Volume-Based Procurement in China’s Healthcare System: Implications for Multinational Pharmaceutical and MedTech Companies

2025-08-06 Research Reports 0

Abstract

China’s Volume-Based Procurement (VBP) program, strategically initiated in 2018, represents a paradigm shift in the nation’s pharmaceutical and medical device sectors. This comprehensive report meticulously examines the intricate mechanisms, multifarious objectives, foundational historical context, and profound ongoing impacts of VBP on multinational pharmaceutical and MedTech companies operating within China. Furthermore, it delves into the nuanced strategic adaptations that these companies are rigorously implementing to navigate and succeed within this rapidly evolving and highly regulated market environment. The analysis underscores VBP’s dual role in national healthcare reform: simultaneously achieving substantial cost reductions and fostering a reorientation of competitive dynamics towards domestic players and high-value innovation.

Many thanks to our sponsor Esdebe who helped us prepare this research report.

1. Introduction

The Chinese healthcare landscape has been subjected to a continuous and accelerating series of reforms over the past decade, driven by a complex interplay of factors including an aging demographic, rising healthcare expenditures, and the national ambition for universal health coverage. Within this transformative backdrop, the Volume-Based Procurement (VBP) program stands as perhaps the most pivotal and disruptive policy intervention. By centralizing the procurement of a vast array of medications and medical devices, the Chinese government aims to fundamentally overhaul its healthcare financing model, drastically reduce costs for both the state and individual patients, and concurrently enhance accessibility to essential healthcare products across its immense population.

However, the implementation of VBP has not been without significant repercussions, particularly for multinational corporations (MNCs) that have historically enjoyed substantial market dominance and lucrative margins within the Chinese market. These companies, long accustomed to a different competitive paradigm, now face unprecedented pressures on their revenue streams, profitability, and established market strategies. Understanding the intricate mechanics, underlying strategic intentions, and far-reaching implications of VBP is no longer merely advantageous but absolutely essential for these global players to formulate robust, effective, and sustainable strategies in what remains one of the world’s most dynamic and critical healthcare markets. This report seeks to provide a detailed, analytical framework for comprehending these complexities and the strategic imperative they present.

Many thanks to our sponsor Esdebe who helped us prepare this research report.

2. Historical Context and Evolution of Chinese Healthcare Procurement

To fully appreciate the significance of VBP, it is crucial to understand the historical trajectory of China’s healthcare procurement system and the persistent challenges that necessitated such a radical reform.

2.1 Pre-VBP Era: Fragmentation and Inefficiency

Prior to the comprehensive VBP rollout, China’s drug and medical device procurement was largely decentralized and fragmented. Hospitals and provincial health authorities conducted their own procurement, leading to a highly inefficient system characterized by:

  • High Markups: A deeply ingrained system of markups (often exceeding 15% on drug sales) on top of manufacturer prices allowed hospitals to generate significant revenue, disincentivizing cost control and encouraging over-prescription. This system, while financially beneficial for hospitals, directly inflated healthcare costs for patients and the state.
  • Decentralized Bidding: Procurement tenders were often conducted at the provincial or even municipal level, resulting in varying prices for the same product across different regions. This lack of centralized bargaining power meant that the government could not leverage the sheer scale of its national demand to secure optimal prices.
  • Lack of Transparency and Corruption: The opaque nature of multi-layered distribution channels and decentralized procurement created fertile ground for illicit payments, kickbacks, and other forms of corruption, further driving up prices and eroding public trust. Stories of ‘gray market’ activities and relationships influencing procurement decisions were common.
  • Fragmented Supply Chain: The numerous intermediaries between manufacturers and hospitals added significant costs and inefficiencies, making it difficult to track product origin, ensure quality, and streamline distribution.

2.2 Early Reforms and the ‘Two-Invoice System’

Recognizing these systemic issues, the Chinese government initiated several reform efforts in the years leading up to VBP. A significant step was the introduction of the ‘Two-Invoice System’ (liang piao zhi) in 2017, designed to streamline the distribution chain by limiting the number of invoices between manufacturers and medical institutions to just two (one from manufacturer to distributor, and one from distributor to hospital). The primary goal was to compress the distribution margin, enhance transparency, and crack down on ‘shell companies’ used for illicit transactions. While a step in the right direction, its impact was limited by the persistence of decentralized purchasing and the fundamental hospital revenue model.

