Professional Documents
Culture Documents
Authored by:
Florian Then
Kevin Wu
Implementing a two-invoice system in China’s
MedTech market: What to expect and how to
prepare
By Florian Then and Kevin Wu
The authors would like to thank Katherine Wang and Xiaoyi Liu of Ropes
& Gray LLP for their valuable insights and inputs to this work
Policy history
Explicit mention in
only one
announcement
Central
NHFPC NHFPC releases
government State Council policy New CFDA policy
encourages two- official two-
policy centralizes drug requires distributors
invoice for drugs invoice system
supplies and to assess their
and consumables in for drugs, aiming
encourage pilot compliance with
healthcare reform at nationwide
provinces implement GSP and other
pilot provinces and implementation
two-invoice policies regulations
cities by 2018
2012
Implementing a two-invoice system in China’s MedTech market: What to expect and how to prepare 2
The rationale for the change is simple and medical consumables and devices, but the
compelling: fewer distributor layers will two-invoice system will have a significant
lead to more transparent, and eventually impact on all medical device manufacturers
smaller distributor margins, more compliant across their businesses. Many will need to
business conduct, and eventually a make changes in route to market, channel
consolidation of the distributor landscape. structures, the roles and responsibilities
So far, the rules are geared toward of manufacturers, distributors and other
pharmaceuticals – few announcements or service providers, pricing, margin and P&L
policies explicitly mention MedTech – but structure, and compliance management.
MedTech pilots are underway.
Building on discussions with leading
Will the rollout of a two-invoice system for MedTech companies in China, this paper
MedTech follow the same pattern it did in provides an update of the two-invoice
pharmaceutical distribution? If so, what implementation status, its likely evolution,
will the prevailing model look like? The and the implications for medical device
answers may vary across segments of companies.
Implementing a two-invoice system in China’s MedTech market: What to expect and how to prepare 3
Exhibit 2: Five provinces have implemented two-invoice policies, and nine more intend to
do so in 2017
The move to the two-invoice system is part subsidiaries can be exempted from the
of a broader healthcare reform package calculation of invoices. And in rural areas,
targeting distribution and pricing up to three invoices may be allowed
to ensure drug supplies to grass-roots
The two-invoice approach is not an isolated healthcare institutions.
system. It is a building block of some local
governments’ reform efforts to consolidate
The two-invoice rollout for medical devices
distributors, reduce medical product costs,
may be patchy in the near to mid-term
and improve compliance, as part of the
overall healthcare reform, as in the Shaanxi How fast will the two-invoice system
case example in the sidebar. be rolled out for MedTech? The rollout
in pharma may provide some guidance
(Exhibit 3). In April 2016, Fujian was the first
Some exceptions to the two-invoice system
province to fully implement the two-invoice
have been clarified
system for pharmaceuticals. Less than six
The NHFPC system provides exceptions to months later, Anhui became the second
the two-invoice requirements: a transaction province to release implementation details,
between a manufacturer and a wholly- while nine other provinces released general
owned subsidiary acting as a distributor, guidelines. In another six months, all by
or between a foreign manufacturer and February 2017, another 10 provinces and
its exclusive national distributor in China, cities had released implementation details
is not counted as an invoice. Invoices with timelines, and eight other provinces
between a distributor and its wholly-owned have published general guidelines.
Implementing a two-invoice system in China’s MedTech market: What to expect and how to prepare 4
Exhibit 3: Pharma has seen a sweeping roll-out of two-invoice policy
No progress
General guideline released
Implementation detail released
Before the policy launch, By the end of September, Today, ten provinces,
Fujian was the only province Anhui became the second including Hebei, Shaanxi,
that fully implemented the province to release its Ningxia, Qinghai, Sichuan,
two-invoice policy. No other implementation details; nine Chongqing, Hunan and
province published agenda other provinces released Hainan, have released
to follow. general guidelines. implementation details with
timelines. Eight others have
published general guidelines.
