Regulation refers to “rules developed and enforced by administrative agencies” (Kessler, 2011, p. 1). In the literature of comparative economics, marketization in a transitional economy such as China’s is accompanied by the expansion of rule based legal institutions (Liebman, 2011). But regulation together with law can be used to correct market failure caused by information asymmetry and other reasons in the social policy arena such as the healthcare system.
Market failures are prevalent in the healthcare system in general. Two types of market failure are highlighted here. First, the information is asymmetric between patients and doctors. For example, the quality of healthcare service is not observable, and the effects of pharmaceutical products is not fully understood by patients. Second, there are externalities for many public health issues. For example, the social costs of smoking are much larger than the private costs of smoking given that many people suffer from second hand smoke.
Regulations are very useful for addressing market failures in the healthcare sector (Posner, 2010). First, regulations can be considered as a mechanism to internalize the externality to equalize private and social costs. For example, regulations to ban second hand smoke can reduce the externality. Second, compared to law, the cost of the enforcement of regulations can be lower since regulations require agents such as doctors or pharmaceutical producers to fulfill certain quality requirement ex ante and they will be punished if those quality requirements are not fulfilled properly. These ex ante requirements are expected to be easier to be observed compared to ex post evidences required for litigation (Glaeser and Shleifer, 2003).
Recently, there have been regulatory reforms in the Chinese healthcare system. First, there are new regulatory initiatives in the pharmaceutical sector. China Food and Drug Administration (CFDA) was promoted from a vice-ministerial to ministerial level agency in 2013. CFDA has recently implemented a number of regulatory reforms. For example, it was reported that local agencies of CFDA have been established in all provinces, in over 70 percent of cities, and 30 percent of counties. These agencies are expected to be independent from the local government and only report to CFDA. It is also expected that the approval of new drugs is going to be more restricted. Drugs approved earlier will be reevaluated and the regulatory standard is going to be highlighted. It was announced by CFDA in March 2016 that all generic drugs which were approved before Oct 2007 must pass clinical evaluations of their consistency by 2021.
Second, in the health service sector, there are also regulatory reforms. Medical malpractice is a serious concern in China (He and Qian, forthcoming). In 2014, there were over 115,000 medical malpractice disputes in China. There are two versions of regulations addressing medical accidents which were released in 1987 and 2002 respectively. However, there are a number of problems in these two regulations, including the relatively low amount of compensation, and uncertainty in enforcement due to their overlap with other regulations and laws, including tort law (Harris and Wu, 2005; Liebman, 2013). In Nov 2015, a draft of an amendment to malpractice dispute regulation was released by the National Health and Family Planning Commission. The division of labor between malpractice dispute regulation and tort law has been addressed in this amendment.
Third, regulatory reforms in the arena of public health have been initiated, in particular at the local level. For example, while there is still no national level tobacco control law, local tobacco control regulations have been implemented since 2008. In Hangzhou since March 2010, smoking has been banned in most public spaces. The Shanghai government initiated a regulation in 2010 to ban smoking in almost all public spaces such as schools and hospitals. In June 2015, Beijing's smoke-free regulations, the country’s strictest tobacco control law, took effect, leaving all indoor and many outdoor public spaces in Beijing 100 percent smoke-free (WHO, 2015).
In a fragmented regulatory system, blame-shifting and other opportunistic behaviors may be observed among the regulatory agencies.
While there are many ongoing initiatives in building up the regulatory framework of the healthcare system, there remain several important issues to be addressed.
First, the capacity of regulatory agencies is low at both central and local governments. In this case, shortage of capacity is a concern for the implementation of all the above initiatives. For example, there is a shortage of manpower at the CFDA. Compared to the US FDA in which over 4,000 employees works on the approval of new drugs, there are only 170 people working on the approval of new drugs in the CFDA, working on a queue of over 14,000 applications (Southern Metropolis Daily, 2014). At the local level, the shortage of resources is even more obvious. For example, in Chongqing, a city with over 30 million people, the number of local CFDA staff was 22 in 2014 (China National Radio, 2014). A similar situation can be found in public health regulation enforcement. For example, there were only 5 full time staff working on tobacco control regulation enforcement in Guangzhou in 2015.
