State Council's document on high-value consumables governance; reshaping of the hundreds of billions medical device market

      On the one hand, each cardiac stent costs tens of thousands of yuan, and imported products are even more expensive; on the other hand, leading experts in cardiology point out that12% of patients clinically have overtreatment, and 38% of stents are "optional". Some problems in the use of cardiac stents are just a microcosm of various drawbacks in the field of high-value medical consumables. Therefore, calls for rectification in related fields have been continuous.

      On July 31, the General Office of the State Council issued the "Notice on Issuing the Reform Plan for the Governance of High-Value Medical Consumables" (hereinafter referred to as the Notice), which clearly proposes to reduce the inflated prices of high-value medical consumables, Cancel the medical consumables markup of public medical institutions, encourage medical institutions to jointly carry out volume-based negotiation procurement, and severely investigate and deal with violations of clinical use of high-value medical consumables in medical institutions at all levels.

      According to the calculation of the Medical Device Research Institute,the market size of high-value medical consumables in China is about 104.6 billion yuan. Since the notice proposes to strengthen the standardized management of high-value medical consumables, clarify the scope of governance, and take high-value medical consumables with relatively high unit price and resource consumption ratio as the key governance targets. The industry generally believes that related high-value medical consumable products may usher in a wave of price reductions, and the entire market faces a major reshuffle.

      Some high-value consumables have gross profit margins exceeding Kweichow Moutai

      In 2018,Kweichow Moutai(959.300, -13.30, -1.37%) had a gross profit margin as high as 91.14%, which is enviable. However, reporters from the Daily Economic News noticed that the gross profit margins of some listed medical device companies even exceeded that of Moutai.

      For example,Zhenghai Bio(63.310, 0.82, 1.31%) (300653, SZ) had a gross profit margin of 93.08% in 2018, with main products including oral repair membranes, biofilms, bone repair materials, and other bioregenerative materials. Zhenghai Bio's 2018 annual report shows that the company's biofilm products have a gross profit margin of 94.20%, and oral repair membranes have a gross profit margin of 93.29%.

      Aide Bio(48.760, 0.15, 0.31%) (300685, SZ) also had a gross profit margin comparable to Moutai last year, reaching 91.04%, with main products including in-vitro diagnostic reagents.

      Guanhao Bio(19.270, -0.50, -2.53%) (300238, SZ) 2018 annual report shows that the company's biological dura mater graft has a gross profit margin of 93.46%. In addition, the gross profit margins of sterile bio-protective films and type B dura mater grafts are as high as 83.77% and 81.94%, respectively.

      Dabo Medical(39.150, -0.45, -1.14%) (002901, SZ) 2018 annual report points out that the company's overall gross profit margin is 80.40%, while the gross profit margin of its spine products reaches 85.42%.

       Under high profit margins, the proportion of R&D expenses to total revenue of the above-mentioned enterprises is generally low. In addition, high-value consumables also have the problem of inflated prices. During the Two Sessions this year, Zhou Haibo, a deputy to the National People's Congress and director of Qingyuan People's Hospital in Guangdong Province, submitted a proposal to lower the inflated prices of high-value medical consumables, citing examples such as ceramic artificial hip joints, pointing out that their prices in Guangdong and other places are much higher than those overseas.

      Many places have successful governance experience

      Inflated prices of high-value consumables can also easily lead to medical corruption.

      Recently, Yang Xiangjun, vice president of the Clinical Medical Research Institute of Soochow University, director of the Department of Internal Medicine of the First Affiliated Hospital of Soochow University, and director of the Department of Cardiology, was reported by a doctoral student for improper installation of (cardiac) stents and accepting kickbacks, claiming that he"improperly installed stents, with a kickback of 10,000 yuan for each installation." After that, the rumor became "solid evidence." Soochow University has disclosed several facts of Yang Xiangjun's violation of laws and disciplines, including improper dealings with medical consumables agents.

      In addition,in the first half of 2017, a case verdict by the Wuling District People's Court of Changde City, Hunan Province showed that Huang, the director of the Department of Internal Medicine of the First People's Hospital of the city, while participating in the procurement, use, and supervision of cardiac intervention-related high-value consumables such as stents and pacemakers in the hospital, alone or in collusion with Lu, the deputy director of the Department of Cardiology, accepted a total of 4.14 million yuan in kickbacks from multiple medical device companies.

