On Aug. 25, the Hunan Medical Security Bureau published a notice on fully implementing a zero-markup policy for TCM formula granules, specifying that from Sept. 15, all public medical institutions at all levels in the province will cancel markups on TCM formula granules and sell them at zero markup based on actual purchase prices. This voids the last price protection for TCM formula granules, bringing the golden era to a definitive end.
In April, the State Council General Office issued opinions on improving the drug price formation mechanism, explicitly placing TCM formula granules under zero-markup management in public medical institutions and requiring all formula granules to be purchased through provincial medical procurement platforms. Shandong and Hunan responded first, with other provinces following.
For more than two decades, TCM formula granules enjoyed special pricing treatment, allowing public medical institutions to sell them at up to 25% above the actual purchase price. Because they were managed as decoction pieces, they were exempt from the drug proportion assessment and immune to volume-based procurement price cuts. The more they sold, the more they earned, so hospitals were naturally eager to prescribe them.
In 2021, the TCM formula granule market peaked at 24 billion yuan, enriching leading players such as China Traditional Chinese Medicine Holdings and Hongday Pharmaceutical.
With the zero-markup rule taking effect this year, the clinical landscape has shifted. A doctor at a Beijing hospital told Jianshi that his hospital has essentially stopped using TCM formula granules and now only prescribes decoction pieces. Formula granules take up cabinet space, require manpower, and cannot be stocked in every variety. With zero markup, they are no longer cost-effective or necessary. In contrast, the hospital now encourages patients to fill TCM prescriptions outside, where free decoction services save labor and materials.
This signals a dangerous trend: if hospital enthusiasm wanes, the market cooldown for TCM formula granules may only be beginning.
Zero Markup: Sell at Cost
Before the zero-markup policy was fully rolled out, the TCM formula granule industry had already felt the first wave of pressure from volume-based procurement.
On Oct. 27, 2023, the first inter-provincial alliance volume-based procurement for TCM formula granules opened in Shandong, with average price reductions exceeding 50% for selected products. Less than six months later, in March 2024, the Beijing-Tianjin-Hebei '3+N' alliance launched a volume-linked procurement for TCM formula granules. After the results took effect, some commonly used varieties saw local price cuts of over 40%, with Tianjin averaging a 68.76% reduction.
The centralized procurement policy has largely stripped away the inflated prices of TCM formula granules, but it has not fundamentally solved the problem.
TCM formula granules, an innovative form of TCM decoction pieces, have existed for only 25 years. In 2001, the National Medical Products Administration formally named them 'TCM formula granules,' placed them under the management of decoction pieces, and approved six pilot manufacturers. Over the following two decades, the market remained small. In 2021, four departments including the NMPA jointly announced the end of the pilot phase, moving formula granules into a new stage of filing-based management. More companies gained market access, expanding supply.
For manufacturers, formula granules have lower raw-material requirements than ordinary decoction pieces. In clinical management, they remain classified as decoction pieces, so hospitals can add a markup. This combination creates a very large profit margin for formula granules.
The NHSA has proposed canceling the markup on formula granules while introducing a compromise compensation mechanism: a dispensing fee for formula granules.
After the markup is canceled, public hospitals can still charge a dispensing fee when prescribing formula granules, effectively covering pharmacists' work in reviewing prescriptions, preparing medications, and verifying. But if the prescription is for decoction pieces, no such fee applies. Hunan wants to completely separate formula granules from decoction pieces to prevent improper charges such as 'prescribing decoction pieces but charging a formula-granule dispensing fee.'
As for how much room the dispensing fee leaves for hospitals, Hunan has not specified a standard. Based on other provinces' experience, the fee is unlikely to be high. Previously, Shandong province set its formula-granule dispensing fee at 4 yuan per prescription.
Even with this fee, hospitals cannot cover the management costs of formula granules. Their storage and dispensing processes are more complex, with high requirements for moisture-proofing and insulation, representing a significant expense. As a result, zero markup plus a dispensing fee will certainly generate less revenue for hospitals than before, inevitably dampening their willingness to use these products.
Before the policy took effect this year, the China Association of Traditional Chinese Medicine submitted a report and policy recommendations to the NHSA urging that formula granules be temporarily exempted from the zero-markup policy. It argued that applying zero markup to formula granules alone could increase cost pressure on medical institutions, leading some hospitals to limit their use and affecting patient access to TCM. Now the policy has taken effect. For hospitals, whether the limited dispensing fee can offset these costs is a very real question.
Traditional Chinese Medicine Granule Industry Faces Major Test
Hunan's new policy may be just the beginning, with more provinces expected to take measures that squeeze the high margins of traditional Chinese medicine formula granules.
In January, China Traditional Chinese Medicine Holdings, the leading formula granule maker, issued a profit warning, projecting its first annual loss in a decade. Pressure persisted in the first half: its TCM formula granule revenue fell 35.4% year-on-year to 1.933 billion yuan. Similarly, another leader Hongri Pharmaceutical posted first-half revenue of 2.188 billion yuan, down 21.72%, with formula granule revenue at 1.071 billion yuan, down 12.99%.
If leading players are struggling, mid-tier companies are having an even harder time. Shineway Pharmaceutical's formula granule revenue fell 31.1% year-on-year to 336 million yuan in the first half. The company attributed the decline mainly to Hebei's centralized procurement of TCM formula granules, which cut winning bid prices by an average of over 30%.
Notably, Shineway also pointed to an interesting shift: procurement mainly drove prices down, while demand from medical institutions didn't drop significantly in the first half.
That suggests the hardest times for TCM formula granules may still lie ahead. In the second half, as zero-markup policies take effect across regions, the real question becomes: how can hospitals be persuaded to keep selling these products without the markup? If zero-markup further erodes end-user demand, the industry could face falling volumes and prices simultaneously.
At that point, the entire TCM formula granule industry will have to answer a question it never needed to consider before: without policy support, is this product still worth prescribing for hospitals and worth producing for companies?