bid on a drug, or if a drug is in short supply, the evaluators may negotiate both price and quantity with the bidders. The main purpose of bidding systems and group procurement is to reduce drug prices. Unfortunately, the systems have suffered from misconduct such as commercial bribery and protection of local manufacturers [21]. In addition, local government committees recruit key members who are both experts and managers in local hospitals to implement the bidding tasks [22]. As a result, the bidding prices of many drugs that hospitals stock are higher than wholesale or even market prices of the same drugs stocked in stand-alone pharmacies [23, 24].

3 Literature Review In developed countries, pharmaceutical price competition has been thoroughly studied by researchers and policy makers. However, empirical studies of price competition are rare in developing countries, including China. Many studies based on data collected in the USA find that the price of the original drug remains unchanged or even rises when generic versions enter the market. However, the price of generic drugs decreases as the number of manufacturers bringing the product to market increases [25–27]. In addition, the estimated price elasticity and cross-price elasticity of branded and generic versions are great, indicating the presence of a strong substitution effect among pharmaceutical drugs [28, 29]. In terms of research framework, some studies have adopted a quasi-hedonic price approach to comparing price differences in the pharmaceutical industry [30–32]. For example, Danzon and Chao [30] studied the effect of government regulation on pharmaceutical prices in seven countries. They found that generic competition lowered prices in unregulated or less regulated countries such as the USA, the UK, Canada and Germany. They also found that generic competition was ineffective at lowing prices in 8

These three administrative classification levels are in a hierarchical order and each submitted drug is divided into one of them in our data analysis. 9 In general, the number of winning bids depends on the number of competitors. For example, evaluators might approve bids from five of ten competitors, from five of eight competitors, three of five competitors, or two of three competitors.

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countries with strict price regulation, such as France, Italy and Japan. However, evidence of the price consequences of therapeutic competition—that is, competition between products of similar molecules in the same class—is less conclusive. It is highlighted that there is a bias owing to endogeneity associated with entry decisions, as manufacturers would prefer to enter therapeutic fields with higher value (higher prices). Wang [8] conducted one of the few empirical studies on pharmaceutical competition in developing countries, and used the model by Danzon and Chao [30] to look at price competition between high-quality global drugs and lowquality local drugs in China. In this study, Wang found evidence of competition among local generic drugs. However, this competition had no effect on the price of the global drugs. Instead, therapeutic competition among global drugs exists with little effect on the prices of local generics. The results indicate that competition in China’s pharmaceutical market differs in many ways from competition in developed countries.

4 Data and Methods 4.1 Data Source Our data for the current study were obtained from, and based on the historical bidding records of, Hai Hong, one of the top pharmaceutical companies bidding in China. The dataset contains records of Hai Hong’s successful bids of public hospitals in three cities from January 2002 through December 2005. The three cities, Beijing, Kunming and Foshan, have distinct economies and geographic locations. Beijing is a city with district-wide authority in the north, Kunming is a provincial capital in the south, and Foshan is a well developed city in the east. The data included the wholesale hospital bidding price in standard units, product name, manufacturer name, molecule, therapeutic class, strength and pack size. Our study focused on antibiotics and cardiovascular drugs, as they are widely prescribed in hospitals and are the top two highest selling drug categories in China. Their combined sales revenues represent 32 % of the total revenues in our dataset. All categories in antibiotics and cardiovascular products for each city are included in our study. We limited our data to tertiary hospitals, the prescribing patterns and market competition of which are quite different from those of lower ranked hospitals and medical institutions.10 The sample set covers about one-sixth of the 10

In fact, primary and secondary hospitals during the study period did not attend the drug bidding and group procurement process in Beijing. Therefore, we could not obtain a representative sample of primary and secondary hospitals for the three cities.

