In late October last year, top Chinese party officials concluded the fifth plenary session of the 19th Central Committee and issued the 14th national Five-Year Plan covering the 2021-25 period. Since 1953, China’s Five-Year-Plans have been the single most important guiding document signaling the policy direction for the country’s future economic and social development.
In the new Five-Year Plan, the Chinese government makes it clear it sees scientific and technology innovation as a key area, and it aims to promote major national projects with a focus on emerging sectors such as brain science, life science and next-generation biotech.
Despite recent geopolitical tension, as the only major economy to report positive economic growth in 2020 (2.3 percent) and a projected growth of 8 percent in 2021 (compared with a contraction of 11 to 12 percent in Europe), China is continuing to attract many multinationals and increasingly small-to-medium-sized biopharma companies who have been deepening ties with local Chinese partners.
Regulatory Reforms Supporting Faster Roll-Out of Innovative Drugs
China’s domestic regulatory reforms are expected to support the faster roll-out of innovative drugs benefiting a broad range of specialty pharma companies, in particular oncology focused players because high cancer incidence rates in Asia.
Since July 2015, the former China Food and Drug Administration (CFDA), now the National Medical Products Administration (NMPA), has issued a series of policies and regulations to optimize review and approval procedures of new pharmaceuticals.
In 2017, The CFDA introduced a slate of amendments to its foreign drug registration rules including allowing foreign drugmakers to file for a new drug approval using data from international, multicenter trials, so long as those trials include China as a study site. In the past, foreign drugmakers can only apply to start clinical trials for a drug—except for vaccines—in China after it has at least entered phase 2 testing elsewhere.
Effective December 1st, 2019, the revised Drug Administration Law, includes a number of new regulations that encourage research and innovation of new drugs, and accelerating their approval and availability in China. Under the revised law, the Marketing Authorization Holder system was established; the registration and approval process of new anti-cancer drugs was accelerated.
In addition, according to the Drug Registration Administrative Measures issued on March 30th, 2020 by the NMPA, innovative and rare disease drugs will be eligible for priority review and approval from July 1st, 2020.
A recent New Centre for Medicines Research Report from Clarivate Indicates Since 2017 China has increased New Molecular Entity launches by 11 percent (compared to a decrease of 25 percent in the US).
Health Care Financing
China’s overall health reform goal is to establish a universal basic health care system providing safe, effective, and affordable health services to all.
In 2018, China spent about 6.6 percent of GDP on health care (USD 1,665 billion). Government expenditure, composed of government budget earmarked taxes and government subsidy for social insurances, accounted for 28% of Total Health Expenditure (THE); out-of-pocket (OOP) payments from individuals accounted for 28% of THE; the balance was financed by social expenditure, composed of social insurance contribution from individuals and employers, private health insurance contribution and social donations.
The basic medical security system in China consists of Basic Medical Insurance (BMI) schemes covering over 95 percent of the population and Medical Financial Assistance (MFA) schemes for the poor. More specifically, employees and retirees in urban areas are covered under a compulsory Urban Employee Basic Medical Insurance (UEBMI), which is funded primarily via employer and employee payroll taxes. Other residents (urban unemployed and rural) can voluntarily enroll in Urban-Rural Resident Basic Medical Insurance, financed primarily by central and local governments through individual premium subsidies.
Inpatient, outpatient care and prescription drug coverages under the BMI are subject to different deductibles, copayments, and reimbursement ceilings depending on the insurance plan, region, type of hospital (community, secondary, or tertiary), and other factors. There are no annual caps on OOP spending. Under the current reimbursement policy, patients are responsible for 20 to 30 percent of the drug expenses across China. This can translate into high levels of OOP expenditures for cancer and rare disease patients.
Private insurance is used to cover deductibles, copayments, other cost-sharing, and expensive services not paid for by public insurance. In 2015, premiums from private health insurance accounted for 5.9% of THE. With the increasing burden on public medical insurance funds, the Chinese government is encouraging the development of private insurance market.
Consolidation under the National Healthcare Security Administration (NHSA)
In 2018, the NHSA was established as a sub-ministry-level government agency directly under the State Council of the People's Republic of China. Management of all public health insurance schemes has been consolidated under the NHSA including basic medical insurance, occupational injury insurance, maternity insurance, and medical aid programs.
Other key responsibilities of the NHSA include centralized procurement of drugs and medical supplies and healthcare reforms aimed at reducing waste and improving efficiency of the insurance fund.