2.3 Rationale for VBP: A Comprehensive Solution

The limitations of prior reforms underscored the need for a more comprehensive and forceful intervention. VBP emerged as the flagship policy to address the persistent issues on a national scale. The rationale was multi-faceted:

  • Systemic Cost Reduction: To fundamentally lower the financial burden on the National Healthcare Security Administration (NHSA) and individual patients by leveraging centralized, large-volume purchasing power.
  • Promoting Rational Drug Use: By making high-quality, often generic, medicines significantly cheaper, VBP aimed to encourage doctors to prescribe these cost-effective options, thereby reducing reliance on more expensive patented drugs where equally efficacious alternatives exist.
  • Industrial Restructuring: To consolidate China’s highly fragmented pharmaceutical and MedTech industries, weeding out inefficient producers and fostering competition based on quality and innovation rather than price inflation and marketing.
  • Enhanced Accessibility: To ensure that a broader range of essential medicines and devices are affordable and available, particularly in lower-tier hospitals and rural areas, thereby advancing the goal of equitable healthcare access.
  • Curbing Corruption: To centralize decision-making, increase transparency in pricing, and reduce opportunities for rent-seeking behavior that plagued the previous system.

VBP, therefore, represents not just a procurement policy but a profound strategic tool for industrial policy, healthcare financing reform, and public health improvement in China.

Many thanks to our sponsor Esdebe who helped us prepare this research report.

3. Mechanisms of Volume-Based Procurement

VBP operates through a meticulously designed centralized procurement system, spearheaded primarily by the National Healthcare Security Administration (NHSA), which was established in 2018 to oversee all aspects of healthcare security, including drug and medical device procurement, pricing, and reimbursement.

3.1 Government-Led Bulk Purchasing

The core of VBP lies in the NHSA’s ability to aggregate the vast purchasing power of China’s public medical institutions. Instead of individual hospitals or provinces negotiating separately, the NHSA, often in collaboration with the Joint Procurement Office (JPO), initiates national or regional procurement rounds for specific categories of products.

  • Product Selection: The NHSA meticulously selects products for VBP rounds based on several criteria:
    • Generic Drugs: Products with multiple generic manufacturers that have passed bioequivalence testing are prime candidates, especially those with high clinical utility and significant market volume.
    • Patented Drugs Post-Patent Expiry: Once patents expire, these drugs become eligible, forcing original manufacturers to compete with generic versions on price.
    • High-Value Medical Consumables: This category includes a wide range of devices such as coronary stents, orthopedic implants (hip and knee joints), intraocular lenses, and diagnostic reagents, which collectively represent a substantial portion of healthcare expenditure.
  • Volume Commitment: A critical feature of VBP is the commitment of a substantial guaranteed volume from public hospitals to the winning bidders. This guaranteed volume, typically 50-80% of the total estimated demand for the product category within the VBP period (usually 1-3 years), provides a significant incentive for manufacturers to offer steep price reductions. For example, in the national procurement of hip and knee implants in 2021, the promised volume was a crucial factor enabling average price reductions of nearly 80%, with some products seeing cuts up to 97.9% (medicaldevice-network.com). This guaranteed volume ensures market access and a predictable sales base for winning companies, albeit at significantly lower prices.
  • Centralization and Standardization: By centralizing procurement, the NHSA aims to eliminate regional price disparities and establish a nationwide standardized pricing system for VBP-selected products. This fosters a more equitable healthcare system where patients in different provinces pay similar prices for the same essential products.

