Ending the Subsidization of Medical Services with Profits from the Sale of Medicines and Deepening the Reform of Public Hospitals

From: English Edition of Qiushi Journal Updated: 2012-10-08 15:00
text size: T | T
Share:

The subsidization of medical services using profits from medicine sales, which derives from China’s policy of marking up the prices of medicines sold in hospitals, is a mechanism for the financial compensation of public medical institutions in China. Since 1954, China has imposed a 15% markup on the prices of medicines prescribed in public hospitals. However, public hospitals in China have become increasingly reliant on price markups since the implementation of the reform and opening up drive in 1978. The reasons for this are twofold. On the one hand, government health care spending has been relatively low for many years, with direct government subsidies accounting for only 7% of public hospital revenues in 2008. On the other hand, the prices of medical services, which are supposed to reflect the value of the specialist services provided by medical workers, have long been lower than the costs of providing them, and we have been unable to adjust these prices dynamically in line with the level of economic and social development. To a certain extent, medicine markups have served as a form of encouragement for public hospitals and medical workers to give out large prescriptions and prescribe their patients with high-priced medicines. This policy, combined with the asymmetry of information between doctors and patients due to the highly specialized nature of medical services, has gradually given rise to a mechanism whereby hospitals subsidize the costs of medical services with profits from the sale of medicines.

Fees for medical services are displayed above the reception desk of the Beijing Friendship Hospital. Beijing’s trials for the separation of hospital services from pharmacy services began in Friendship Hospital on July 1, 2012. Under the scheme, hospital registration fees, treatment fees, and 15% mark-ups on drug prices have been cancelled and replaced with medical service fees. According to Mao Yu, deputy director of the Beijing Hospital Management Bureau, though the trials in Friendship Hospital may appear to be a straightforward replacement of drug mark-ups, registration fees, and treatment fees with medical service fees, in essence they will have a profound impact on the operating mechanisms of hospitals. Hospitals will no longer be able to profit from the sale of medicines, no matter how much they sell, and will mainly rely on the growth of outpatient visits and the provision of quality and safe services to supplement their revenue. / Photo by Xinhua reporter Li Wen

As the negative effects of this mechanism continue to become apparent, we are increasingly facing a systematic affliction in our medical care and public health system that must be removed.

I. Proceeding with confidence and seizing the opportunity for reform

China is currently at a crucial stage of its efforts to deepen the reform of its health care system. This is a favorable juncture for us to bring an end to the subsidization of medical services with profits from medicine sales, and to proceed with separating hospitals from pharmacies.

Health care reform policies have become increasingly clear. In 2009, the CPC Central Committee and the State Council promulgated the Guidelines on Deepening the Reform of the Pharmaceutical and Health Care System. This was followed by the promulgation of the Implementation Plan for Short-Term Priorities in Health Care Reform (2009-2011) by the State Council. These documents have clearly stipulated that hospital operations will be separated from pharmacy operations, that medicine markups will be gradually phased out, and that hospitals will be forbidden from receiving discounts on the purchase of medicines. The drop in revenue or losses that hospitals suffer as a result of these changes will be offset by introducing dispensing fees, adjusting fees for certain specialist services, and increasing government expenditure in hospitals. In 2011, the Ministry of Health and other related government departments issued the Guidelines on the Trial Reform of Public Hospitals, which further clarified the policy requirements and implementation measures for ending the subsidization of medical services using profits from medicine sales. In March 2012, the State Council circulated the Plan and Implementation Measures for Deepening the Reform of the Pharmaceutical and Health Care System During the Period of the Twelfth Five-Year Plan. The plan provides for the separation of hospitals and pharmacies, with the key focus being dismantling the mechanism for the subsidization of medical services with pharmacy profits. The policy of imposing markups on the sale of medicines will be gradually rescinded, and the three-channel system for the compensation of public hospitals, which comprises of service fees, medicine markups, and government subsidies, will be replaced by a two-channel system comprising of service fees and government subsidies.

Our experience in health care reform is becoming increasingly extensive. Since the launch of trials for the reform of public hospitals, a group of cities participating in trial reforms at the national and provincial levels have worked out several specific measures for ending the subsidization of medical services using profits from medicine sales, with the key starting points being the purchase and sale of medicines, the management of revenue and expenditure, and the system of payments. These cities have gradually built up a wealth of experience in health care reform. According to incomplete statistics, trails for the comprehensive reform of county-level hospitals have been launched in more than 600 hospitals throughout 19 provinces, autonomous regions, and municipalities directly under the central government. On this basis, trials for reform will be extended to all counties in the provinces of Zhejiang, Shaanxi, Gansu, and Qinghai, and in the autonomous region of Ningxia in 2012. The core aspect of these reforms is the total cancellation of medicine markups in county-level public hospitals. The drop in revenue that hospitals suffer as a result of these reforms will be made up by increasing government expenditure and adjusting the fees for certain specialist services.