The consolidation of all public health insurance schemes under the NHSA has made it the largest buyer of healthcare goods and services in China. This consolidation also allows the manufacturers to align their market access activities to focus on one government agency rather than several, which had historically been the case.
Pricing Regulation
According to the Opinions on Management of Current Drug Price issued by the NHSA (effective 26 November 2019), except for narcotic drugs and first-class psychotropic drugs, which are subject to a government-guided price, all other drugs are subject to market price.
The National Reimbursement Drug List (NRDL) Explained
A growing number of innovative drugs are being included in China’s National Reimbursement Drug List, including 119 new therapies treating ailments from pulmonary diseases and diabetes to cancers and lupus were added to the NRDL this past December after drawn-out negotiations. Once on the NRDL, the BMI covers a significant portion of the drug costs and drugs become available for a much larger market.
However, inclusion on the NRDL implies heavy discounting. The average price cut for 2020 NRDL update is 50.63% according to the NHSA, which, however, represents a 10% reduction from 2019. In exchange for price reduction, drugmakers can enjoy larger sales volume. For instance, BeiGene reported increased product sales to a median 2.16 times their pre-NRDL levels after four quarters, and 2.88 times after seven quarters.
Class A vs. Class B
The NRDL is separated into two classes:
• Class A: older, generic drugs that are 100% reimbursed by government.
• Class B: premium drugs that are partially reimbursed (50% - 90%).
Frequency of Updates
There have been four rounds of NRDL updates, in 2017, 2018, 2019 and 2020, respectively. Price negotiations from 2018 onward has been managed by the NHSA.
On July 30, 2020, the NHSA published Interim Measures for the Administration of Use of Drugs Covered by the Basic Medical Insurance (2020 Interim Measures), which contain detailed processes for negotiation and management of NRDL. According to the 2020 Interim Measures, the NRDL will be adjusted once per year and the agreement period of the drugs on the NRDL is “in principle” two years. The 2020 NRDL update will take effect March 1, 2021 through Dec. 31, 2022, slightly less than two years.
The 2020 Interim Measures also provide criteria for removals of drugs: limited clinical value, approval revocation or inclusion on the “negative list.” The NHSA did not define the “negative list.” In practice, however, the First Batch of Drug List under Key Monitoring and Rational Use in 2019 seems to be the “negative list.”
Convention Admission vs. Negotiation Admission
The adjustment to the NRDL is divided into conventional admission and negotiation admission based on the characteristics of new drugs.
Conventional admission: does not require negotiation and is much faster; this option is available for drugs that are determined to meet clinical need and are priced at or lower than the level of similar products on the NRDL.
Negotiation admission: is a process for a few highly innovative but expensive medicines. It has four steps: preparation, evaluation, negotiation, and announcement. For 2020, the entire assessment process from preparation (July 2020) through to announcement (December 2020) was 6 months. For 2019, from preparation (Jan 2019) through to announcement (November 2019), it was 11 months.
Negotiation Admission
Step 1: Preparation. A key step within the preparation phase is to identify the list of drugs eligible to be negotiated or need to be re-negotiated. On Aug. 17, 2020, NHSA issued the Working Plan for the Adjustment of the 2020 NRDL (2020 Working Plan), which materializes 2020 Interim Measures. Under the 2020 Working Plan, pharmaceutical companies for the first time can propose a candidate product for negotiation. Prior to 2020, the list of drugs to be negotiated was determined by the expert team assembled by the NHSA. The NHSA did not accept applications from manufacturers.
To apply, manufacturers need to submit online applications containing basic product information, pricing information and other supporting materials. According to the 2020 Working Plan, the online platform was open for application from Aug. 21 through Aug. 30, 2020. Companies also needed to mail hard copies of the application to the NHSA before Aug. 30, 2020.
The NHSA, however, remains the gatekeeper for which manufacturer applications will enter the negotiation phase based on the agency’s eligibility criteria. In 2020, out of the hundreds of applications received, only 162 drugs were negotiated in December. Comparing to 2019, the 2020 criteria are more inclusive for innovative drugs. Under the 2019 criteria, drugs eligible for NRDL must be approved before Dec. 31, 2018, with priority given to essential drugs, drugs for major diseases such as cancers and rare diseases, drugs for pediatric use, etc. In 2020, the NHSA allowed drugs approved by Aug. 17, 2020, to submit NRDL applications. As a result, the 2020 NRDL includes more innovative drugs. The eligibility criteria are expected to continuously evolve as NHSA matures its national pricing negotiation process.