      In response to the inflated prices of high-value consumables, the notice issued this time proposes to improve the price formation mechanism and lower the inflated prices of high-value medical consumables. A unified coding system and information platform will be established. Strengthen the standardized management of high-value medical consumables, clarify the scope of governance, and take high-value medical consumables with relatively high unit price and resource consumption ratio as the key governance objects.

      What specific key governance objects will there be? Some local practices are worth noting.

      For example, this yearat the end of May, the Nanjing Municipal Medical Insurance Bureau conducted price negotiations on 17 types of anastomosis devices. The selection criteria were: "the total online procurement amount of some medical institutions in Nanjing in the eight months of 2018 exceeded 50 million yuan, and the price was more than 5% higher than the lowest bid price in other domestic cities." After negotiations, the average price reduction of these 17 products reached double digits, with the highest single product price dropping from 5723 yuan to 3083 yuan, a decrease of 46.13%. Based on the estimated procurement volume of over 130 million yuan in Nanjing in 2018, it is expected that the annual reduction in medical expenses will be about 18 million yuan.

      In addition, Anhui Province, which pioneered the centralized volume-based procurement of high-value medical consumables, has clarified that the first batch of products included in the volume-based procurement of high-value consumables are: orthopedic implants (spinal) and ophthalmic (intraocular lenses) high-value consumables.

      Exploring centralized procurement of high-volume consumables

      This notice also clarifies the improvement of classified centralized procurement methods. It explores the classified centralized procurement of high-value medical consumables based on principles such as volume-based procurement, price linkage to volume, and promotion of market competition.

      For high-value medical consumables with large clinical usage, high procurement costs, mature clinical use, and production by multiple enterprises, the notice indicates that centralized procurement should be explored by category, encouraging medical institutions to jointly conduct volume-based negotiation procurement and actively exploring cross-provincial alliance procurement.

      Based on previous local volume-based procurement of medical consumables, it can be foreseen that the future implementation of volume-based procurement of high-value consumables will also achieve significant price reductions. A research report by Galaxy Securities shows that,Between 2012 and 2015, Ningbo conducted centralized procurement of 18 categories and 1436 types of medical consumables in five batches, with an average price reduction of 43.15%.

      Some listed companies have also expressed concerns. For example, DaBo Medical stated that,In 2018, with the establishment of a new medical supervision and management department by the state, the reform efforts in the medical and health field have been continuously strengthened. The introduction of the "4+7" volume-based procurement policy in the pharmaceutical field, the implementation of medical insurance cost control, and the two-invoice system in the high-value consumables field piloted in some provinces and cities will have a profound impact on the future development of the high-value consumables industry.

      The cancellation of surcharges on medical consumables is also mentioned again in this notice; the progress in many places has been fruitful. With this year'sJune cancellation of medical consumables surcharges by nearly 3700 hospitals in Beijing, more than 7000 hospitals in China have now canceled medical consumables surcharges. This will further squeeze out the "water" in consumable Prices, clarifying the consumable Price system.

      The notice also requires the scientific formulation of medical insurance payment standards for high-value medical consumables and the establishment of a dynamic adjustment mechanism. For high-value medical consumables of the same category and similar functions, explore the formulation of unified medical insurance payment standards. Medical insurance funds and patients pay for high-value medical consumables according to the medical insurance payment standards, guiding medical institutions to actively reduce procurement Prices.

      An executive of a medical device company, in an interview with a reporter from the Daily Economic News, said that the supervision of high-value consumables has been advancing in recent years, but some difficulties still exist. For example, from the perspective of enterprises, the high Price of high-value consumables is related to the high investment in technology and capital in the early stage, and of course, some costs in the circulation links are also included. If the difficulties of enterprises, circulation links, and hospitals can be resolved, the promotion of high-value consumable supervision will be smoother.

      To this end, the notice also emphasizes the strengthening of circulation management. Improve the scale, specialization, and informatization level of the high-value medical consumables circulation field. Public medical institutions should establish a distribution selection mechanism for high-value medical consumables to promote fair market competition. Standardize the management of purchase and sale contracts, and medical institutions should strictly complete payment according to the contract. Encourage local areas to combine actual conditions throughmethods such as the "two-invoice system" to reduce the circulation links of high-value medical consumables and promote open and transparent purchase and sale behavior.