3.2 Price Tenders and Bidding Process

Under VBP, the government conducts highly competitive price tenders, inviting eligible companies to submit bids for supplying specified products. The process is designed to be transparent, efficient, and relentlessly competitive:

  • Eligibility Criteria: Companies must meet stringent criteria, including product registration, manufacturing capabilities, and often, a track record of quality compliance. For generic drugs, passing China’s consistency evaluation (bioequivalence testing) is mandatory.
  • Bidding Rules and Structures: The bidding rules are precisely defined, often involving tiered bidding. For instance, depending on the number of participating companies and their submitted prices, multiple winners might be selected. This ‘multiple winner’ approach ensures supply stability and some level of competition, even post-tender. Typically, a certain number of the lowest-priced bids (e.g., 2-4 winners for drugs, more for devices) are awarded contracts, with the volume allocated based on their rank or a pre-determined formula. The specific rules vary by VBP round and product category.
  • Price Reduction Methodology: The competitive nature of the bidding drives down prices dramatically. Companies are incentivized to offer aggressive discounts to secure a share of the guaranteed volume. The lowest bids often set the benchmark, and subsequent rounds have shown a ‘ratcheting down’ effect, where prices continue to fall based on previous VBP results. This competitive environment has been particularly impactful in the high-value medical devices market, where MNCs have faced immense challenges due to their inability to meet the steep price reductions required to secure contracts (merics.org).
  • Implementation and Enforcement: Once winners are selected, supply contracts are signed. The NHSA and local health authorities closely monitor the execution of these contracts, ensuring timely supply and adherence to quality standards. Payment mechanisms are also streamlined, with hospitals typically making direct payments to manufacturers or through a single distributor, further reducing the scope for intermediaries and markups. Compliance failures can lead to severe penalties, including exclusion from future VBP rounds.

Many thanks to our sponsor Esdebe who helped us prepare this research report.

4. Objectives of Volume-Based Procurement

VBP is underpinned by a multi-faceted set of objectives, extending beyond mere cost reduction to encompass broader goals of healthcare reform and industrial policy.

4.1 Reducing Healthcare Costs

This is arguably the most immediate and visible objective of VBP. By centralizing procurement and negotiating bulk discounts, the government aims to significantly lower the acquisition costs of medications and medical devices for public hospitals and the national healthcare insurance fund. This, in turn, is intended to reduce the financial burden on the Chinese healthcare system, which faces increasing pressure from an aging population and rising prevalence of chronic diseases. Estimates suggest that VBP has saved billions of yuan annually. For instance, the 2021 VBP round for orthopedic artificial joints alone led to an estimated saving of 16.2 billion yuan per year compared to pre-VBP prices, a clear demonstration of the policy’s efficacy in cost containment (pmc.ncbi.nlm.nih.gov). These savings are crucial for the long-term fiscal sustainability of China’s universal health insurance system.

4.2 Increasing Access to Healthcare Products

By making essential medications and medical devices dramatically more affordable, VBP seeks to enhance patient access, particularly for those in lower-tier hospitals, rural areas, and economically disadvantaged populations. Lower prices mean that more patients can afford necessary treatments and interventions, leading to improved health outcomes and reduced out-of-pocket expenses. This objective aligns with China’s broader national strategy to achieve ‘Healthy China 2030’ and ensure equitable access to quality healthcare across all segments of society (pmc.ncbi.nlm.nih.gov). The availability of high-quality, VBP-negotiated products at lower prices also encourages hospitals to utilize these treatments more broadly, rather than being constrained by budget limitations.

4.3 Promoting Industrial Upgrading and Innovation

While not always explicitly stated as a primary objective in official announcements, VBP serves as a powerful instrument for industrial policy. By favoring price-competitive bids, the program implicitly encourages domestic pharmaceutical and MedTech companies to enhance their efficiency, scale, and R&D capabilities. The fierce competition compels companies to invest in process optimization, quality control, and ultimately, innovation, rather than relying on high markups.

  • Consolidation of Domestic Industry: VBP weeds out inefficient or uncompetitive domestic players, leading to consolidation and the emergence of stronger, more capable domestic champions. These larger entities are better positioned to invest in R&D and compete globally.
  • Shift from Generic Volume to Innovative Value: For domestic companies, VBP creates a clear incentive to move beyond producing low-cost generics and focus on developing novel drugs and medical devices that can command premium prices outside the VBP framework. This aligns with China’s national strategy to transition from a ‘manufacturing power’ to an ‘innovation power’.
  • Enhancing Quality Standards: The requirement for generic drugs to pass consistency evaluation tests before being eligible for VBP rounds directly pushes domestic manufacturers to improve their product quality to international standards.

