Industries such as pharmaceuticals and medical devices are already feeling the effects of China’s healthcare reform, and the country plans to introduce more changes in upcoming years.China began planning for healthcare reform at the start of the twenty-first century, after several decades of market opening yielded a steady decline in the scope and quality of healthcare services. Chinese citizens had become increasingly dissatisfied with the healthcare system—which suffered from chronic government underfunding, urban and rural inequalities, and overpriced, low-quality products and services. The system had consequently left much of the population without access to medical care.

PRC leaders have made significant progress in a relatively short period to improve the healthcare system. After several failed attempts, the PRC State Council in 2008 initiated a formal drafting process for reform, which included soliciting 10 draft healthcare plans from domestic, foreign, and multilateral actors. This led to the implementation of China’s ¥850 billion ($124 billion) healthcare reform plan in April 2009, which aims to provide affordable medical care for the country’s entire population by 2020 (see China’s Immediate Healthcare Reform Goals). The reform calls for a complete overhaul of China’s healthcare system, including by establishing or updating laws related to healthcare investment, pharmaceuticals, and medical devices. In the first phase of the plan (2009-11), the central government set a ¥139 billion ($20.9 billion) healthcare budget for 2010, and the PRC Ministry of Finance (MOF) in November 2010 announced it was allocating an additional ¥12.3 billion ($1.8 billion) for local healthcare reform initiatives.

The pace of China’s healthcare reform has matched the government’s goals so far, indicating that China will likely reach its targets. The quality of medical services remains to be seen, however, and efforts to develop a social healthcare plan are still in progress. China is working toward tough goals, such as improving medical care in rural areas and tackling, with limited funding, entrenched reimbursement plans for insurance, medical devices, and pharmaceuticals. Foreign companies in the healthcare sector should understand and track these changes, as China’s changing regulatory system will affect sales and open investment opportunities.

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China’s Immediate Healthcare Reform Goals

China outlined five major programs to achieve healthcare reform in its 2009-11 implementation plan:

  • Broaden basic healthcare coverage;
  • Establish a national essential drug system;
  • Expand infrastructure for grassroots medical networks;
  • Provide equal access to basic public healthcare services; and
  • Implement pilot reform of public hospitals.

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Healthcare reform administration

The PRC National Development and Reform Commission (NDRC) and Ministry of Health (MOH) are jointly leading China’s healthcare reform. The complicated authority division between the two agencies and numerous other ministries with healthcare responsibilities has hindered effective implementation of the reforms, however.

To minimize conflicts between ministries, the State Council in 2006 established the Leading Group for Coordinating Healthcare System Reform, an interagency team headed by Vice Premier Li Keqiang and administered by NDRC. In 2008, the leading group was restructured and tasked with overseeing all aspects of healthcare reform, as well as the provincial-level governments and various ministries, bureaus, and administrations charged with implementation. Under the leading group’s supervision, four designated agencies—the Ministry of Human Resources and Social Security, MOF, MOH, and NDRC—are each responsible for certain aspects of the reform. In addition, several other PRC government bodies are involved (see Table 1).

health reform table 1

Healthcare reform’s focus

Because of China’s urban-rural healthcare disparity, reforms focus primarily on grassroots medical networks, which can penetrate lower-tier and remote regions. The PRC government is constructing new and updating existing infrastructure and facilities to transform grassroots medical networks, including healthcare facilities and services in rural areas and urban communities. The reform lists specific targets for 2009-11: Build roughly 2,000 county hospitals and 29,000 township centers; upgrade or expand 5,000 township health centers; and build or upgrade 3,700 urban health service centers and 11,000 community health service stations.

In 2009, the central government allocated more than ¥20 billion ($3 billion) to expand and upgrade grassroots medical institutions. Though the number of medical centers being built is unclear, MOF claimed to have supported the construction of 34,000 hospitals in towns and townships in 2009.

The government has also issued separate guidance for constructing county hospitals, county traditional Chinese medicine hospitals, township health centers, community health service centers, and village clinics. The State Council’s 2010 work plan called for establishing an additional 830 county hospitals, 1,900 village hospitals, 1,256 urban community health service centers, and more than 8,000 village healthcare clinics.