The conditions for health care reform are increasingly falling into place. All government-run medical institutions at the community level have implemented the national system for essential medicines. According to regulations, medical and public health institutions at the community level are required to stock and use essential medicines, the sale of which is not subject to price markups. This has effectively dismantled the mechanism for the subsidization of medical services with profits from the sale of medicines, leading to the significant reduction of the burden of medical costs on the public. In addition, seizing on the opportunity presented by the implementation of the system for essential medicines, medical and public health institutions at the community level have effectively advanced comprehensive reforms in regard to the management of staffing, the arrangement of work positions, the allocation of personnel, and the evaluation of performance, thereby helping to create new mechanisms for the operation of medical and public health institutions at the community level. On this basis, public hospitals will enjoy several favorable conditions for cancelling the subsidization of medical services with price markups on medicines. On the one hand, the framework for a basic medical care and public health system has been established, the basic medical insurance system now covers a large proportion of the population, and medical insurance funds are increasing on a constant basis. On the other hand, government obligations regarding expenditure in public hospitals have been further clarified, and government expenditure in health programs is constantly increasing, providing an important financial foundation for the subsidization of medical services with pharmacy profits to be brought to an end. It is particularly important to note that we have the strong support and correct leadership of Party committees and governments at all levels in deepening health care reform; we have the understanding, approval, and support of the general public and medical workers; and we have the valuable experiences gained by local medical and public health institutions during the course of reform. These things constitute a solid foundation for our efforts to completely end the practice of subsidizing medical services with pharmacy profits.

II. Improving policies and completely abolishing the practice of subsidizing medical services with pharmacy profits

We will work to rescind the mechanism for the subsidization of medical services with pharmacy profits in public hospitals in accordance with the central government’s overall arrangements for the reform of public hospitals and its requirement that the public welfare nature of these hospitals is maintained. To do this, we will focus on county-level public hospitals, adhere to the principle of reducing the financial burden that medical costs have on the public, and work towards creating a comprehensive mechanism for the compensation of hospitals. The decreases in revenue that hospitals experience as a result of these reforms will be offset mainly by adjusting certain specialist service fees and by increasing the level of government expenditure in hospitals. At the same time, for the sustainable development of public hospitals, medical insurance funds will also be utilized as a major source of revenue for these hospitals. The reform of county-level public hospitals, which will focus on ending the subsidization of medical services with pharmacy profits, will be expanded to around 300 counties on a trial basis before the end of 2012. We will aim to have achieved our initial targets in reform by 2015. At the same time, the reform of public hospitals in cities will also be advanced.

In the effort to end the subsidization of medical services with profits from medicine sales, we must proceed under the unified leadership of the government, increase coordination between various departments and policies, and focus on the following aspects of work.

First, we will take county-level hospitals as the breakthrough point of reform. County-level hospitals represent our best-equipped, best-staffed, and most important medical and public health institutions at the county level, playing an important role in meeting the public demand for medical care, responding to natural disasters and public health emergencies, and ensuring the health of local residents. By taking the lead in reform, county-level hospitals will be able to build up the experience that we will need to promote the reform of all public hospitals. In addition, through efforts to enhance the capacity and service standards of county-level hospitals, these institutions will be able to treat more patients that would otherwise seek treatment in large urban hospitals, thus relieving the pressure on large hospitals in cities. In turn, this will create conditions and provide impetus for the reform of large hospitals in cities. After a breakthrough has been made in cancelling the subsidization of medical services with pharmacy profits in county-level hospitals, we will gradually extend these reforms to large hospitals in cities.

Second, we will appropriately adjust the prices of medical services. By honoring the inherent laws associated with specialist medical services, we need to take the appropriate steps to adjust the prices of medical services in our hospitals. At the same time as lowering the prices of medicines, high-priced medical materials, and medical examinations and procedures that involve the application of large medical equipment, we should rationally increase the prices of medical services, such as fees for diagnosis and treatment, fees for nursing, and surgery fees. These fees should be made to reflect the reasonable cost of providing medical services and the value of the services provided by medical workers, thereby allowing public hospitals to be rationally compensated for the quality services that they provide.