The 2020 Working Plan also included renegotiation of certain drugs listed in the 2019 NRDL. Renegotiation may be initiated when the drug is significantly more expensive than similar ones, or when companies apply for renegotiation or the expert team determines to renegotiate. Neither the 2020 Working Plan nor the 2020 Interim Measures provides further details on under what circumstances companies can apply to renegotiate or the expert team would decide to renegotiate, or the criteria the expert team would use to determine to renegotiate.
Step 2: Evaluation. Estimating the floor price based on budget impact and phamacoeconomic analysis by two independent expert groups before negotiation is a key change introduced in 2019 and remains the same in 2020. Experts on pharmacoeconomics and medical insurance management are selected nationwide by the NHSA to form the pharmacoeconomics measurement group and the fund measurement group. The two expert groups independently calculate the floor price in parallel, then convert to a final floor price following an internal prescribed method.
The question of “Is it worth it (cost-effectiveness)?”, i.e., the importance of economic evaluation, will continue to be highlighted in the coming years. However, like in other lower-and-middle-income countries, the question of “Can I afford it (affordability)?”, i.e., budget impact, will play a more dominant role in determining the final reimbursement price.
Additionally, in 2019, it was reported that manufacturers were also asked to submit their drug prices in 12 “recommended countries or regions”, i.e., international reference pricing (IRP), including Japan, France, Germany, Italy, Spain, the UK, Canada, South Korea, the United States, Australia, Turkey, and Taiwan. The NHSA has not operated a formally defined reference basket. Neither the 2019 nor the 2020 Working Plan clarified the mechanism of IRP. Though IRP may be relevant to the calculation of the floor price, it is more likely used to help rationalize the final reimbursement price than determine it.
It’s also worth noting, starting 2019, meetings between the NHSA and the manufacturers were also added in the evaluation phase to help achieve consensus on basic information and materials used to support the negotiation.
Step 3: Negotiation. The NHSA negotiators, composed of representatives from the national or local medical insurance agency, conduct on-site negotiations with manufacturers based on the expert groups’ evaluations. The NHSA negotiators would only know the floor price once on-site. Each company will have two chances to offer and if both offers are 15% higher than the floor price, the negotiation ends. If the offer is within 15% of the floor price, negotiation begins. The NHSA negotiators will announce the outcome of the negotiation and if successful sign a confirmation contract with the manufacturer on the spot. The formal agreement between the manufacturer and the NHSA will be executed subsequently based on the outcome of the negotiation.
Two key changes were introduced to the negotiation phase starting 2019. First, competitive negotiation is used when it is difficult to guide companies to reduce price based on pharmacoeconomic information alone. Under competitive negotiation, only two drugs with the lowest full-course cost could be allowed to enter the catalogue within 2 years. Second, allowing companies to apply for price confidentiality to induce further price cut.
Step 4: Announcement. The last step is to announce the agreement upon release of the new NRDL.
Phasing Out Provincial Reimbursement Drug List (PRDL)
In the past, aside from the NRDL, some provinces (Qingdao, Jiangsu, Jiangxi, Zhejiang etc.) also negotiated their own drug list (PRDL). Local level negotiations preceded the national negotiation, which offered referential experience and lessons for the national negotiation. However, in July 2019, NHSA issued a policy memo that discussed the need for a unified national formulation of the drug reimbursement list, thus, removed the authority of provincial governments to adjust the NRDL Class B listing. Provinces are allowed a three-year ‘buffering period’ before the regulation is fully implemented.
Final Thoughts
China’s national pricing negotiation process is still evolving. However, the inclusion of innovative drugs in Category B of the NRDL and the increasing use of Health Technology Assessment in supporting price negotiations for innovative drugs send a clear signal to the industry, i.e., China supports and wants innovation at the right price.
Given NRDL as the most important mechanism for reimbursement in China and the short negotiation period (2-3 months), multinationals need to align their global, regional, and local teams much earlier to allow the market access team sufficient time to adapt to the evolving local NRDL update practices.
For non-Chinese small-to-medium-sized biotech firms relying on their Chinese partners, it is important to appreciate the trend and be even more knowledgeable than their Chinese partners to capitalize on the changes in reimbursement. After all, the royalty and commercial milestone are dependent on the Chinese market growth, which, in turn, hinges in large part on the success of market access.
China is at a critical stage, as it moves towards its goal of evolving from a generic producer to a pharmaceutical innovator. Pharma companies from Europe, Japan, and the United States will need to decide quickly whether, how, and to what extent they should participate in China’s therapeutic and innovation ecosystems.
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