(SDPC document, Ji Jia Ge  No. 961)
In order to provide suitable conditions for the establishment of a socialist market economy, encourage competition in the pharmaceutical market, and reduce drug expenditures in providing patients with good quality and reasonably priced drugs, SDPC promulgates the following Guidelines for Drug Price Administration Reform (hereinafter "Guidelines") which has been approved by the State Council.
1. Adjustment in Drug Price Administration Methods
According to the principle that state macro control and regulation should be combined with the free market mechanism, the following two methods will be used for setting drug prices: government pricing and free market pricing. The drugs that are included in the National Drug List for Basic Medical Insurance and the special drugs of certain manufacturers or operators that are subject to monopoly conditions (including narcotics, psychiatric drugs, preventative and immunological drugs and drugs for family planning) shall have government set prices. Free market pricing will be used for those drugs that are not subject to government set pricing. The prices of such drugs shall be set by various businesses in the industry [including drug manufacturers, distributors, retailers, and medical institutions]. The control of price margins [between manufacturer and wholesaler, and that between wholesaler and retailer] will be eliminated.
With the establishment of a basic medical insurance system, the implementation of healthcare reform, and the improvement of relevant laws and regulations, the types and amounts of drugs subject to government pricing shall be gradually reduced, drugs subject to free market based pricing shall be further expanded so that the mechanism of marketplace can be brought into full play under state macro control and regulation.
2. Introduction of the Market Mechanism into Drug Price Administration
In principle, average drug category production costs shall serve as the base of government pricing, and average costs using advanced production methods will be used as the base to price those drugs for which supply exceeds demand. The sales costs and profit margins shall be regulated so that the businesses in the industry can cover reasonable costs and obtain reasonable profits. The price margin between manufacturer and wholesaler shall be combined with that between wholesaler and retailer, "different price margins" [smaller price margins for expensive drugs and larger price margins for cheaper drugs] shall be implemented, and the overall level of price margins in drug distribution shall be gradually adjusted.
For a drug subject to government pricing, the price administration department will set a ceiling retail price. Drug retailers (including medical institutions) shall decide on the actual retail price which shall not be higher than the ceiling price.
For a drug subject to free market pricing, a drug manufacturer shall set the retail price according to its operating costs and market conditions. Drug wholesalers and retailers (including medical institutions) shall determine the actual sale price which shall not be higher than the retail price set by the manufacturer.
3. Establishment of a Highly Responsive Mechanism for Drug Price Administration
The types and amounts of drugs subject to government pricing shall be reduced. The drugs included in the "A" List of the National Drug List for Basic Medical Insurance, and the special drugs of certain manufacturers or dealers that are subject to monopolistic conditions shall be priced by SDPC. The drugs included in the "B" List of the National Drug List for Basic Medial Insurance shall be priced by relevant provincial price administration departments according to the pricing principles set by the national government. Provincial price administration departments are authorized to set prices of national minority drugs included in the National Drug List. The price administration of prepared TCM and of hospital preparations shall be by provincial price administration departments.
For a drug which has a government set price, the price administration department shall duly adjust the price according to the cost of manufacture, market conditions of supply and demand, and actual distribution margins, etc. For a drug subject to free market pricing, its manufacturer shall duly adjust the retail price according to the cost of manufacture, supply and demand, etc.
4. Improvement in the Transparency and Scientificness of Drug Price Administration
For a drug subject to government set pricing, if its efficacy and safety are much better, therapeutic time shorter, and therapeutic cost much lower than other drugs of same category, the manufacturer of the drug may apply for an independent price. The relevant price administration department shall duly hold a public meeting to conduct an evaluation. SDPC and provincial price administration departments shall be responsible for establishing expert evaluation system(s) for government set drug pricing, in which relevant experts will be invited to evaluate drug prices. The price will be set according to the recommendations of these experts. The relevant administration departments shall negotiate regarding drug pricing. The pricing department shall publicize through media the ceiling retail prices of drugs subject to government pricing.
5. Strengthening the Administration and Inspection of Drug Market Prices
Drug operators shall follow the principles of fairness, legality, honesty and credibility in setting drug prices, and may not use fraudulent costs, set nominal prices, or dump drugs at low prices. Drug operators shall issue receipts according to the actual transaction price and value, and may not record false prices.
Drug prices shall be clearly marked. The printing of the retail price of the drugs subject to free market pricing on retail packages by drug manufacturers shall be gradually implemented. When a medical institution settles a bill with a patient, it is medical institution's obligation to provide the patient with information concerning the types, amounts and prices of the drugs used.
A drug price monitoring system shall be established. The key units of drug manufacturers and operators (including medical institutions) which are selected by relevant price administration departments shall duly report to the pricing department the information about drug manufacture and operation costs, actual transaction prices and volumes, etc. For drugs purchased through bidding, the relevant bidding organizers shall file the winning bid prices with the local price administration department.
Drug administration departments shall monitor and inspect drug prices according to the Price Law of PRC, and apply administration sanctions against any illegal practices according to the Regulation for Administrative Sanctions for Illegal Price Practices.
This Guidelines shall take precedence over any previous price regulation with which it is in conflict.
The price administration departments at all provinces, autonomous regions, and municipal cities shall conform and promulgate detailed implementation methods based on local conditions according to this Guidelines, and file the methods with SDPC.