J. Wu et al. Table 1 Sample size and distribution by cities Total Number of hospitals

Beijing

Kunming

Foshan

11

5

4

2

Chemical identity (molecule)

160

124

145

141

Generic derivative

335

210

273

269

Products

1,980

715

1,050

898

Observations

8,734

2,453

3,817

2,464

tertiary hospital market in Beijing and all tertiary hospitals in the other two cities.11 After we deleted two quarterly hospital bidding records with missing data (price equals zero), our final sample contained 8,734 records of 160 molecules, with 1,980 drugs from 620 manufacturers in 11 tertiary hospitals (Table 1). The numbers of chemical identities and generic derivatives12 are 160 and 335, respectively. 4.2 The Study’s Variables As the defined daily dose (DDD) was not available in our data, the price in the dataset is reported as the standard unit price for a prescription—for example, the price per tablet, per capsule, per pellet, or per litre. To normalize the price distribution, we used the log transform of price.13 Three levels of substitute competition are defined and calculated (Appendices 1 and 2). The strongest substitute competition is called generic-1 (N Generic-1) competition, defined as the number of generic products with the same chemical identity (molecule) and the same derivative. The products vary by preparation, pack size, strength and manufacturer. The second substitute competition is generic-2, where the substitutes have the same chemical identity (molecule), with different derivatives. Even though generic-1 and generic-2 products have the same names, generic-2 products are weaker substitutes. For generic-2 products, we constructed two variables to identify the competition: the number of generic derivatives of each molecule (NC Generic-2) and the average number of products per substitute derivative (AN Generic-2).

11

Beijing has six bidding groups, each group covering populations of similar size. Hence, our sample covered one-sixth of Beijing’s tertiary market. 12 Generic derivatives are derivatives that have the same molecules but in different solutions. For example, levofloxacin lactate, levofloxacin meslylate and levofloxacin hydrochloride are regarded as generic derivatives. 13 First, models using log(y) as the dependent variable often satisfy the classical linear model (CLM) assumptions more closely than models using the level of y. Second, taking the log in our model can mitigate the problem of conditional distributions of y that are skewed.

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The least competitive level is the therapeutic substitute competition, where substitutes within the same therapeutic class have different chemical identities. For this level, we constructed therapeutic substitute competitors, using the World Health Organization Anatomical Therapeutic Chemical (ATC) classification system, which groups drugs according to the organ or system on which they act and their chemical, pharmacological and therapeutic properties. As with generic-2, we again constructed two variables to identify the competition: the number of derivatives in the ATC5 therapeutic category (NC Therapeutic) and the average number of substitute products in a different generic derivative class but with the same ATC3 category (AN Therapeutic). Because of market segmentation, we computed the number of competitors for each city and each year. We used the city dummy variables to identify the submarket. The dummies may also reflect differences in the hospital bidding policies of each city, which influence bidding prices. We used log transformations for substitute competition variables, so the coefficient can be regarded as elasticity, representing a percentage-change effect. We used the variables to proxy the attributes of products and manufacturers to reflect cost, value and marketing strategy. First, three-digit ATC codes were used to identify the therapeutic categories. There are 20 categorical variables for each therapeutic class, 12 categories for antibiotics and eight categories for cardiovascular products. Second, we used the weight or volume of the standard unit (dosage) as a proxy for the strength of a drug’s active ingredient, which is assumed to be positively related to the therapeutic effect of each product. Third, we used a product’s preparation to reflect cost and value. We defined this variable in terms of the following five categories: oral normal-release form, sustainedrelease form, injection powder form, injection solution form and other forms. Fourth, we used pack size, defined as the average number of standard units per pack, to reflect the competition by volume discount. Pack size is expected to be inversely related to price, because the higher the volume sold, the lower the unit price. Fifth, we generated a vector to identify manufacturers by type. They are foreign, joint venture, local entities among the top 100 and local entities that are not among the top 100 [33]. The vector is used to proxy competitive advantage or disadvantage owing to national price controls and hospital bidding policies. It is also employed to proxy brand or generic information, as most of the foreign and joint venture products are branded and most of the local entity drugs are generic. Year dummies were controlled to account for certain policy or economic changes over time.

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4.3 Empirical Method A standard hedonic model of prices is one that deconstructs the price of an item into separate components that determine the price [34, 35]. We employed a quasi-hedonic model in our study to estimate implicit prices of pharmaceutical attributes for two reasons. First, a pharmaceutical market is imperfectly competitive because it is influenced by patents, insurance, imperfect information and other factors. Our quasi-hedonic regression coefficients are still implicit prices but cannot be interpreted as marginal values (costs) to consumers (producers). Second, the measures of competition, which would not belong in a pure hedonic model, were included in the model to test its influence in an imperfect market [31]. Hence, the major attributes of product substitution, as well as other attributes of products and manufacturers, were the focus of this study. The implicit bidding prices (P) of the pharmaceutical product can be expressed as: P ¼ f ðZ; SÞ where Z is the attributes of product (including the attributes of manufacturer) and S the attributes of substitute competition. Two specifications of the reduced-form regression to measure the contribution of each attribute to prices are given below: LnPijk ¼ b0 þ b1 LnZijk þ b2 LnðNG1Þj þ b3 LnðNCG2Þk þ b4 LnðANG2Þk þ b5 V þ b6 Y þ lijk

