Healthcare procurement + Bidding and tendering + Data exports

In this issue of the MERICS China Industries Brief, we cover the following topics:

Bulk buying: Healthcare authority expands centralized procurement
State Council vows to make bidding and tendering fairer
Green channels: Shanghai publishes whitelist for general data exports
Easing the transfer of genetic samples to speed up drug discovery
Supply chain guidelines emphasize collaboration, efficiency, and security

1. Bulk buying: Healthcare authority expands centralized procurement

At a glance: The National Healthcare Security Administration released measures to enhance the coordination between local governments on centralized procurement. Also known as volume-based procurement (VBP), centralized procurement refers to the purchase of pharmaceuticals and medical consumables in large quantities at reduced prices. The policy aims to:

Have all provinces carry out at least one batch of centralized procurement for pharmaceuticals by the end of 2024, bringing the total number of drugs acquired through VBP at the provincial and national level up to 500 from 450 currently
Strengthen the national coordination of centralized procurement policies at the provincial level
Prevent local protection and discrimination against suppliers based on ownership, place of registration, size, or other unreasonable conditions
Counter corruption, through more rigorous application of centralized procurement arrangements, so that local governments adhere to the agreed volume, price, etc.

MERICS comment: Since 2019, Beijing has gradually expanded the centralized procurement of pharmaceuticals and medical consumables. This approach has brought about substantial decreases in the cost of some medical products and is seen to combat corruption in the healthcare system. However, the excessive focus on price means that lower quality, potential less effective and riskier drugs and consumables could be selected as part of the scheme.

Officially, centralized procurement should not discriminate against foreign firms. But in practice it puts them at a disadvantage and advances the government’s localization efforts. Foreign firms are often unable to meet the drastic price reductions required to participate. Securing market share under such circumstances may require selling products at a loss. Following the introduction of VBP for artificial joints in 2021, the share of domestically produced products increased to 58.4 percent in 2022, up from 30 percent in 2020.

Market access is becoming ever more challenging for foreign pharma and medical device companies in China (see exhibit below). In addition to the expansion of VBP, hospital executives in China report that implementation of Document 551, a local content checklist including hundreds of medical items, is becoming more strict. The government’s corruption crackdown on the healthcare sector could also make hospitals more cautious in contracting foreign firms as suppliers, lest they be seen as engaging in corrupt practices for choosing a more expensive option.

Article: Notice on Strengthening Regional Collaboration to Improve the Quality and Expansion of Centralized Purchasing of Pharmaceuticals in 2024 (国家医疗保障局办公室关于加强区域协同做好2024年医药集中采购提质扩面的通知) (Link)
Issuing body: NHSA
Date: May 20, 2024

2. State Council vows to make bidding and tendering fairer

At a glance: The State Council issued instructions to improve the administration of national bidding and tendering practices. The document aims to address problems private businesses and foreign firms have had with bidding and tendering processes with actions aimed to:

Standardize bidding processes by streamlining regulations and approval, licensing, and registration processes
Reduce restrictions and barriers which hinder bidding processes, including unlawful restrictions based on bidders’ geographical location or ownership
Increase the punishment for illegal activities such as excluding and restricting potential bidders, illegal subcontracting, bribery, and collusion in bidding
Develop a system for addressing complaints, and enhanced dispute resolution mechanisms and support for businesses to safeguard their rights

MERICS comment: Tendering and bidding processes are a huge business in China and are especially important in sectors where the state dominates demand, such as telecommunications and healthcare. Private and foreign firms have often faced obstacles preventing them from securing a share of the tendering pie, due to favoritism, local protectionism, and corruption. In the past, bidding requirements have been established which impede qualified bidders through unreasonable procurement rules or other forms of manipulation. As such, the harsher punishments for illegal activities and enhanced dispute mechanisms are much awaited.