Changes to drug prices after DRG implementation

Compared with centralized procurement, the impact of DRG implementation on drug prices is indirect, but the continuous impact is far-reaching
.

Compared with other countries, Japan's DRG model is relatively loose to hospitals.
Not only hospitals can join voluntarily (all other countries are compulsory), but the way of calculating prices is also beneficial to hospitals
.

The Japanese government officially launched DPC/PDPS (Diagnosis Procedure Combination Per-Diem Payment System) in 2003
.

As of 2019, the number of DPC groups is 4955, of which only 4296 are paid according to DPC, and the rest are still paid according to the project
.

Although Japan's DPC does not cover all hospitals, because DPC package payment sets a cap price for each operation, this promotes the substitution of generic drugs for DPC inpatient drugs in Japan
.

According to the data on the use of generic drugs released by the Ministry of Health, Labour and Welfare in March 2021, the proportion of generic drugs used in DPC hospitals is the highest among all categories, even higher than the out-of-hospital retail pharmacies that are mandated by policies to replace generic drugs
.

Chart: Generic Drug Substitution Ratio of Various Types of Institutions in Japan in 2020

Data source: Japanese Ministry of Health, Labour and Welfare, Latitude Health analysis

If we look at various regions, the regions with a high substitution rate of DPC inpatient generic drugs have a correspondingly higher substitution rate of outpatient and prescription retail, which means that the medication habits of the entire region have changed significantly at the same time
.

From the perspective of proportion, most of the prescriptions for inpatient drugs have flowed out.
Inpatient drugs only account for 1.
7% of all drug revenue, but 17.
5% of outpatient prescriptions remain in medical institutions
.

Since only more than 50% of hospitals and beds in Japan join DPC, this gives the market a valuable perspective to directly compare the impact of two different payment models on hospitals and medicines
.

First, the substitution rate of generic drugs in pay-per-project hospitals is much lower than that in DPC hospitals, with a gap of nearly 15 percentage points
.

Second, DPC drives the outflow of inpatient prescriptions
.

Finally, areas with poor medical resources are more affected by DPC
.
Due to the lack of abundant medical resources and the weak treatment capacity of complex diseases in these areas, it is difficult to transfer high-value drugs and consumables to pay by item after being affected by the fixed payment of DPC, so the substitution rate of generic drugs is extremely high
.
For example, the substitution rate of generic drugs in DPC hospitals in regions such as Hokkaido and Okinawa is as high as 90%
.
In areas with rich medical resources such as Tokyo, the replacement rate is correspondingly lower
.

Therefore, if we look at the experience of the Japanese market from the above three points, there may be three changes in the Chinese market: First, after the full coverage of DRG/DIP, the prices of medicines in the inpatient part of the hospital will continue to decline, and the substitution rate of generic drugs will continue to rose sharply
.
Second, more outpatient prescriptions in hospitals will stay in the body rather than outflow, but there is a possibility that the inpatient part will outflow, which is contrary to the current market perception and deserves continuous observation
.
Third, areas with backward medical resources, especially the central and western regions and at the county level and below, are greatly affected by DRG, and drug sales will be more severely impacted
.
On the contrary, large hospitals and eastern medical resources developed areas still have a certain buffer possibility
.
Although there is no possibility that China's DRG can transfer high-value drugs to project-based payment, there is still a relatively high possibility that prices of complex diseases will continue to rise, which is conducive to the market maintenance of high-value consumables and drugs
.

Overall, after the implementation of the DRG, the continued decline in hospitalization-related drug prices and the substitution rate of generic drugs is a long-term trend, and small and medium-sized hospitals and areas with backward medical resources will be more affected
.
Considering that the separation rate of medicines in Japan has reached 80%, the prescriptions in the Chinese market are still in the hospital, and the direct impact on the market will be greater
.