ð1Þ

where i indexes specific products, j indexes generic molecule derivative and k indexes generic molecule. Pijk is the product’s price per unit; (NG1)j is the number of generic derivative competitors in a molecule derivative j; (NCG2)k is the number of generic derivative competitors in molecule k; (ANG2)k is the average number of competitors per derivative for other M - 1 derivatives in category k, excluding derivative j. Zijk is the vector of product attributes, including quality and manufacturers’ characteristics. V is a vector of categorical variables denoting therapeutic class, Y is a vector of year dummy, and lijk is the random error term. In order to include broader substitute classes as therapeutic substitutes, we used level 5 of the ATC classification system, which codes for chemical substance, instead of generic molecule class. We re-estimated the model by recoding the therapeutic substitute classes (NCG2)k and (ANG2)k into (NCT)L and (ANT)L. LnPijl ¼ b0 þ b1 LnZijl þ b2 LnðNG1Þj þ b3 LnðNCTÞLk þ b4 LnðANTÞLj þ b5 V þ b6 Y þ lijl

ð2Þ

where Lj indexes the specific therapeutic category and generic molecule. (NCT)Lj is the number of molecule

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derivatives in therapeutic category L and generic molecule k. (ANT)Lj is the mean number of competitors per generic molecule for the j - 1 other molecules in category Lj, excluding molecule j and all other L - 1 therapeutic categories. Our measures of competition may be endogenous and thus underestimate the competition effect. Since Chinese hospitals (retailers) prefer high-priced drugs due to the 15 % mark-up policy, pharmaceutical manufacturers might also prefer to develop molecules to enter the highly valued therapeutic markets with higher prices.

J. Wu et al. Table 2 Descriptive statistics of key variables (N = 8,734) Variable

Mean (SE)

Min

Max

Price (CNY)a

23.9 (44.5)

0.007

931.9

Antibiotics

32.5 (53.1)

0.019

931.9

Cardiovascular

14.2 (29.2)

0.007

337

b

Substitute competition N Generic-1

3.3 (3.7)

0

21

NC Generic-2

2.7 (3.4)

0

16

AN Generic-2

1.6 (1.9)

0

17

NC Therapeutic

16.4 (9.1)

0

36

AN Therapeutic

2.5 (0.9)

0

10

Manufacturer attributes

5 Results

Foreign Joint venture

17.6 % 32.9 %

0 0

1 1

Table 2 presents the full sample means and proportions of the key explanatory variables used in the study. The product price averages CNY24 per unit (tablet, capsule, pellet or litre) but has an enormous range—from less than 1 cent to more than CNY932 per unit. The average number of competitors for each generic derivative is about 3.3, with a minimum of 0 and a maximum of 21 competitors. The average number of therapeutic substitute classes is 2.7 in model 1 and 16.4 in model 2. Similarly, the mean of the average number of therapeutic substitute competitors is 1.6 as classified in model 1 and 2.5 as classified in model 2. Of the total of 8,734 observations, about one-third are the products of joint venture manufacturers, 30 % are the products of local manufacturers that are not among the top 100 sellers, 19 % are the products of local manufacturers that are among the top 100, and 18 % are imported by foreign manufacturers. Figure 1 compares prices of products sold from 2002 through 2005 in terms of the type of company that manufactured them. The prices of products imported to China by foreign manufacturers are much higher than the prices of products from the other types of manufacturers. In all but one category, the price slightly increased over time. The greatest change is seen in the price of products from local manufacturers that are not on the top 100 list. Table 3 displays the regression results of models 1 and 2. The coefficients of derivative competition (NG1) in models 1 and 2 are both negative (-0.019 and -0.018, respectively) and statistically significant (P \ 0.001). This implies that derivative competition reduces prices. Consistently, the coefficients of average substitute derivatives (ANG2) and average substitute generic molecules (ANT) are also negative (-0.162 and -0.183, respectively) and statistically significant (P \ 0.001). However, the coefficient of the number of generic molecule derivatives (NCG2) (0.187) and the number of generic molecules in the ATC level 5 therapeutic class (NCT) (0.209) are all positive and statistically significant (P B 0.001). These

