This article originally appeared in China Business Review (CBR), the official magazine of the US-China Business Council (USCBC).
Chinese regulations on tendering and bidding practices published by the Ministry of Finance (MOF) in July are a promising sign for US pharmaceutical and medical device manufacturers that government procurement behavior will be better regulated to guarantee consideration of quality alongside price. However, true improvement for the industry will require regulators to faithfully implement the law and refrain from unofficial practices such as local favoritism, which sometimes plague procurement processes.
The existing law, which has governed drug and device procurement since 2003, called upon an assessment committee to equally evaluate product quality and price in determining selections. However, concerns over shrinking public healthcare insurance funds have placed greater pressure on the committee to disproportionately consider price over quality.
Although certain products were awarded contracts for meeting the highest standard performance threshold, the system often favored more inexpensive products that only met minimum quality standards. At times, these products were priced so inexpensively they did not reflect actual production costs. This influenced some companies to seek market access by being the lowest bidder in their product category, regardless of quality and performance. As a consequence, the assessment committee often favored low-priced generics over foreign-produced originator drugs and devices with superior product quality.
To improve this system, the new law requires the assessment committee to ensure low-price bids do not neglect quality. The law stipulates that when a bid is considerably lower than the average price offered by competitors, the committee will determine if the low price implies poor product quality or performance. The bidder is required to provide a written statement and relevant materials that justify the low price of the product. Should the bidder fail to provide an adequate rationale for the low price, the committee will dismiss the bid.
This adjustment could incentivize higher quality and performance standards for all drug and device manufacturers seeking Chinese market access. A stronger emphasis on quality could favor foreign companies’ products, which generally have quality and performance advantages over their domestic competitors.
While this is major step forward in reforming the drug and device evaluation system, the law must be implemented in good faith to have a positive effect.
Other unofficial factors also influence provincial bid selections, such as consideration toward candidates that have set up factories—and pay taxes—within a particular province. Candidates in national high-tech industrial parks have also received further consideration in the past. Because provincial assessment committees frequently include such criteria, which disregard quality and performance, local bidders can have advantages over outside competition in these situations. For the new law to achieve its goals, it will need to be implemented as drafted to offer a fairer playing field for foreign and domestic companies during assessment periods.
David Solomon is a Business Advisory Manager for the US-China Business Council, a private, nonpartisan, nonprofit organization of more than 200 American companies that do business with China.