Healthcare institutions in China suffer from regional disparities in medical human resources, particularly between rural and urban areas. To lessen the disparities, MOH is taking measures to attract healthcare professionals to rural regions—where job incentives are typically lower—such as providing subsidies to improve the training and supply of qualified healthcare professionals. By 2011, the central government aims to subsidize the employment of 3,000 licensed physicians in township clinics and waive tuition fees for students who agree to work in township clinics after graduation—with the goal of employing at least one licensed physician in every township clinic by the end of 2011.

To improve the administration and governance of public hospitals, the central government has targeted 16 cities for public hospital reform. The pilot project to improve public hospitals is a key component of China’s healthcare reform efforts, and investment—private and foreign—will play a crucial role in improving management systems and upgrading hospitals. The government is examining several focus areas during the pilot reforms, including management, governance, compensation systems, and supervising mechanisms. It is also analyzing healthcare professional training and private healthcare institution development. Public hospital reforms in 2010 focused on system administration, hospital compensation, internal management, and medical services quality.

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Cities under China’s Public Hospital Reform

  • Anshan, Liaoning
  • Baoji, Shaanxi
  • Ezhou, Hubei
  • Kunming, Yunnan
  • Luoyang, Henan
  • Ma’anshan, Anhui
  • Qitaihe, Heilongjiang
  • Shanghai
  • Shenzhen, Guangdong
  • Weifang, Shandong
  • Wuhu, Anhui
  • Xiamen, Fujian
  • Xining, Qinghai
  • Zhenjiang, Jiangsu
  • Zhuzhou, Hunan
  • Zunyi, Guizhou

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Specific sector impacts

In addition to provincial and city initiatives (see the CBR web exclusive: Regional Development Sheds Light on National Progress), companies should have a strong grasp of regulatory changes that healthcare reform brings to specific product markets.

Pharmaceuticals

China’s healthcare reform aims to improve the quality, accessibility, and regulation of pharmaceuticals. Though access to drugs increased significantly when China opened its economy, the steady decrease of government subsidies has left hospitals reliant on drug sales as a main source of income. As a result, hospitals have over-priced and over-prescribed pharmaceuticals to increase revenue, making drugs unaffordable for much of the population. To address this problem, the central government in 2009 created the National Essential Drug System (NEDS).

Under NEDS, China released the National Essential Drugs List (NEDL), a catalogue of drugs with capped prices that government-funded hospitals, grassroots clinics, and other health institutions must use and keep fully in stock—enabling patients to pay relatively small co-pays. The current list contains 307 drugs: 205 chemical and biological drugs and 102 traditional Chinese medicines. China plans to update the list every three years, or as needed, according to the country’s economic growth, disease trends, and scientific developments. The new pricing system covers more than 30 percent of state-run grass-roots hospitals and clinics, and about 50 percent of primary healthcare institutions have implemented the system since august 2009. The government plans to implement the list nationwide by 2020.

The government is also improving its oversight of essential drugs by establishing a digital network that assigns each medicine package a unique code and monitors the drug’s transportation, storage, and sale. According to state media reports, the digital monitoring network will cover all companies that produce essential drugs by March 31. State-run hospitals may not purchase essential drugs outside the network beginning April 1.

NEDS centrally controls overall drug pricing. Under the system, the central government sets maximum essential drug prices, and provincial-level governments may set unified prices under that ceiling, according to local conditions. Institutions that have implemented NEDS have faced a deficit from lost drug sales profits, however. To address the problem, the PRC government in December 2010 announced it would provide subsidies to support these institutions.

All listed essential drugs are included in China’s national Reimbursement Drug list (RDL) and enjoy higher reimbursement rates than non-essential drugs. The national RDL sets the percentage of drug costs reimbursed under national insurance. The list, which currently includes 2,127 drugs, was last revised in November 2009 and is set to be updated every two years. Provincial authorities then draft local RDLs, which adjust the national list based on local conditions to determine reimbursement levels for the region. Twenty-three recently released provincial RDLs include all drugs on the national RDL along with various additional drugs (see the CBR, January-February 2010, Drugs for the Masses).