Local top 100

19.4 %

0

1

Local non-top 100

30.1 %

0

1

Product attributes Dosagea

562.1 (1,555.4)

0.2

30,000

Pack size

15.0 (49.7)

1

1,000

36.4 %

0

1 1

Preparation Oral normal Oral sustained

1.5 %

0

Powder for IV

27.4 %

0

1

Solution for IV

31.2 %

0

1

Others

3.4 %

0

1

Beijing

28.1 %

0

1

Kunming

43.7 %

0

1

Foshan ATC1 class

28.2 %

0

1

City

Antibiotics

52.3 %

Cardiovascular

47.7 %

0

1

2002

16.1 %

0

1

2003

19.6 %

0

1

2004

29.1 %

0

1

2005

35.2 %

0

1

Year

ATC Anatomical Therapeutic Chemical, CNY Chinese Yuan, IV intravenous, SE standard error a

The price and the dosage are reported as the standard unit price for a prescription such as per tablet, per capsule, per pellet or per litre

b N Generic-1 is defined as the number of generic products with the same chemical molecule and derivative; NC Generic-2 is defined as the number of generic derivatives for each molecule; AN Generic-2 is defined as the average number of products per substitute derivative within a molecule; NC Therapeutic is defined as the number of derivatives in the ATC5 therapeutic category; AN Therapeutic is defined as the average number of substitute products in different generic derivative class but with the same ATC3 category

results imply that competitive pressure on price is weak with respect to product-differentiated substitute categories. Furthermore, they imply the existence of reverse causality

Aerage standard unit price (CNY)

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299

prices of the 100 top-selling manufacturers are lower than those of manufacturers that are not on the top-100 list. The coefficients of global manufacturers are positive and statistically significant. The magnitude of the coefficient for foreign manufacturers is even larger than that of jointventure manufacturers. This indicates that these global firms command higher prices for their products than do their local competitors offering products with the same chemical identity and derivatives. As expected, prices are related to many product attributes. The negative relationship between pack size and price implies that manufacturers compete on volume discounts on large pack size. Furthermore, the higher the strength of a product the more expensive the product.

60 50 40 2002 2003

30

2004 20

2005

10 0 Foreign

Joint venture

Top 100

Non-Top 100

Fig. 1 Pharmaceutical prices by year and type of manufacturer. CNY Chinese Yuan

as discussed in earlier literature [8, 28]. That is, manufacturers may enter the market with higher price expectations. In both models, the coefficients of the 100 top-selling manufacturers are negative (-0.142 and -0.146) and statistically significant at 5 %. This indicates that the product

Table 3 Regression results of competition on drug price

Variable

6 Discussion Our results reveal the existence of pharmaceutical market competition. Despite strong government intervention, especially in the form of price controls and hospital bidding

Model 1

Model 2

Coef.(t)

P

Coef. (t)

P

Ln (N Generic-1)

-0.019 (-4.31)

0.000

-0.018 (-4.18)

0.000

Ln (NC Generic-2) Ln (AN Generic-2)

0.187 (7.50) -0.162 (-6.64)

0.000 0.000 0.209 (3.53)

0.000

-0.183 (-3.28)

0.001

Substitute competition

Ln (NC Therapeutic) Ln (AN Therapeutic) Manufacturer attributes

Control = other

Foreign

1.314 (23.60)

0.000

1.303 (23.16)

0.000

Joint venture

0.477 (8.87)

0.000

0.497 (9.23)

0.000

Top 100

-0.142 (-2.28)

0.022

-0.146 (-2.32)

0.021

Ln (strength)

0.176 (13.01)

0.000

0.168 (12.43)

0.000

Ln (pack size)

-1.056 (-48.57)

0.000

-1.063 (-48.08)

0.000

0.246 (2.24)

0.025 0.011

Product attributes

Preparation Oral sustained

Control = oral normal-release 0.217 (2.02)

0.043

Powder for IV

-0.162 (-2.98)

0.030

-0.210 (-2.55)

Solution for IV

-0.164 (-2.96)

0.003

-0.231 (-4.06)

0.000

Other

-1.019 (-5.69)

0.000

-1.042 (-5.79)

0.000

Control = Foshan -0.055 (-1.01)

0.313

-0.008 (-0.13)

