| I. By the initiation of health care reform and implementation of essential medicines policy, problems such as segmentation of essential medicines policies and reform of the pharmaceutical distribution system, lack of thorough analysis for the physician's interest from the perspective of economic incentives become rising issues during the implementation process. This study used the methodology of stratified cluster sampling, investigated the status quo of the essential medicines provision in primary health facilities by referring to the Fourth National Health Services Survey and the "Survey of accessibility and utilization of Chinese essential medicines" conducted by WHO (World Health Organization), MOH (Ministry of Health) and FDA (Food and Drug Administration). The author also applied case study to analyze the policy influence on the pharmaceutical distribution value chain based on the health reform model developed by World Bank and Harvard University. Finally, the author focused on the key stakeholders of physicians by analyzing the value chain using the theory of contract, rent and transaction cost in new institutional economics, proposed strategies for purchasing, utilization, marketing, pricing and compensation in the essential medicines distribution value chain by alternatives comparison, analysis and assessment.II. According to statistics, utilization of essential medicines in primary health facilities was adequate based on the 2004 version of essential medicines list (above 2000 essential drugs). In community/township health care facilities, the purchasing rate of essential medicines reached 80%, and the utilization rate was beyond 90%. Although essential medicines were relatively less stored and sold in retail pharmacies, the total utilization rate of essential medicines were high because most of the drugs were sold in health facilities. However, there existed a shortage of some sorts of essential medicines throughout the distribution value chain in not only primary health facilities and retail pharmacies, but also in manufacturing. And if based on the latest version of essential medicines list involving 307 drugs, we could find that essential medicines were insufficient in primary health facilities. The problems in the essential medicines distribution chain contain:(1). Shortage of several sorts of essential medicines existed in the drug supply chain. There were two problems regarding accessibility of essential medicines. Firstly non-essential medicines were frequently used instead of essential medicines, although utilization of essential medicines in primary health facilities was relatively high. Secondly, for several diseases, the most cost-effective drugs could not be attained.(2). Using essential medicines did not significantly reduce health care expenditure and it could not slow down the increasing of drug cost.(3). Irrational drug use continued to be a significant issue. Antibiotic and injection were more widely used in lower-level hospital. Irrational drug use could bring about drug-induced diseases and increase drug expenditure. Both of them lead to inefficient use of essential medicines.The above problems were interrelated. We first observed shortage of some sorts of essential medicines in the distribution systems, which lead to higher pharmaceutical expenditure. Non-essential medicines could substitute essential medicines, which also related with high drug cost. Additionally, irrational drug use could further worsen the cost burden and reduce efficiency of drug utilization.III. In the recent reform of pharmaceutical distribution system, alternatives regarding each interest link throughout the essential medicines supply chain include:(1). The current purchasing model was based on centralized bidding system. Related schemes include centralized competitive bidding, competitive bidding with price limit, entrust purchasing, centralized and single-brand selection competitive bidding. In addition, dispersed purchasing model was also employed in few places.(2). The drug distribution mode was coordinated with manufactory centralized purchasing. The alternatives were manufactory combined with distribution merchants, manufactory with agents combined with distribution merchants and centralized selection by manufactory.(3). Purchasing methods included the decentralized procurement and payment as well as the decentralized procurement and centralized payment.(4). The pricing for essential medicines also had various alternatives. In the past, we used cost plus method. Recently, discriminated cost plus, zero-markup rate and public production cost plus method were applied. The zero-markup pricing would become the major pricing method under the new policy.(5). Several mechanisms including prescription guidelines, monitoring of the prescription combination and control of prescription cost were adopted to regulate the physician's or pharmacists'behaviors in terms of prescribing essential medicines. The latter two mechanisms were more feasible and dominated, the former one were currently underway. (6). The traditional compensation model was actually compensated by their own revenue and expenditure. Now there were more compensation models for primary health facilities. Separation between revenue and expenditure, insurance capitation and public-private partnership were applied. Public compensation was the widely-used model. However, constrained by the financial condition, some local government could not cover compensation for essential medicines.(7). A new essential medicines list has been published recently, I will briefly introduce it in the following section.â…£. In the above alternatives, the following factors may cause the problems existed in the essential medicines supply chain.(1). The purchasing cost could hardly be lowered. In the centralized competitive bidding model, the stakeholders such as purchasing parties, distribution parties, regulation parties reached their equibrilium. It would be more difficult to break the equibrilium and bring the cost down.(2). Lack of regulation on essential medicines prescription. First, the essential medicines list was not mandatory, which had little influence on physician's prescribing behaviors. Second, prescription guidelines, monitoring and cost control were not applied with economic incentives, which resulted in no direct effect on rational drug use.(3). The pricing and compensation model did not adjust the distorted structure of revenue and expenditure in health facilities. Recently, the structure of pharmaceutical revenue and balance was unreasonable among health facilities including primary health care institution. On the one hand, the increase of pharmaceutical expenditure induced financial burden for patients, and offset the impact of price regulation. On the other hand, the decrease of balance through pharmaceutical sales exacerbated the financial situation in urban hospitals.