Healthcare reform in China raises tensions between hospitals, pharma companies

A new rule requiring pharmaceutical companies to pay a so-called deposit to have their drugs sold in China's hospitals is stoking tensions between the companies and healthcare providers as China tries to reform its healthcare industry.

The move follows recent efforts by the government to rein in spiraling healthcare costs by cutting the amount Chinese hospitals can charge patients for medicines. Hospitals used to be able to tack on a 15% surcharge on medicines, but that charge has now been ruled out. The effort by hospitals to impose the "deposit" on drug companies is an effort by them to keep their revenues from declining.

A recent dispute at a major public hospital in Jiangsu province brought the issue out into the open after the facility "suspended the procurement of some popular products from 8 international drug makers for more than two weeks," according to a report in the Wall Street Journal.

The WSJ reported that the hospital "requested" in October that drug companies pay a deposit of 8% of their annual in-hospital sales with a $45,600 cap for each product. The WSJ said some domestic companies paid the amounts, but most international companies did not.

That led to the suspension of sales of the products at the hospital that affected drugs from Pfizer ($PFE), AstraZeneca ($AZN), Sanofi ($SNY), Merck ($MRK), Bayer, Novartis ($NVS), Eli Lilly ($LLY) and Roche ($RHHBY), according to the WSJ report.

After complaints arose on the Internet and in media reports, the hospital lifted the ban, the WSJ said, but not before an Internet survey showed 92% of China's Tencent users felt the hospital was just trying to gouge the drugmakers.

For its part, the hospital said the companies that didn't pay and had sales suspended did not have contracts with the hospital and that it was "legitimate" to request the deposit, the WSJ reported.

China is undergoing major reforms in its healthcare sector and the government is pushing the burden of drug pricing on to hospitals and drug companies to cut the cost to the government. In addition to cutting the 15% surcharge hospitals previously charged, drugmakers are seeing their prices cut dramatically at the provincial level.

Other facilities have also implemented such deposits such as the Fujian Provincial Health and Family Planning Commission, which said its deposit would be used to compensate people if the drug company failed to meet its obligations or provided substandard products. Officials and executives interviewed by the WSJ said that policy was clearer, but they still questioned the legitimacy of the overall policy.

- here's the report from the Wall Street Journal (sub. req.)

Read more on