0.895

0.031 (0.60)

0.549

0.052 (1.00)

0.318

City Beijing Kunming Year indicators

Yes

ATC3 indicators

Yes

Yes

ATC Anatomical Therapeutic Chemical, IV intravenous

Constant

0.554 (3.59)

Observations

8,734

8,734

Yes means these indicators were controlled for but not shown

R2

0.7131

0.7086

Yes 0.000

0.199 (1.01)

0.313

300

policies, market competition still has a downward influence on price in hospitals, as expected. In addition to the inverse relationship between price and number of competitors, manufacturers compete on volume discounts on large pack sizes. They also compete by product differentiation, such as product strength and preparation. All these phenomena indicate that competition plays a positive role in shaping the pharmaceutical market in China. The results also indicate a certain level of distortion resulting from market failure and government interventions. In both models, pharmaceutical price is positively related to the number of therapeutic classes. Similar to findings reported in national and international literature, our results confirm that many products on the market are ‘me-too’ drugs. The chemical structures and clinical effects of these drugs are very similar to those of existing drugs on the market; however, me-too drugs are classified as new instead of generic drugs. Thus, they can obtain patent protection, which bring higher prices than their generic competitors can command. The me-too drug issue is especially complicated in China because of the country’s policies for the registration of new drugs, and the corruption these policies can engender [11, 14]. Many so-called new drug products have the same chemical identities as existing generic drugs, with only some minor changes, such as different solutions. These products enjoy more generous price control policies and an easier registration process than their generic competitors. Our finding that the prices of products from the 100 topselling local manufacturers are lower than those of products from local manufacturers not on the top-100 list is counterintuitive. The products of the top sellers are believed to have better quality and safety profiles than the products of other local manufacturers, suggesting that they should therefore have the advantage in market power and brand name loyalty. As expected, the prices of products imported by global manufacturers and joint-venture firms are higher than those of local manufacturers not on the top100 list. This result corroborates evidence from earlier literature on the topic [8]. A plausible explanation is that the public may believe that global products have higher efficacy and are safer. However, the result may also reflect the favoured status of global products in China’s pricing policy and bidding process, which shield these products from the pressure of local competition. For example, bidding policies in some cities and provinces clearly state different protocols for local and global products [22]. Our results, combined with those of earlier studies, lead us to conclude that leading local manufacturers are at a competitive disadvantage in China’s market. One explanation has to do with corporate behaviour. Leading local manufacturers are more likely to protect their reputations

J. Wu et al.

and status in the market than non-leading local manufacturers; therefore, they are more likely to follow social norms and government regulations. Small local manufacturers, struggling to gain a footing, are often reported as resorting to illegal tactics to increase profits [36]. This research should be interpreted with caution, given the following limitations. First, our data are from 2002 through 2005, which pre-dates the 2009 Chinese health system reform. However, the tertiary hospital and bidding systems were not greatly affected by these reforms; therefore, we believe the reform has minimal impact on our results. Second, we do not know the bidding policies that the three cities were using during the period of our study, therefore the inverse relationship between pharmaceutical price and the number of competitors may not reveal pure competition. For example, a bidding policy might have required that the majority of products on the bidding list be low priced. However, no anecdotal evidence or expert consulting output on the topic support this speculation. We therefore assume the bidding process the cities used reflects the market situations of the manufacturers that submitted bids. In addition, preliminary results show that the products for which bidding was most competitive were those with high rates of use by hospitals, thus this concern may not be serious. Third, we cannot identify the different clinical outcomes of products, which are key determinants of product price. Although we did use indicators such as therapeutic class, strength and preparation as proxies for quality and molecule age (years or months from the first product launch), these variables may not fully capture the variation in quality among generic products. For example, if low prices increase the number of manufacturers making low-quality generic products, then there are more competitors for the sales of products with low prices. Consequently, our results may overestimate the impact of competition on price. The competition effect may also be underestimated if generic or therapeutic entry is positively related to price, as in that case manufacturers may enter the market with high price expectations [8, 31]. Fourth, our study may not be generalisable to the entire pharmaceutical market, as our data consisted only of prices in the hospital market; we had no information on prices charged by stand-alone pharmacies. Fifth, our results do not show conclusively whether hospital bidding has increased or decreased competition. Further study is necessary to investigate the role of the bidding process in determining the price and quality of pharmaceutical products. The stand-alone pharmacy market also requires investigation in order to obtain a more complete picture of competition in China’s pharmaceutical market.

