China -  Chinese law firm

What are the shortcomings and problems in implementation of the hospital bidding?

(a) Inequality Between Bidders and Hospitals

Since hospitals control the whole bidding process, sometimes they do not undertake corresponding responsibilities, such as:

1. Bidders not being awarded bids unless they agree to unreasonable conditions required by hospitals.

2. Hospitals do not purchase the winning products; instead, they prefer to buy other medicines with larger margins or hospital-made drugs.

3. Hospitals do not make timely payments. Many payments are made at least 3 months after drug delivery. Some of payments are made only after all the drugs have been provided to patients. Some hospitals are not making any payments.

4. No minimum-purchase amount for winning products. Some hospitals order such small amount that the transportation fee is higher than the profit. Hospitals often return the products to the bidders after the purchasing deadline expires. However, in accordance with the bidding regulations, hospitals should continue to use the remaining drugs in the next purchase period.

5. Hospitals set various fees/deposits, e.g. bidding guarantee deposit; which will become a contract performance guarantee deposit after bidding. Losers cannot get their deposit refunded; winners also cannot get their deposit refunded as the hospitals set impracticable conditions. Hospitals deduct the deposits due to the delayed performance of the delivery companies, but do not inform the bidders.

6. Hospitals purchase the drugs at a lower price, but sell to the patients at the original retail price. The larger margin becomes hospital income and is not shared with patients.

7. Hospitals adopt unfair scoring systems such as in Guangdong Province where such systems have removed the balance between quality and price, resulting in price being primarily purchasing factor. As a result, many hospitals separately purchase drugs that have not won the bid.

8. Hospitals have no liability for national taxes (including VAT and income).

Results of the problem: Inequality, with hospitals having more power, has increased inappropriate practices. In order to win the bid, bidders have to lobby the hospitals in various ways, and some bidders do so inappropriately. This causes even more disorder in the market.

(b) Agent's (Purchasing Center's) non-standardized operations

1. Tendering agents charge illegal fees such as guarantee deposit, administrative fee, participation fee, expert evaluation fee, bid winning service fee, drug quality inspection fee, contract performance guarantee, etc.

2. Complex bidding procedures and too many required bidding documents. Over time, local and national databases should be built so that bidders do not continually need to "qualify" themselves.

3. Some company is beginning to dominate the market and supposedly it is working on some draft standardized bidding documents/forms for MOH. These draft documents have not yet been provided to industry for comments.

Results of the problem: The illegal fees and certain "qualification" documents will likely be reduced, but industry must be given the opportunity to comment on draft-standardized documents.

(c) Price rather than quality is given undue weight in bid appraisal

Because quality and business reputations are difficult to quantify, experts tend not to give such a large point spread between products. Price, which is in a certain sense self-quantifying and easier to compare leads to a larger point, spreads and therefore takes an inappropriate weight.

Certain price barriers could be found in bidding regulations of local governments and hospitals. Hospitals typically use the lowest purchasing price of prior purchases as a price cap in awarding bids. Some places such as Beijing do not have such a cap.

Any bidding at a reduced price carries the risk of further the State Development Planning Commission ("SDPC") retail price cuts.

Results of the problems:

1. Because of reduced prices as a result of bidding, some government officials have noted that certain essential drugs are no longer available in certain hospitals.

2. Some manufacturers reduce cost by reducing active ingredients and other methods that seriously impact on drug quality.

3. Some companies reregister of drugs (the drug ingredients are same), or sell the drugs under different names, at a price that several times higher than original price. As a result, patients cannot obtain any benefit from bidding.

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