Appropriate market incentive brings drug prices down

Recently, relevant state ministries and commissions decided to cancel government pricing of most drugs since June 1, 2015 and actual drug prices are formed mainly by the competition in the market.

Why drugs in China should be priced by the government before? One reason given by the government is that drugs are related to public health while pharmaceutical industry belongs to typical information asymmetry, if their prices are determined by enterprises, it will infringe the right of public health. Then, how drugs were priced in the past? From the point of view of the provisions in the Drug Administration Law, drug price is determined according to the social average cost by combining with the relationship between supply and demand as well as social tolerance ability.

But from a practical point of view, on the contrary such a model pushes up costs, why? The most important reasons is that government departments can not be aware of the true cost of drug production and have to depend on various pharmaceutical manufacturers, circulation links and terminal medical institutions, all of which have incentive to inflate costs, because the price is based on cost. At the same time, drug pricing led by the government makes relevant government departments have rent-seeking space, and even becomes a hotbed of corruption.

Then, after canceling government pricing, how to ensure that drug prices return to normal?

One of the most important reasons why medicines are special is that users are not final decision makers. Unlike other ordinary commodities, patients have no power to decide prescription drugs but depend on doctors. At the same time, what we must take into account is that in reality, except for drugs at patients’ own expense, the majority of patients are not final bearers of drug cost. Instead all levels of the health departments and insurance companies pay for their medical expenses. In this context, many patients are insensitive to drug price and doctors have impulse to give more prescription, and manufacturers also have the incentive to increase retail prices.

How to make the market play a role in drug manufacturing and retail links? The key is to encourage and let the market play a decisive role in the allocation of medical resources. Under health care model, medical insurance departments at all levels are finally bearers of medical costs. Although previously many local governments took the way of total quantity control to reduce the cost of medicare payment, this practice can not reduce diagnosis cost of individual patients, not to say solve the cost of uninsured patients. In the final analysis, information asymmetry is the crux of the problems above. How to reduce information asymmetry? The feasible way is that the government researches the diagnosis cost of each kind of disease by relying on the third party, rather than the price of individual drugs.

Who is the appropriate third party? In my opinion, the insurance agency is a possible option. Through market research, insurance companies can get the possible treatment cost of each disease. Under the constraint of a premium, higher treatment cost means lower income of insurance companies. In this way, insurance companies will have an incentive to control this cost, and give a clear expectation for patients’ treatment cost. At the same time, during the process of diagnosis and treatment, insurance companies will communicate with hospitals so as to reduce unnecessary expense. As insurance companies have a large number of patients who can be used as a bargaining chip, hospitals may discuss with insurance companies on the treatment costs of a disease and then get a fair price to avoid over treatment phenomenon as far as possible.

When the treatment cost is determined, it is not necessary for hospitals to use drugs with high price but general curative effect; and pharmaceutical companies will not set too outrageous prices for each drug. It is obvious that once prices are too high they may be kicked out of the market, so it will have incentive to control costs instead of   increasing offers as before.

We believe as long as there is appropriate incentive, the competition in the medical market will bring drug prices down.

Published in Southern Metropolis | 2015-5-12