4.4 Combating Corruption and Improving Transparency

The centralized and transparent nature of VBP bidding processes significantly reduces opportunities for corruption and illicit payments that plagued the previous decentralized system. By making pricing public and procurement decisions based primarily on competitive bids and volume commitments, the scope for ‘gray market’ activities and personal influence is greatly diminished. This promotes fairer competition and enhances public trust in the healthcare system, aligning with the government’s broader anti-corruption drive.

Many thanks to our sponsor Esdebe who helped us prepare this research report.

5. Historical and Ongoing Impact on Multinational Pharmaceutical and MedTech Companies

For multinational corporations (MNCs) that have historically dominated segments of the Chinese market, VBP has presented an unprecedented wave of challenges, forcing a fundamental re-evaluation of their long-standing business models.

5.1 Revenue and Margin Pressures

Perhaps the most immediate and profound impact of VBP has been the dramatic erosion of revenues and profit margins for MNCs. The steep price reductions, often ranging from 50% to over 90% for VBP-selected products, have made it exceptionally challenging for these companies to maintain profitability on products subject to the program. For instance, in the first national VBP round for drugs in 2019, prices for 25 selected generic drugs fell by an average of 52%, with some falling by as much as 96%. Similar trends have been observed in subsequent rounds and for medical devices. When VBP expanded to high-value medical consumables, companies like those producing coronary stents saw prices plummet from around 13,000 yuan to 700 yuan (approximately a 90% reduction).

This ‘race to the bottom’ effect directly impacts an MNC’s P&L in China. Lower prices translate directly into reduced revenue for products included in VBP. Furthermore, the volume commitment for winning bids, while substantial, often comes at a price point that makes it difficult to cover global R&D costs, manufacturing expenses, and existing marketing structures. This has led some companies to reassess their strategic presence. For example, in March 2023, U.S.-based Zimvie announced plans to withdraw its spine business from the Chinese market, explicitly citing the challenges posed by VBP as a primary factor (zs.com). Such decisions highlight the existential threat VBP poses to products with limited differentiation and high exposure to the program.

5.2 Market Concentration and Shifting Competitive Landscape

VBP has accelerated a significant shift in market share, favoring domestic companies capable of meeting the aggressive price points. The policy has acted as a catalyst for market concentration, with fewer, larger players emerging as dominant forces in VBP-affected categories.

  • Domestic Gain: Domestic companies, often with lower cost structures, shorter supply chains, and a greater willingness to accept thinner margins for volume, have been more successful in VBP bids. For example, after the introduction of VBP for artificial joints in 2021, the share of domestically produced products in public hospitals increased to 58.4% in 2022, a substantial rise from approximately 30% in 2020 (merics.org). This trend is replicated across various drug and device categories, indicating a clear strategic preference for domestic supply under VBP.
  • The ‘Winner-Takes-All’ Dynamic: While multiple winners are often chosen, the vast majority of the procurement volume is allocated to the lowest bidders. This creates a ‘winner-takes-most’ dynamic, marginalizing companies that cannot compete on price. MNCs, with their premium pricing strategies, often find themselves either winning a small, unprofitable share or being entirely excluded from the public hospital market for VBP products.
  • Impact on Sales and Marketing: With prices fixed and volumes guaranteed through central tenders, the traditional sales and marketing models based on relationship-building with individual hospitals or doctors become largely obsolete for VBP products. This has led to significant restructuring, downsizing, or reallocation of sales forces within MNCs, further impacting their operational footprint in China.

5.3 Quality Concerns and Supply Chain Implications

The intense focus on cost reduction inherent in VBP has, at times, raised concerns regarding product quality. The Chinese government, acutely aware of these potential pitfalls, has implemented stringent quality requirements, particularly for generic drugs (consistency evaluation) and has enhanced post-market surveillance.