(4). By far the empirical data regarding the effect of the essential medicines policy were unavailable, but we can predict that the accessibility to essential medicines would be significantly improved to a considerable extent over time after perfection of the specific strategies. Nevertheless, utilization of essential medicines would only be increased after implementation of the National Essential Drug Guideline and the National Essential Drug Formulary. Yet the primary derivative question is whether it could reduce patients'financial burden. Currently, local governments confronted the rising pressure to compensate primary health facilities for not selling medicines. Even in affluent cities like Shanghai where public funding could afford the compensation, they still had to figure out the feasible mechanisms for financial compensation.(5). Economic analysis based on rental and transaction cost theory was conducted to analyze the provision, demand and resource allocation of medical services. Essential medicines were defined as quasi-public goods. The author found that the causes to the problems within essential medicines distribution value chain were:1. as quasi-public goods, essential medicines were not guaranteed by public financing.2. Contradiction between physicians'financial incentive for rental compensation and public feature of essential medicines.3. Market equilibrium price for essential medicines had not been identified and determined.(6).The author systematically compared and combined different kinds of alternatives using theories such as rental and transaction cost in the new institutional economics in order to find out the best strategy under ideal conditions. The recommended solutions were:based on the latest essential medicines list, using capitation as a key insurance solution to encourage health facilities seeking the right financial incentive; applying zero-markup method to disconnect the interest between health care facilities and pharmaceutical industry; promoting clinical guidelines and formulary and conducting the third party accreditation to induce cost for physicians seeking pharmaceutical rental compensation; facilitating patients to buy medicines outside the health institution so as to reduce the rental profits for medical facilities; applying centralized competitive bidding at provincial level and single-brand selection at county/prefecture level that organized by the department of health insurance and applying decentralized purchasing with centralized payment to guide healthy competition among upstream supply chain and find out the equilibrium price. Furthermore, considering the inadequate public financing, substitute financing strategies should be applied gradually.(7). Based on the optimal solution, the author proposed policy recommendations as follows:a. Given the government-led and market-supplemented guidelines, government should target on formulation of essential medicines list, regulation of clinical prescription, monitoring retail pricing, public financing and regulation of purchasing mechanism. And pharmaceutical companies in the market should play a critical role in recourse allocation throughout the manufacturing and provision chain of essential medicines. And they should also compete in the selling market of essential medicines.b. Based on the current essential medicines list, primary health facilities must ensure that all the essential medicines in the list should be stored and utilized. And the list could then be gradually adapted to the actual demand in the market.c. Finance essential medicines provision, distribution, utilization through health insurance complemented by public funding, gradually increase the level of insurance financing and compensation, and include public funding into the regulation of health insurance. In the areas with affluent insurance and public funding, capitation method combined with scientific measurement and calculation should be applied; whereas in areas with insufficient funding, propayment system with monitoring and censoring should be applied. Meanwhile, compensation of medical services for physicians should be steadily improved.d. Production cost plus pricing and cost plus pricing reference to production cost should gradually be cancelled. Zero-markup pricing, which equals to purchasing price, should be implemented. In the areas where insurance and government could not afford pharmaceutical compensation, alternatives such as bid price through competitive bidding at province level could be used.e. Essential Medicines Clinical Guideline and Essential Medicines Formulary should be promoted in health facilities and referred as professional prescription for physicians, and should be assessed by a third party as a crucial qualification test for health facilities and physicians.f. Electronic prescription and formulary information network (authorized by the patients) could be promoted in areas with necessary infrastructure. Otherwise computer-based printed prescription should be used. More importantly, retail industry certified by department of health insurance should be given the incentive to compete with health facilities to provide essential medicines.g. The centralized purchasing system of essential medicines composed of purchasing parties, health facilities, health care administration and department of finance should adopt the following strategies:a) Centralized competitive bidding through transparent on-line competition among manufacturing companies should be organized at the provincial level. Within each province, single-brand selection should be applied at the county level. Under the prepayment insurance system, health insurance payment should be calculated based on the discount price. Under the propayment insurance system, payment should be according to the price before discounting.b) Each province should organize selection of logistic companies. Grass roots logistic companies should be selected at the county level. For the provision chain in which agent companies participated, tax department should examine the bills so as to control illegal promoting behaviors.c) Each county should purchase the pharmaceutical cost using public financing for the health care institution unity under the guidance of health administration at a timely manner. For areas where public could not afford the expenditure, financial institutions could be integrated to provide financing services and third-party trust for the sustainability of the essential medicines provision.h. Except for the regulation on the terminal demand, government should not intervene the organization and production of essential medicines manufactories in principle. Financial and monetary methodologies could be used to indirectly affect the production and distribution of essential medicines if necessary.i. Introduce agent services such as information, finance, auditing and assessment to provide support for efficient and high quality policy implementation so as to reduce the transaction cost and improve the outcome.j. Moreover, we should promote diversified competition by encouraging participation of private parties into health care education, health services, expanding provision of medical services, and gradually permitting price competition in health care market.
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