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Finally, we could not predict whether lower prices gained from generic competition could make people better or worse off. Market competition usually decreases the price and increases the amount supplied, which causes increased consumer welfare and social welfare. However, given that hospitals are incentivised to make a profit on drugs, and that over-prescribing is an issue in China [37], lower prices might result in more over-prescribing, as prescribers have an incentive to maintain their income, so market competition could in fact make people worse off. We have limited capacity to address this, as volume data were not included in our dataset. This should be explored in a future study.

Appendix continued Variable AN Therapeutic

Average number of substitute products in different generic derivative class but with the same ATC3 category NC Generic-2 Number of generic derivatives for each molecule NC Therapeutic Number of derivatives in the ATC5 therapeutic category Manufacturer attributes Foreign Global manufacturer for imported product Joint venture Joint venture manufacturer Top 100

7 Conclusion Other

Acknowledging the above limitations, our study breaks new ground in documenting the empirical evidence of the performance of China’s pharmaceutical market. The results reveal that generic competition does reduce the pharmaceutical price in hospitals despite strong government intervention. However, the results also indicate a certain level of distortion resulting from market failure and government intervention. Specifically, pharmaceutical price is positively correlated with the number of therapeutic classes. Furthermore, the prices of products from the 100 top-selling local manufacturers are lower than those of products from international and non-top-100 local manufacturers. Our evidence can be an insightful and applicable reference for policy makers to consider as they develop drug policies to correct the distortions created by hospital price schedules. Acknowledgments This study is funded by the National Natural Science Foundation of China (Grant Number 71203155) and Humane Social Science Fund Project of Ministry of Education China (Grant Number 13YJAZH108). All authors contributed to all aspects of the paper. J. Wu is the guarantor for the overall content of this paper. The authors have no conflicts of interest that are directly relevant to the contents of this study.

Appendix 1: Definitions of Key Variables

Variable

Definition

Substitute competition N Generic-1 Number of generic products with the same chemical molecule and derivative AN Generic-2 Average number of products per substitute derivative within a molecule

Code

Count number

Product attributes Strength Pack size Preparation Oral normal

Local manufacturers who are on the top-100 list Local manufacturers who are not on the top-100 list Weight or volume of the standard unit Average number of standard units per pack Oral normal-release form

Oral sustained

Oral sustained-release form

Powder for IV

Powder form

Solution for IV

Intravenous injection

Other

Other

City Foshan

Foshan City

Beijing

Beijing City

Kunming

Kunming City

Year 2002

2002

2003

2003

2004

2004

2005

2005

ATC1 class Antibiotics Cardiovascular

Continuous number

Definition

Antibiotics Cardiovascular

Code Continuous number

Count number Count number 1 = yes, 0 = no 1 = yes, 0 = no 1 = yes, 0 = no 1 = yes, 0 = no Number Number

1 = yes, 0 = no 1 = yes, 0 = no 1 = yes, 0 = no 1 = yes, 0 = no 1 = yes, 0 = no 1 = yes, 0 = no 1 = yes, 0 = no 1 = yes, 0 = no 1 = yes, 0 = no 1 = yes, 0 = no 1 = yes, 0 = no 1 = yes, 0 = no 1 = yes, 0 = no 1 = yes, 0 = no

ATC Anatomic Therapeutic Chemical classification, IV intravenous

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Appendix 2: Example of a Generic and Substitute Competitor Calculation

ATC1

Antibiotics

ATC3

Caphalosporin

ATC5

Molecule 1 (3 derivatives 7 products)

Derivatives

Derivative1 (5 products)

Derivative2 (15 products)

Tablets (5 products)

Preparations

Dosage Package Manufacture (Abbr. M)

Molecule 2 (4 derivatives 38 products)

M1 (2mg×5)

M2 (2mg×10)

Case of molecule 2 derivative 2: 1. 2. 3. 4. 5.

N Generic-1 = 15 – 1 = 14 NC Generic-2 = 4 AN Generic-2 = (5 ? 10 ? 8)/(4 - 1) = 7.7 NC Therapeutic = 3 ? 4 ? 4 = 11 AN Therapeutic = (7 ? 38 ? 6 - 15)/(11 - 1) = 3.6

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Derivative4 (8 products)

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M4 (5mg×20)

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