Pharmaceutical companies that want to penetrate the China market should take into account national and provincial RDLs. Selling a product that cannot be reimbursed increases risks because most Chinese cannot afford these drugs out of pocket. The process for placing a product on a provincial RDL varies depending on the product type and targeted province, so companies should decide in advance the provinces in which they will apply for listing and familiarize themselves with local regulatory requirements.

Under NEDS, China is also updating the system for procuring and distributing essential drugs (see the CBR, January-February 2010, Drug Procurement Bidding). Provincial governments conduct centralized, public, and online procurement for national essential drugs and coordinate distribution and allocation to government-run healthcare institutions, which can purchase only pharmaceuticals that win their bids. To clarify processes, the PRC State Food and Drug Administration in June 2009 and the Ministry of Commerce in February 2010 released opinions on pharmaceuticals procurement and a circular on drug distribution, respectively. These regulations increased management and supervision over the procurement process, including by controlling when pharmaceutical companies and sellers can raise prices in the bidding process. In December 2010, the State Council announced plans to develop provincial-level platforms to standardize essential drug purchases at government-funded grassroots hospitals and clinics. According to the official notice, provincial health departments will manage the centralized procurement process. Procurement agents must purchase commonly used essential drugs from pharmaceutical companies directly and may buy less commonly used drugs from wholesalers.

Though the general NEDS is set in theory, the system is still developing. In addition to long-standing concerns such as weak intellectual property rights enforcement and restrictive clinical trial requirements, US companies entering China’s pharmaceutical market are worried about the system’s exclusive focus on cost and the effect new pricing policies will have on sales. Though manufacturers still determine the prices of pharmaceuticals not under the NEDL and must notify provincial authorities about pricing changes, recent government statements have indicated that this may change in the future. In November 2010, NDRC stated that it would take “persistent efforts to bring down the prices of some relatively expensive drugs,” many of which may be produced by private or foreign manufacturers that previously held independent pricing power.

NEDS has driven pharmaceutical bidding to focus on low costs, and will likely polarize China’s pharmaceutical industry—with a basic medical market determined by the NEDL and a high-end medical market of drugs not on the reimbursement list. As demand for NEDL drugs increases with fuller implementation of healthcare reform, manufacturers that can meet government price requirements may see more business. Whether companies can make up in volume what they lose in price reductions remains unclear, however.

Medical devices

China is steadily expanding its regulatory regime for the medical device sector—causing foreign companies to worry that tighter regulation will make business operations more challenging. For example, the 2009-11 National Class II Large-Scale Medical Device Allocation Plan aims to regulate the number of medical devices each province can purchase in the procurement process. China has been shifting toward a centralized procurement process that requires hospitals to go through MOH or a provincial or municipal procurement center, depending on the device’s price.

MOH in May 2009 released a list of essential medical equipment that community centers and rural clinics must carry, similar to the NEDL. Essential equipment on provincial government medical device insurance lists are reimbursable. More often, the devices are reimbursed as an expense of a medical procedure, making cheaper devices more attractive. Imported products, on the other hand, usually require some out-of-pocket expenses as they often are not reimbursed through medical procedures.

China also aims to improve medical devices’ safety and quality, including by issuing a series of trial regulations on medical device good manufacturing practices in December 2009 and a draft of revised Administrative Regulations for Medical Devices in September 2010 that govern safety standards and product registration. Though when China will release the final medical device regulations remains unclear, the rules will be critical for understanding new companies should track changes in China’s healthcare reform and medical system going forward and take measures to understand how their products will fit in the market. Product monitoring requirements, product recall mechanisms, registration processes, medical devices advertising rules, and safety requirements. Foreign companies are particularly interested in whether the regulations will follow through on China’s promise to adopt a risk-based approach that uses results from clinical trials conducted outside of China, rather than automatically requiring in-country clinical trials for all medical devices.

