At a time when almost every commodity in China is getting more expensive, the dwindling cost of medicine is a rarity.

Zhang Jinkui, a hypertension patient, buys medicines from the community health center of his neighborhood in Changzhou, a city in east China's coastal Jiangsu Province.

His prescription list includes Aspirin Enteric-coated tablets, down to 1.4 yuan from 4.7 yuan (0.7 U.S. dollars) per unit, and Fosinopril Sodium Tablets, down to 41.39 yuan from 51.6 yuan per unit.

Both drugs are found on the essential drug list unveiled in 2009. The list names the 307 most common western and traditional Chinese medicines, which are heavily subsidized so hospitals can sell them at cost price.

All essential medicines are listed by their generic names, and drug producers compete to supply essential medicines through public procurement.

Due to a long history of low government funding for state-run hospitals, which often covers only 10 percent of the hospitals' operating costs, doctors have generated income for hospitals by aggressively prescribing expensive, and sometimes unnecessary, medicines and treatments.

The essential medicine system and the reform of publicly funded hospitals, two pillars of China's health reform, are designed to address high medical costs and low accessibility of medical services.

In April 2009, China kicked off health reforms aimed at correcting these long-standing problems facing China's health system and easing public grievances.

Two years later, the essential medicine system has reduced drug prices, but still fails to please hospitals, patients and drug producers.

The system requires government-funded grassroots health clinics, including urban community health centers and rural clinics, to prescribe only essential medicines and to sell these medicines at cost price, rather than with the previous 15 percent mark-up.

Such policies have brought hard times to grassroots health clinics, especially in cash-strapped areas.

Song Wenzhi, a public health professor at Peking University, said "Grassroots health clinics, without the expertise to perform operations and other treatments, rely heavily on selling drug," adding that these hospitals have found themselves scraping by due to the zero percent mark-up policy.

Wang Zhiying, Vice Director of the People's Hospital of Anxiang County in the city of Changde, Hunan Province, said four grassroots hospitals in Changde tested the essential medicine system as pilot projects, but the zero percent mark-up policy took away 60 to 70 percent of the hospitals' revenue.

Wang was quoted by "Health News," a newspaper run by China's Ministry of Health, as saying that, due to financial difficulties, the county government had not yet channeled the 8 million yuan (1.2 million U.S.dollars) in support funds into the hospitals' accounts, resulting in the resignations of many doctors.

The essential medicine system covers 60 percent of government-funded grassroots hospitals and drug prices have fallen by an average of 30 percent, said Sun Zhigang, Director of the Health Reform Office under the State Council, or China's Cabinet.

According to the health reform plan for 2011, the essential medicine system will cover all government-sponsored health institutions at the grassroots level by the end of the year and drugs will be sold there at a zero percent mark-up.

Song Wenzhi said the key will be the commitment of local governments to health reform and their financial input. This way, essential medicines can benefit the public without bankrupting grassroots health institutions.

"That would be a great sum of money." said Song, citing his own studies. "There are roughly 5,000 government-funded hospitals in China. One third of them make profits, one third barely break even, and still one third rely heavily on government subsidies."

To maintain the poorest hospitals, central and local level governments would need to invest 15 billion yuan (2.3 billion U.S. dollars) each year, according to Song's estimate.

Less expensive, but harder to find

While some patients benefit from the less expensive drugs, others find that some drugs have disappeared from the shelves of neighborhood clinics. To get medicines they need, sometimes they have to go to higher-level hospitals.

Li Jian, a retiree from the coastal port city of Tianjin, suffers from asthma. Li uses an anti-inflammatory inhaler that costs about 300 yuan. Since the essential medicine list came into effect, his local clinic has stopped carrying his prescription inhaler.

"Doctors in the community clinic are reluctant to prescribe drugs that sell for over 100 yuan for fear of being accused of aggressive prescribing, so I have to travel farther to a larger hospital to buy the spray," said Li.

Bidding process raises quality concerns

Pharmaceutical companies are not happy, either. Some argue that the essential medicine procurement system distorts market competition.

Across China, essential medicines are procured by provincial governments through bidding, and distributed to hospitals at all levels.

Some drug producers complain that only companies offering the lowest prices can win bids, thus driving producers of quality drugs out of market.

Liu Gexin, CEO of Sichuan Kelun Industry Group, a pharmaceutical company, submitted a proposal to adjust the current procurement system of essential medicines during the annual legislative session this year.

Liu said some companies might compromise drug quality to lower production costs. For example, Liu said, Fufangdanshen, a traditional Chinese medicine tablet, has a market price of 5.6 yuan, but the government procurement of Anhui Province prices it at 0.95 yuan.

"The bidding price is significantly lower than the cost of raw materials, supplements and packaging," said Liu, calling for changes in the current tender system that only favors low prices.

Song Wenzhi said that, in a country with 1.3 billion people, a quickly aging population and a grave shortage of healthcare resources, it's natural for problems to surface as health reforms sail into uncharted waters.

"In the end, health reform heads in the right direction," said Song.