  • Balancing Cost and Quality: While VBP aims to secure ‘good quality at low prices,’ the significant price cuts have led to anxieties among some stakeholders about whether manufacturers might compromise on raw materials or manufacturing processes to maintain any semblance of profitability. Reports of quality issues with certain drugs eligible for distribution through public hospitals have prompted investigations by Chinese regulators, underscoring this delicate balance (reuters.com). These investigations, though limited in scope, highlight the government’s commitment to quality control amidst cost pressures.
  • Supply Chain Resilience: MNCs face challenges in maintaining robust and resilient global supply chains when faced with drastically reduced margins for products sold into China via VBP. Ensuring consistent supply, managing logistics, and upholding quality standards at VBP prices can be a complex operational challenge, potentially leading to supply disruptions if not managed effectively.

5.4 R&D and Innovation Strategy Re-evaluation

VBP has forced MNCs to critically re-evaluate their global and local R&D strategies for the Chinese market. Products that are nearing patent expiry or have established generic competition are now seen as highly vulnerable to VBP. This shifts strategic focus significantly.

  • Prioritizing Novel Assets: MNCs are increasingly prioritizing the development and rapid market entry of novel, highly differentiated drugs and medical devices. These innovative products, without direct generic competition, are less likely to be immediately subjected to VBP and can potentially command premium prices, at least until their patent expires or suitable generic alternatives emerge.
  • China-Specific R&D: Some MNCs are increasing investment in R&D centers within China, focusing on developing products that specifically address unmet medical needs prevalent in the Chinese population. This ‘in China, for China’ R&D strategy aims to create unique value propositions that are less susceptible to VBP’s price-cutting mechanisms.

Many thanks to our sponsor Esdebe who helped us prepare this research report.

6. Strategic Adaptations by Multinational Companies

In response to the profound transformation wrought by VBP, multinational pharmaceutical and MedTech companies have embarked on a series of sophisticated strategic adaptations to navigate the evolving Chinese healthcare market and ensure long-term viability.

6.1 Focus on Differentiated Innovation and Pipeline Prioritization

Recognizing that VBP primarily targets established, often commoditized, products, MNCs are shifting their strategic focus towards truly innovative and differentiated offerings. This involves a multi-pronged approach:

  • Accelerated Launch of Novel Products: Companies are prioritizing the rapid introduction of new drugs and medical devices into the Chinese market, leveraging pathways like the China Green Channel (Priority Review pathway) for products addressing unmet clinical needs. By being first-to-market with novel therapies, they can establish a strong market presence and potentially secure premium pricing before generic alternatives emerge or VBP targets the category. This aligns with a ‘value over volume’ strategy, emphasizing the clinical benefits and unique selling propositions of their cutting-edge portfolio (linkedin.com).
  • Investment in High-Value Therapeutic Areas: MNCs are directing R&D investments towards complex diseases with high unmet needs, such as advanced oncology, rare diseases, specialized cardiovascular conditions, and neurological disorders. Products in these areas often have fewer direct competitors and are more likely to be reimbursed through alternative mechanisms or command higher prices due to their unique therapeutic value.
  • Lifecycle Management Beyond Price: For products that may eventually face VBP, companies are exploring strategies to extend their lifecycle and perceived value beyond just the molecule itself. This includes developing new formulations, expanding indications, or integrating digital health solutions and patient support programs that add value beyond the core product.

6.2 Partnerships and Localization

Collaborating with local Chinese companies has emerged as a crucial strategic imperative for MNCs. These partnerships offer multifaceted benefits, enabling MNCs to mitigate VBP’s impact and gain deeper market penetration:

  • Joint Ventures and Strategic Alliances: MNCs are forming joint ventures or strategic alliances with domestic MedTech and pharmaceutical firms. These collaborations can involve co-development, co-manufacturing, or co-distribution agreements. Local partners often possess a better understanding of the Chinese regulatory landscape, established relationships with local hospitals and distributors, and a more competitive cost structure for certain product lines. For instance, some MNCs might license out their VBP-susceptible products to local partners for local manufacturing and distribution, allowing them to participate in VBP at a lower cost base, while the MNC focuses on its premium, innovative portfolio (zs.com).
  • Technology Transfer and Local Manufacturing: To reduce costs and demonstrate commitment to the Chinese market, MNCs are increasingly investing in local manufacturing capabilities or engaging in technology transfer. ‘Local for local’ production can reduce tariffs, import duties, and logistics costs, potentially making products more competitive in VBP rounds or for non-VBP segments.
  • ‘In China, for China’ Strategy: Beyond manufacturing, this philosophy extends to R&D and clinical trials. Establishing local R&D centers, conducting clinical trials in China, and developing products tailored to Chinese patient needs or regulatory requirements can provide a distinct competitive advantage and foster stronger ties with local stakeholders.