More healthcare updates in the upcoming FYP

Companies should track changes in China’s healthcare reform and medical system going forward and take measures to understand how their products will fit in the market, such as by determining whether their products are included on pharmaceutical and medical device reimbursement lists. China plans to release more details on the direction of the healthcare sector in its upcoming 12th Five-Year Plan (FYP, 2011-15). One of the 12th FYP’s major policy goals will be to improve basic public services, including social insurance and healthcare services, and the plan will likely include new targets for healthcare spending and more funding for grassroots medical facilities and traditional Chinese medicines. The PRC Ministry of Science and Technology in July 2010 announced priorities for health science and technology under the 12th FYP, which include improving drug safety surveillance, promoting innovation, creating internationally competitive pharmaceutical companies, and developing technologies for disease prevention and treatment.

Investment opportunities

China’s healthcare reform has emphasized attracting private and foreign investment to healthcare institutions. In December 2010, several PRC government agencies released Opinions on Further Encouraging and Guiding Healthcare Institutions Set Up by Social Capital, and the State Council announced that it would encourage privatizing state-run hospitals and abolish the 70 percent foreign ownership cap to allow wholly foreign-owned hospitals.

Because China’s healthcare infrastructure and services have traditionally been concentrated in the country’s eastern region and in medium and large urban areas, the central government aims to provide more financial subsidies to central and western provinces and build and upgrade more facilities in those regions. Foreign healthcare investors will likely find more incentives outside the country’s already developed eastern areas. To expand their presence in the China market, foreign companies should consider looking to healthcare facilities that are new or being upgraded and need assistance developing information technology systems and stocking medical devices and pharmaceuticals.

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Health Information Technology

China’s health information technology (HIT) sector is undergoing significant changes because of healthcare reform. China first established HIT systems in the mid-1990s, but the systems were simplistic and, without unified software systems, the industry developed unevenly across regions. The PRC government in 2003 released a National Information Development Plan (2003-10) to implement electronic health records and regional health information networks (RHINs) across the country. Despite the plan, most healthcare institutions in China still do not have HIT systems, and most pre-existing HIT systems need upgrades. The national healthcare reform plan aims to establish an all-encompassing, integrated, and advanced HIT system to connect healthcare institutions nationwide.

China’s current HIT system is comprised of RHINs and two HIT technical frameworks (electronic medical records and electronic health records). Using data centers and telecom networks, RHINs provide institutions with health industry data that is collected, transmitted, stored, and processed in digital form to enhance medical care services, public health, and health administration. RHINs are designed to share data and clinical services across different regions in China. Electronic medical records are data standards for formatting patient medical history information; electronic health records are standards for transmitting and operating medical data systems between medical facilities and insurers, pharmacies, and doctors who use patient medical histories. Under healthcare reform, the PRC Ministry of Health has released documents to guide the mutual development of electronic health records and RHINs.

Healthcare reform aims to strengthen information systems for new elements being added to China’s healthcare system, including an information system connected to medical institutions for social insurance plans; a three-tier (state, province, and municipality) information network of drug regulation, drug testing, and drug adverse reaction surveillance; and a system that provides information on essential medicine supply and demand. China has also launched an “all-in-one” card that can be used in designated hospitals and drug stores. The card stores a user’s name, gender, payments, and consumption patterns, and an employer can allocate money to the user’s health insurance card through its bank.

HIT-related goals in the healthcare reform plan are creating an unprecedented demand for software, hardware, and information technology services to outfit new and updated medical facilities, particularly in rural areas. A recent Springboard Research study estimated that HIT spending in China will increase from $2 billion in 2009 to $3.8 billion in 2012.

Opportunities in China’s HIT market will be most obvious in areas where the country is facing challenges. China’s HIT market lacks the software necessary to accompany its complex system of hospitals and healthcare facilities. The country suffers from a shortage of skilled workers with HIT experience and management expertise to make a smooth transition to new HIT systems. In addition, underdeveloped industry standards and rural infrastructure add to the challenge of installing a unified, standard HIT system. These issues present significant investment opportunities for private and foreign companies, which can offer more high-tech products and services.

—Christine Kahler
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[author] Christine Kahler is manager, Business Advisory Services, at the US-China Business Council in Washington, DC. [/author]

Posted by Christine Kahler