To conduct successful drug price reform, the pricing mechanism should consider the interests of both manufacturers and consumers. And the sharing and checking of power are fundamental to guarantee effective supervision.

The excessive cost of pharmaceutical drugs has long been an issue affecting reform of China's medical system. Zhou Wangjun, vice-director of the Department of Price under the National Development and Reform Commission, gave direction on the next stage of price reform at a recent industry meeting. Different from before, this reform will involve various aspects of the medical system including production, circulation and hospitals. Further adjustment of drug prices will be conducted every two years and will involve government intervention where drugs are priced by the market.

It is noteworthy that Zhou suggested China will draw on the experience of India in its drug price management system.

World Health Organization (WHO) statistics show that in 2002, public input accounted for 17.9 per cent of the total medical expenses in India, while the number was 16 per cent for China. Both are developing countries with huge populations. In India, about 260 million people are living under the poverty line, mostly in rural areas. But there are many obvious differences too. The WHO ranked China 188th for fairness of government contributions to healthcare costs, while India was 43rd. In a word, the experience of the India model is to give limited government money where it is needed most. That is also the target and direction of China's reform.

According to India's model, an overall commercial operation will harm the fairness of the public health system and bring hidden problems to social stability. Meanwhile, the public healthcare system should support and supervise domestic pharmaceutical companies and urge them to provide inexpensive drugs to domestic consumers. This will also be the way for China to succeed in the medical reform.

China's government contributions to healthcare costs will not catch up with that of developed countries at an average 40 per cent in a short time. So it is practical to learn from the success of other developing countries. At the same time, the input is not the absolute standard to measure a public healthcare system. Social fairness and balance among different interest groups are also important.

The key point of the current drug price reform lies in the construction of a raw material cost monitoring system, as well as a manufacturing cost accounting system. Only by clarifying the production costs of pharmaceutical drugs can the final price be set through limiting the profit margin; or can the illegal rebate channel be cut between hospitals and drug sellers; or can the price increase in circulation links be effectively controlled.

Luckily the differences in manufacturing costs of various domestic pharmaceutical firms are not big and there is no difficulty calculating the costs of raw materials. And technical factors will not affect the reform much.

The institutional design will be the major factor that affects the progress of reform. The core of the reform is to strengthen government control on the pharmaceutical industry. The efficiency of public departments has long been a key issue affecting reform costs. To build a rational system is important to guarantee the efficiency of the supervision departments.

According to Zhou Wangjun, pharmaceutical manufacturers that increase drug prices should be put on record in the commission. The government will also conduct accounting on the raw materials costs of certain drugs and set up a corresponding pricing system. The interests of both drug manufacturers and consumers should be considered when setting the price adjustment margin and base.

The sharing and checking of power are basics to guarantee the efficiency of supervision. There should be a law enforcement team and a corresponding supervision team. The supervisors should provide related cost accounting data, but not intervene in the making of punishment rules. Enforcers should concentrate in defending fairness and order, but not step into the investigation of data.

The author is a PhD candidate with the Department of World Economics at Fudan University.

(China Daily May 22, 2006)