6.3 Market Segmentation and Channel Diversification

MNCs are no longer solely reliant on the public hospital channel, which is heavily impacted by VBP. They are adopting sophisticated market segmentation strategies and diversifying their distribution channels to protect revenue and explore new growth avenues:

  • Targeting Premium Segments: A key strategy is to focus on premium segments where price sensitivity is lower. This includes private hospitals, high-end clinics, and specialized medical centers that cater to affluent patients or those seeking specific advanced treatments. These institutions may be less reliant on VBP-negotiated prices and more willing to pay for perceived superior quality, brand reputation, or innovative features (eos-intelligence.com).
  • Retail Pharmacy and Online Channels: For pharmaceutical products, MNCs are expanding their presence in retail pharmacies, both brick-and-mortar and online platforms (e.g., e-pharmacies, O2O models). While these channels may have different pricing dynamics and require different marketing approaches, they offer an alternative route to market for products not covered by VBP or for which patients are willing to pay out-of-pocket.
  • Direct-to-Patient Models and Patient Support Programs: To enhance patient loyalty and capture value, some MNCs are developing direct-to-patient programs, offering support services, educational resources, and even home delivery where appropriate. These programs can differentiate a product beyond its price and foster stronger relationships with the end-users.
  • Regional Focus: Rather than a uniform national strategy, MNCs are adopting more granular regional approaches, targeting tier-one cities (e.g., Beijing, Shanghai, Guangzhou) and economically developed coastal areas where private healthcare spending and demand for premium products are higher.

6.4 Cost Structure Optimization and Operational Efficiency

To offset the significant price reductions and maintain profitability, MNCs are rigorously optimizing their internal cost structures and enhancing operational efficiencies:

  • Sales Force Restructuring: The traditional large sales forces focused on hospital detailing are being re-evaluated. Resources are being reallocated towards market access teams, key account management for large hospital groups, and digital marketing capabilities. Some roles may be reduced or transformed to focus on non-VBP products or different channels.
  • Supply Chain Optimization: Companies are streamlining their supply chains, reducing layers of distribution, and implementing lean manufacturing principles to lower production and logistics costs. This includes exploring localized sourcing of raw materials and components where feasible.
  • Digital Transformation: Investing in digital tools for marketing, sales, and supply chain management can lead to significant efficiencies. Digital engagement with healthcare professionals and patients can be more cost-effective than traditional methods, especially for VBP-affected products where margins are tight.

6.5 Engagement with Government and Policy Advocacy

MNCs are increasingly proactive in engaging with the Chinese government and regulatory bodies, advocating for a more balanced policy environment:

  • Highlighting Value Beyond Price: Companies are striving to educate policymakers on the long-term value propositions of their innovative products, emphasizing aspects like clinical efficacy, safety profiles, reduction in healthcare complications, and overall patient outcomes, which may not be fully captured by a price-centric VBP model.
  • Active Participation in Policy Discussions: MNCs are engaging with industry associations, expert panels, and direct government dialogues to provide constructive feedback on VBP implementation, advocating for transparent and predictable rules, and for mechanisms that recognize innovation.
  • Intellectual Property Protection: Continuing to advocate for robust intellectual property (IP) protection remains critical to justify ongoing R&D investments and ensure a return on innovation in the Chinese market.

Many thanks to our sponsor Esdebe who helped us prepare this research report.

7. Future Outlook and Remaining Challenges

China’s VBP program is not a static policy but an evolving one. Its future trajectory, and the continued adaptation required from MNCs, will be shaped by several key factors and ongoing challenges.