Implementing a two-invoice system in China’s MedTech market: What to expect and how to prepare 5
Case example
In Shaanxi, the two-invoice system is implemented with policies on distributor selection
and price-volume negotiation:
Two-invoice system: Since February 2017, urban public hospitals have begun
adhering to the sunshine procurement and two-invoice systems in the procurement
of 13 categories of high-value consumables; distributors provide both invoices upon
delivery. The transition period will end in June 2017.
Distributor selection: Urban public hospitals use a new application process to appoint
a limited number of distributors. Each Class III hospital may select fewer than 15 for
drugs and 15 for consumables; Class II hospitals may select no more than 4 distributors
for drugs and fewer than 15 distributors for consumables.
As a result, many distributors, especially the smaller ones not selected by hospitals, are
becoming contracted hospital service providers.
Implementing a two-invoice system in China’s MedTech market: What to expect and how to prepare 6
Exhibit 4: Large distribution platforms will help some companies comply with the two-
invoice policy
Invoice Services
Option 1: Option 2:
National platform model 3PL model
Manufacturer Manufacturer
3PL
National distribution platform
Service Service
Regional/local providers Regional/local providers
distributors distributors
Hospitals Hospitals
▪ Works if platform is issuing first invoice ▪ Requires significant resources for distributor
▪ Least complex option for manufacturer management
▪ Model gives national distributor great ▪ More exposure to compliance risks
bargaining power ▪ Third-party services likely to be on
▪ Harder to control T2 distributors manufacturer’s P&L
▪ Third-party services can be organized by
distribution platform
How to substitute the value-added services are forced to work with certain local
provided by Tier 2 and 3 distributors? distributors, the range of “divisions of labor”
will increase. A robust framework of value
Manufacturers should map all activities in
chain activities and “fair price of services”
their commercial operations value chain
will be the basis for a manageable (and
from market access to after-services,
defensible) channel and margin architecture.
allocate roles and responsibilities between
manufacturers and distributors, and define
the “fair market value” for each service
undertaken by a distributor or contracted
service providers. As manufacturers
Implementing a two-invoice system in China’s MedTech market: What to expect and how to prepare 7
Exhibit 5: Manufacturers should map value-chain activities to determine the fair value of
services
What are the options for pricing and Some manufacturers may choose to
channel margin strategy? outsource, contracting service providers
to distributors to keep the cost “in the
Contracts with hospital service providers will
channel” and thus avoid impact on their
affect pricing and channel margin strategy.
own P&Ls. It will increase manufacturers’
Generally, manufacturers can choose to
dependence on distributors, however. In
contract with service providers directly
addition, where channel margins have been
or outsource this activity to a platform
very high, services at “fair price” may not
distributor in exchange for higher margins.
match previous channel margins, leaving
In contracting directly with third-party manufacturers exposed to questions about
service providers, manufacturers will whether margins are “fair and reasonable.”
naturally have to raise ex-manufacturer
How to define compliance frameworks for
prices to cover the added costs. Even at a
the contracted distributors and hospital
constant absolute margin, this model would
service providers?
mean a departure from the relatively lean,
high-margin model that many MedTech Changes in the distributor engagement
manufacturers have adopted in China. It will model call for a new approach to third-
also come with the burdens of third-party party management. Historically, device
services, operations management, and manufacturers have preferred to engage
additional compliance liabilities. a limited number of distributors for a
Implementing a two-invoice system in China’s MedTech market: What to expect and how to prepare 8
wide variety of services in exchange for An effective compliance framework will at
high margins. With fewer distributors, least define the service categories, their
manufacturers will find it easier to exercise respective fair market value, and expected
oversight. Under the two-invoice system, concrete deliverables for each service
many distributors will transform into category. Manufacturers will need to
hospital service providers, and distribution develop new mechanisms for performance
margins will be redistributed among evaluation and monitoring, including key
service offerings. Manufacturers will need performance indicators, methods and
to redefine the compliance framework to frequency of performance evaluation, and
accommodate the transformation. consequences for poor performance.
Implementing a two-invoice system in China’s MedTech market: What to expect and how to prepare 9
About the authors
Florian Then is a partner in McKinsey’s Shanghai office. Kevin Wu is a senior engagement
manager in McKinsey’s Beijing office.
Implementing a two-invoice system in China’s MedTech market: What to expect and how to prepare 10
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