The ‘Sanming Model’: Bad Omen Or Hope For Pharma In China?

Pharma executives in China may soon get an earful of the name Sanming, as the populist healthcare reform model that began at the small city in Fujian is rolled out nationwide and impacts profoundly how drugs are tendered, priced and distributed.

A few months ago, the name Sanming was little known to anyone outside China’s Southeastern Fujian province. However, the small industrial city is rapidly gaining fame and more than 1,000 groups from all over the country have already visited to learn about its novel healthcare reform initiatives, now dubbed the “Sanming Model”.

The initiative has been so successful that Chinese President Xi Jinping has now required it to be rolled out nationwide.

In simple terms, the model is intended to reduce rising medical expenditure by tightening controls over costs, said Sanming Healthcare Reform Leadership Committee member Chen Shaobin, speaking at a Healthcare Information Conference held Nov.23 in Guangzhou.

In 2012, the city – burdened by ballooning medical expenditure and piling health funding deficits – started the reform process. There seemed to be little choice, as the outflow of funds surpassed the inflow by CNY144m ($20.8m) in 2010, and the difference increased to CNY208m in 2011.

Also unique to Sanming, a relatively new city built largely on industry clusters, the burden on public health coverage came mainly from spending at grassroots hospitals rather than large, top-tier AAA medical facilities. Thus, how to reach to the "last kilometer to patients" is a key issue facing the health authorities.

Aligning Payers, Treatment And Medicines

To make the reforms successful, a solution-driven combination approach had to be employed, Chen told the conference participants. Sanming's approach has three aspects: the reform of centralized bidding to squeeze the inflated portion of drug prices; reduction of overtreatment and excessive diagnosis; and leverage the role of payers.

China's central bidding process for medicines requires each of the country’s 31 provinces to issue their own set of bidding regulations and conduct their own procedures. The lengthy process has many manufacturers complaining about the need to comply with multiple different sets of rules and burdensome system.

Chen described centralized bidding as a waste of human resources that has failed to lower drug prices as these remain inflated and mean patients are unhappy about their medical bills. Meanwhile, hospitals and physicians still rely on drug margins to make profits that make for a tense patient-physician relationship.

“Drug price monitoring is likely to become routine with overall tightening, so the pressure won't be lessening compared to the previous year” - Lin Jianning, director of the Nanfang Institute.

To that end, Sanming’s healthcare authorities first installed a strong leadership that is ready to take charge and responsibility, Chen said. This was significant given that the city had effectively consolidated three basic health insurance schemes under one wing, while the central government is still struggling to merge two main national schemes into one.

The consolidation has not only improved the efficiency of funding but increased authorities’ leverage over medical expenditure control, Chen said.

Regulating Prescriptions, Drug Use

After securing leadership and combining the funding, the next step was to regulate drug prescription behavior. Previously, physicians – driven by price markups – tended to overprescribe to make money, but now the idea is to base prescriber incentives on saving money, Chen explained.

Aided by clearer treatment pathways and the reinforced reimbursement policy, the city implemented a new method of reimbursement according to diseases and conditions, which encourages physicians to prescribe within a pre-set range of costs and to retain a portion of the savings, rather than to maximize drug profits (Also see "China 2014: Five Commercial Must-Reads" - Scrip, 22 Dec, 2014.).

Reimbursement aside, Sanming also commenced a monitoring scheme for large-selling drugs. Essentially, 129 such products including supplements, nutrients and drugs with high margins but fewer clinical benefits were put under closer scrutiny, Chen said.

The measure generated an immediate impact – after the first month of the monitoring, as much as CNY167.3m was saved, he added. To date, the measure has reduced medical expenditure and led to CNY1bn in savings.

Sanming was also among the first localities in China to successfully bring its annual growth in medical expenditure to under 10%. In return, the savings will go towards compensating physicians through an annual income mechanism instead of drug sales, in a policy called Tenglonghuanniao (“emptying the nest for new birds”), he said.

Tackling Corruption

Facing soaring costs, Sanming is determined to embark on a journey to challenge the status quo and "break the ice", declared Chen.

Other bold measures include dynamic drug price adjustment, for which Sanming has initiated five rounds since 2012 via a joint drug bidding platform. This shares information among members and has since expanded to 28 counties in nine cities across nine provinces.

The platform now allows makers to bid online instead of previously having to manually transfer information.

In addition, the pharma distribution system in China is chaotic and opaque and illegal practices such as kickbacks are rampant, but no one dares to tackle the issues for fear of angering the interest groups behind them.

Undeterred, Sanming started the Liangpiao ("two receipts") mechanism, which drastically reduces the layers of distribution and aims to reduce corruption by reducing the layers of receipts (and therefore markups) that are issued in the distribution system.

Liangpiao has resulted in a large drop in the number of pharma distributors in Fujian. According to the China FDA-affiliated Nanfang Institute – the organizer of the annual Guangzhou conference – the system has led to a fall in provincial distributors from 479 to 217.

Three Impacts

The wider rollout of the Sanming model is likely to generate three immediate impacts, industry analysts say.

The first will be a tightening grip on medical expenditure growth. Already, the government has set goals to control the increase to 14.7% in 2015 and 10% in 2017. That equals CNY28bn or 5-6% of total sales at top-tier Class AAA hospitals, noted Lin Jianning, director of the Nanfang Institute, speaking at the same forum.

With Sanming now successfully bringing the increase to below 10% and more cities following the lead, pricing pressure is likely to increase, Lin predicted.

Secondly, the composition of best-selling drugs will change, he added. So far, supplement and nutritional products account for some of the biggest selling drugs in China, but these will give way to products with clearer clinical benefits. Products with convincing clinical data will win out, analysts forecast.

Thirdly, as the Liangpiao system is expanded to more provinces, there is likely to be a massive consolidation of pharma distributors. Drug makers should use this as an opportunity to foster closer ties with major distributors.

"Drug price monitoring is likely to become routine with overall tightening, so the pressure won't be lessening compared to the previous year," Lin said.

But not all is doom and gloom. One bright spot is that a long-awaited update to China's national reimbursement drug list is scheduled to start by the end of 2016 (Also see "Count Me In! China To Update Drug Coverage After Long Wait" - Pink Sheet, 11 Oct, 2016.).

Many newer therapies launched after 2009 are expected to be newly granted coverage, although associated price reductions are also expected to be steep. Drugs that went through China's first national price negotiation saw cuts of 50% or more, although higher volumes are expected to help offset the impact.

From the editors of PharmAsia News.