7.1 Evolution of VBP Scope and Rules

It is highly probable that VBP will continue to expand its scope, potentially covering more product categories, including biologics and certain patented drugs approaching exclusivity expiry. The NHSA consistently seeks to optimize the program, and future rounds might introduce more refined bidding rules, potentially distinguishing more clearly between truly innovative products and their generic or ‘me-too’ counterparts. There might be a move towards more ‘value-based’ procurement for highly innovative products, where price is balanced with clinical efficacy and cost-effectiveness, rather than solely focused on the lowest price. However, the overarching objective of cost containment will remain a constant.

7.2 Impact on Innovation Ecosystem

The long-term impact of VBP on China’s domestic innovation ecosystem is a subject of ongoing debate. While it certainly pushes domestic players towards R&D, there is a risk that the intense price pressure could disincentivize R&D for certain product types or therapeutic areas if the potential market return is severely constrained. For MNCs, VBP steers R&D investment away from China for products susceptible to the policy, potentially limiting access to a diverse range of innovations for Chinese patients in the future.

7.3 Balancing Cost and Quality

Maintaining a delicate balance between aggressive cost reduction and ensuring high product quality will remain a critical challenge for the Chinese government. The initial concerns about quality degradation following VBP rounds necessitate continued vigilance and robust post-market surveillance by regulators. Any significant compromise on quality could undermine public trust and the long-term sustainability of the program.

7.4 Global Implications: China as a Model?

China’s VBP model has garnered significant international attention. Its success in achieving substantial price reductions could serve as a blueprint or inspire similar centralized procurement reforms in other emerging markets or even developed economies grappling with rising healthcare costs. This means that the strategies developed by MNCs to navigate VBP in China could become highly relevant for their global operations in the years to come.

7.5 MNCs’ Long-Term Viability in the Chinese Market

The fundamental question for MNCs is whether they can genuinely thrive in a VBP-dominated environment, or whether China will become a market primarily for novel, high-value innovations, with a strong domestic presence in commoditized segments. Success will depend on the continued ability of MNCs to adapt, innovate, and align their global strategies with China’s evolving healthcare priorities. Those that can successfully pivot towards innovation, localize their operations, and diversify their market access strategies are likely to secure a sustainable future.

Many thanks to our sponsor Esdebe who helped us prepare this research report.

8. Conclusion

China’s Volume-Based Procurement program stands as a monumental reform that has fundamentally reshaped the competitive landscape for both domestic and multinational pharmaceutical and MedTech companies operating within the country. Initiated with clear objectives of drastically reducing healthcare costs, enhancing patient access to essential products, and fostering industrial upgrading, VBP has undeniably achieved significant success in its primary aims, yielding billions in savings for the national healthcare system and making vital treatments more affordable for the populace. The policy has also served as a powerful catalyst for the growth and consolidation of domestic players, shifting market share towards local manufacturers capable of competing on aggressive price points.

However, this transformation has come at a considerable cost for multinational corporations. MNCs have faced unprecedented revenue and margin pressures, necessitating painful restructuring of their traditional business models, sales forces, and strategic priorities. The fierce competition and the ‘race to the bottom’ for VBP-covered products have forced a profound re-evaluation of their China strategy.

To thrive and sustain their presence in this dynamic and challenging environment, MNCs must continue to demonstrate remarkable adaptability and strategic evolution. The core pillars of this adaptation include an unwavering focus on differentiated innovation, prioritizing the rapid introduction of novel, high-value products that are less susceptible to immediate VBP impact. Equally critical are strategic partnerships and deep localization efforts, fostering collaborations with domestic companies and investing in ‘in China, for China’ R&D and manufacturing capabilities. Furthermore, diversifying market access channels beyond the public hospital system, by targeting premium segments and leveraging retail and digital platforms, is essential for revenue protection. Finally, ongoing cost structure optimization and proactive engagement with government stakeholders remain vital for shaping policy and ensuring a favorable operating environment.

In essence, China’s VBP program is a testament to the nation’s resolve to reform its healthcare system. For multinational companies, it signifies a transition from a historically high-margin market to one where strategic agility, innovative prowess, and a deep understanding of local dynamics are paramount. Only through continuous innovation, strategic localization, and a nuanced approach to market access can these global players navigate the complexities of the Chinese healthcare market and continue to deliver value to both patients and shareholders in the long term.

Many thanks to our sponsor Esdebe who helped us prepare this research report.

References

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