Third, we will make major efforts to reform the way that hospital payments are made. The way that payments are made has an important bearing on keeping medical costs down. The system of itemized payment that is currently exercised in China has been a major reason for rising medical costs and our failure to achieve noticeable results in keeping costs down. Following the institution of reforms to provide fixed amount prepayments for medical services and calculate fees on a per-item, per-illness, and per-patient basis, the price of medicines will become costs that hospitals must assume in the provision of medical services. This will remove the incentive that hospitals have to prescribe unnecessary medicines, urging hospitals and their medical staff to control medical costs. Considering China’s financial resources and the standard of basic health care that the country has attained, our most favorable approach to public hospital reform will be to accelerate the reform of payment methods while at the same time dismantling the mechanism for the subsidization of medical services with profits from the sale of medicines. With the entire population now covered by our basic medical insurance system, the conditions for reforming the way that hospital payments are made are increasingly falling into place. Making good use of the managerial and professional expertise that public health departments boast as the overall managers of medical insurance and medical services, we will effectively integrate efforts to control medical costs with efforts to ensure the quality of medical services.

Fourth, we will continue to increase government health care expenditure. We will improve and fully implement the public spending policies of the government in regard to basic facilities, the purchasing of large equipment, the development of key academic disciplines, and the training of personnel for public hospitals. Effective measures will also be taken to resolve the long-standing debts that hospitals have accumulated, so as to reduce the financial pressure that they face in their operations. By increasing transfer payments to local governments, the central government will support poverty-stricken areas in their efforts to develop medical care and public health programs and cancel the subsidization of medical services with profits from the sale of medicines. Local governments will also be required to increase their expenditure for the same purpose.

Fifth, we will boost the morale of medical workers. We will make efforts to boost, sustain, and utilize the morale of medical workers. This is both an important task in deepening health care reform, and a key point that we must consider in the effort to stop the subsidization of medical services with profits from medicine sales. The training of medical practitioners is a highly-demanding and lengthy process that involves considerable professional risks. Despite this, however, the remuneration of medical workers in China has long been too low to adequately reflect this. On the one hand, by ending the subsidization of medical services with profits from the sale of medicines, we will wean hospitals and medical workers off income supplements from the sale of medicines, and thereby put an end to unhealthy practices such as kickbacks and commercial bribery in the distribution of medicines. On the other hand, by creating systems for remuneration, performance-based evaluation, and income distribution that conform with the features and laws associated with medical services, we will effectively address the concerns of medical workers in regard to salaries and benefits, career development, and working environments.

Sixth, we will intensify industry regulation and monitoring. We will strengthen mechanisms for government regulation of medical resources, make regional development plans on public health more rigidly binding, strictly control the scale of public hospitals and the standards associated with their development, curb the excessive growth of medical resources in central city districts, and stop large medical institutions from sprawling. We will strengthen the mechanism for overseeing and managing the medical costs of public hospitals, and intensify the monitoring of their service quality, financial operations, and purchase of medicines and medical apparatus. We will improve provisions requiring public hospitals to publicize information regarding medical services, and encourage hospitals to willingly accept public monitoring.

Seventh, we will coordinate and advance all aspects of comprehensive reform. Putting an end to the subsidization of medical services with profits from the sale of medicines is a comprehensive, highly complex, and arduous task that must be approached in a coordinated fashion. In consolidating and improving the new type of rural cooperative medical care system, we need to focus on the protection of rural residents against health risks, and establish a stable mechanism for the treatment of major diseases. We will improve the level at which funds for the new type of rural cooperative medical care system are pooled, encourage commercial insurance organizations to participate in the operation of the system, and shift the focus of our efforts from expanding coverage to improving quality. By focusing on key links such as the implementation of expenditure policies, the standardization of the purchase of essential medicines, and the sale of essential medicines to patients without markups, we will promote the sound operation of the essential medicine system and help medical and public health institutions at the community level to make the shift from physical expansion to all-round development. This will help us to consolidate the achievements that we have already made in the comprehensive reform of medical and public health institutions at the community level. We will increase the interaction that takes place between large urban hospitals and local medical and public health institutions; build permanent mechanisms for the regular provision of medical services for public benefit; and shift from limited trials in the reform of public hospitals to the full-scale implementation of reforms. We will strengthen coordination between policies, improve the structure and efficiency of services, shift the development of the medical care and public health system from emphasizing hardware to emphasizing services, and make constant efforts to build up a strong safety net to ensure that urban and rural residents have access to medical care.


(Original appeared in Qiushi Journal, Chinese edition, No.9, 2012)

Authors: Chen Zhu, Minister of Public Health; Zhang Mao, Secretary of the Leading Party Group and Vice Minister of Public Health of the People’s Republic of China

Qiushi Journal | English Edition of Qiushi Jounrnal | Contact us | Subscription Copyright by Qiushi Journal, All rights reserved