Urgent need to remove administrative power abuse in medicines bidding

By Xia Yibin, AnJie Law Firm
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In China’s essential medicines bidding system, which is widely adopted for the country’s medical procurement, there are occurrences of anti-competitive administrative power abuse, which means that the bidding policies and evaluation criteria formulated by provincial authorities contain biased protection for local pharmaceutical companies, and then restrict or eliminate the fair competition rights of their counterparts from other provinces.

夏毅斌 Xia Yibin 安杰律师事务所 合伙人 Partner AnJie Law Firm
Xia Yibin
Partner
AnJie Law Firm

Q: Compared to other acts of unfair competition in the medical field, what are the characteristics of anti-competitive administrative power abuse in the bidding process for essential medicines?

A: It is principally manifested in three ways:

  1. The implementing entities of this act of unfair competition are not business operators involved directly in market competition, but authorities in charge of essential medicines bidding, with a superior legal position to pharmaceutical companies harmed by administrative power abuse;
  2. The acts of unfair competition are by their nature the administrative acts of relevant authorities, and are imposed upon the pharmaceutical companies participating in essential medicines bidding;
  3. A pharmaceutical company harmed by anti-competitive administrative power abuse in essential medicines bidding is entitled to institute an administrative action.

Q: What are the pros and cons of the two-envelope system, which is widely adopted in basic medicines bidding?

A: The two-envelope system originally applied to basic medicines bidding in Anhui province, and its rationale is to divide the bidding procedure into two grading standards, the technical and economical bid, and the commercial bid. The former covers standards of product quality, enterprise scale, market reputation and others, while the latter is the price comparison standard considering similar medicines. The two-envelope system is a basic medicines bidding method promoted by the Ministry of Health nationally.

On one hand, the application of the two-envelope system severs the benefit chains where hospitals or doctors sustain themselves with the profits gained from pharmaceutical sales, and increases the affordability of medicines for patients by effectively cutting prices. On the other hand, because of the varied standards of implementation in provinces, some local authorities exploit this variance to deliberately set up rules of evaluation criteria when they apply the two-envelope system, in order to unfairly protect local pharmaceutical companies by restricting outsiders from entering local markets.

There is an urgent need to unify the implementing criteria of the two-envelope system to build a healthy and sound, fair and competitive pharmaceutical market.

Q: Who are the victims of administrative power abuse in the bidding process for basic medicines?

A: (1) This abuse impairs the fair competition rights of pharmaceutical companies from other provinces. Protectionism is popular in some provinces, where the authorities in charge of basic medicines bidding show discrimination, in the formulation of bidding policies and assessing criteria, against small and medium-sized enterprises (SMEs) from elsewhere, and impair their fair competition rights.

On 14 March 2014, Shandong province published the second list of bidders in the concentration of basic medicines procurement. Prior to the list, Shenyang Original Pharmacy sued the Health and Family Planning Commission of Shandong province, which is in charge of the essential medicines bidding process.

The company believed that the government procurement policies confirmed in the Shandong Province 2013 Document on National Essential Medicines Procurement are illegal and contain clauses discriminating against SMEs from other provinces.

(2) This abuse also impairs consumers’ right to choose medicines. Within the relevant medical markets, some cost-effective medicines produced by some enterprises are restricted by local authorities, leading to unfair competition. The choices of consumers are impaired because they cannot buy the cost-effective medicines offered by companies from other places.

Q: How can affected enterprises claim their rights?

A: Administrative power abuse in essential medicines bidding means not only unfair competition, but monopolistic behaviour as specified in the Anti-Monopoly Law. Pursuant to article 13 of the Supreme People’s Court Interpretations on Several Issues Concerning the Implementation of the Administrative Procedure Law, pharmaceutical companies are entitled to institute an administrative action.

An administrative action is a legal action where the legality of the accused authority’s administrative acts will be reviewed. The authorities in charge of bidding for purchases of basic medicines are responsible for offering evidence for their administrative acts and should prove to the people’s courts that the disclosed purchase documents, bidding policies, evaluation criteria and other files are pursuant to regulatory documents and have legality.

Q: How will administrative power abuse be eliminated in the future? How necessary is change?

A: Six national authorities including the Ministry of Commerce, the National Development and Reform Commission, the National Health and Family Planning Commission and the China Food and Drug Administration jointly promulgated, in September 2014, the Notice on Implementation of the 2014 Key Tasks of Medical Reform to Upgrade Pharmaceutical Distribution Services and Efficiency, which provides that authorities should speed up the elimination and abolition of policies and regulations restricting competition in medicines distribution, and build a unified national market.

This significant notice will be a milestone for breaking down bizarre incidents of power abuse in the pharmaceutical industry. One can imagine that local pharmaceutical companies will stop developing if administrative powers offer monopolistic protection, and outsiders would lose momentum after failing to clear obstacles of local protectionism if unfair competition goes on unchecked.

The entire industry would face difficulties in development, and the abuse of power would be the soil from where “power for money deals” grow and corruption thrives. In brief, there is an urgent need to restrict and eliminate this unusual phenomenon.

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