Second, the regulatory agencies are fragmented. For example, CFDA is not the only regulator for the pharmaceutical sector. The National Development and Reform Commission (NDRC), the State Ministry Administration of Industry and Commerce, as well as the National Health and Family Planning Commission are also involved in regulating the pharmaceutical sector. Different regulatory agents have different objectives, and in the multiple dimension of regulatory objectives, the enforcement in those dimensions with a lower priority may not be very effective. In a fragmented regulatory system, blame-shifting and other opportunistic behaviors may be observed among the regulatory agencies (Tam and Yang, 2005). Further reforms should address this fragmentary regulatory system.
Third, the lack of incentives to enforce regulations is another issue. For example, the total revenue of the pharmaceutical industry is expected to reach RMB 3 trillion. For many provinces, tax revenue from the pharmaceutical industry is important. Local protection behaviors in the pharmaceutical industry have been observed. In this case, regulation enforcement may be undermined by those local protection policies from local government (Medicine Economic Reporter, 2015). Another example is medical malpractice. For many local governments, social stability may still be one of the policy targets with the highest priority. Protestors involved in medical malpractice disputes potentially have a negative impact on the local performance of social stability (Liebman, 2013). In this case, local government may prefer employing more flexible dispute resolution mechanisms compared to enforcing malpractice dispute regulations.
It is still too early to evaluate the recent round of regulatory reforms in the Chinese healthcare sector. However, these reforms may be less effective if the above issues are not addressed properly.
China National Radio. (2014, October 5). “Shiyaojianguan mianlin nanti, jiceng renshou yanzhong buzu” [Difficulties in drug regulations reforms, serious lack of local manpower]. Retrieved from http://china.cnr.cn/xwwgf/201410/t20141005_516549576.shtml
Glaeser, E.L. and Shleifer, A. (2003). The Rise of the regulatory state. Journal of Economic Literature, 41(2), 401-442.
Harris, D.M. and Wu, C.-C. (2005). Medical malpractice in the Peoples Republic of China: The 2002 regulation on the handling of medical accidents. Journal of Law, Medicine and Ethics, 33(3), 456-477.
He, J. and Qian, J. (forthcoming). Explaining medical disputes in Chinese public hospitals: The doctor-patient relationship and its implications for health policy reforms. Health Economics, Policy and Law.
Kessler, D.P. (ed.) (2011). Regulation versus Litigation: Perspectives from Economics and Law. University of Chicago Press.
Liebman, B. (2011). A return to populist legality, historical legacies and legal reform. In Heilmann, S. and Perry, E. (eds.), Mao’s Invisible Hand. Harvard University Press.
Liebman, B. (2013). Malpractice mobs: Medical dispute resolution in China. Columbia Law Review, 113, 181-264.
Medicine Economic Reporter [Yiyao Jingyi Bao] .(2015, November 15). “Difang baohu wanhuai jicai guize” [Local protectionism “spoils” centralized purchase regulations]. Retrieved from http://www.yyjjb.com/html/2015-11/11/content_231653.htm
Posner, R. (2011). Regulation (agencies) verses litigation (courts). In Kessler, D.P. (ed.) (2011), Regulation versus Litigation: Perspectives from Economics and Law. University of Chicago Press.
Southern Metropolis Daily. (2014, June 12). “Xinyao shenpi changlu manman, cong chusheng dao shangshi zuishao haoshi 4-5 nian” [Approval of new drugs needs a long time, 4-5 years between birth and going to market]. Retrieved from http://epaper.oeeee.com/epaper/D/html/2014-06/12/content_3259817.htm?div=0
Tam, W. and Yang, D. (2005). Food safety and the development of regulatory institutions in China. Asian Perspective, 29(4), 5-36.
World Health Organization. (2015). Smoke-free policies in China: evidence of effectiveness and implications for action.