Summary of Key Points
This marks a significant turning point for the domestic traditional Chinese medicine (TCM) formula granule industry: Hunan has taken the lead in announcing that starting from September 15th, all public hospitals in the province must implement a zero-markup policy, meaning they can sell TCM formula granules for exactly the same price as they purchase them, with no additional profit allowed. This is just the first wave of changes across the country, with other provinces following suit. For over the past 20 years, TCM formula granules have been a lucrative business sector for both hospitals and pharmaceutical companies, thanks to exclusive policy benefits. Now that all these special privileges have been abolished, the industry is bidding farewell to its golden era of high margins and is facing a major reshuffle characterized by both declining prices and volumes. The logic of making money through policies is no longer viable.
---
Detailed and Easy-to-Understand Explanation
Why were TCM formula granules so popular in hospitals over the past 20 years?
There were three main reasons:
1. Hospitals were allowed to charge up to a 25% mark-up on these granules. For example, if a hospital purchased a packet of granules from a manufacturer for 40 yuan, they could sell it for 50 yuan, earning a net profit of 10 yuan. The more they sold, the more they made.
2. TCM formula granules were managed in the same way as traditional TCM decoction pieces, which were not included in the hospital's "drug percentage" assessment. In other words, health insurance authorities set rules specifying that the proportion of drug revenue in total hospital income could not be too high. Selling too many traditional Western or proprietary Chinese medicines could result in penalties, but this did not apply to TCM formula granules.
3. These granules were not subject to national price negotiations, meaning any inflated prices were pure profit.
Thanks to these benefits, the market for TCM formula granules grew to 24 billion yuan in 2021, with leading companies like China Traditional Chinese Medicine and Hongri Pharmaceutical reaping huge profits.
The new zero-markup policy is a major shift
This policy does not represent a minor adjustment; it completely changes the industry's profit-making model. Previously, hospitals had the incentive to sell TCM formula granules because they could charge a higher price. Now, they are required to sell them for exactly the same price as they buy them, with only a small "dispensing fee" as compensation for the time and effort spent preparing the medication. For instance, in Shandong, the fee is set at 4 yuan per packet, but this amount is not even enough to cover the costs associated with storing the granules (which require special conditions) and preparing them. As a result, hospitals are no longer able to earn the 10 yuan profit margin they used to.
The impact of the zero-markup policy
The previous price cuts from national negotiations only affected the selling price of the granules, not the hospitals' profit margin. With the zero-markup policy, hospitals have no incentive to sell TCM formula granules at all. This will lead to a decrease in both prices and sales volumes. Leading companies like China Traditional Chinese Medicine have already seen a significant drop in revenue (35% in the first half of the year), and smaller manufacturers will face even greater challenges. Previously, some companies argued that hospital demand did not decline significantly after price cuts, but this is because the zero-markup policy has not yet been implemented nationwide. Once it is, the pressure on demand will become evident.
The need for competitiveness
Without the policy protection, the TCM formula granule industry must now focus on its product's competitiveness. If these granules are truly more convenient, of higher quality, and not much more expensive than traditional decoction pieces, hospitals will be willing to stock them to retain patients. However, if they are not, they will be phased out of hospital pharmacies. Only the most competitive companies will survive by providing genuine value to patients and building a solid market presence. Many smaller manufacturers that relied on policy benefits will likely go out of business, and the remaining leaders will need to improve their products and compete on a genuine basis.