Want to Know China’s Future? Look Back at Policy Changes of the Past Year
By Chang-Hong Whitney
The year 2007 proved to be a turbulent one for the Chinese medical market. Nearly every sector of the market experienced changes as result of new regulations, healthcare policy initiatives, national health insurance programs, government-mandated pricing controls and emphasis on healthcare cost reduction. The inevitable consequences, therefore, have included restructuring and reform in healthcare industries along with re-alignment of corporate strategies for the supply and demand sides of the markets. Change may be scary at times, but it can bring with it good things; in fact, some of the recent changes in the market and potential of the Chinese already have stimulated renewed interest from the investment communities. In the coming years, we may see even more investments into the healthcare arena—but first, let’s look back at the past one more time and take a glimpse at the future.
Regulatory Bodies Strive to Maintain Momentum
Regulatory agencies have been busy formulating or implementing new regulations pertaining to medical device and pharmaceutical products. For example, the Ministry of Information Industry (MII) implemented the Administrative Measures on the Control of Pollution Caused by Electronic Information Products—also known as the China RoHS Law (Decree 39)—on March 1, 2007. This regulation requires that labeling for electronic products must list any components that fall into the law’s six categories of hazardous substances. Companies must adhere to this labeling requirement to demonstrate compliance. (For more details about this law, read the January/February 2007 China News column in Medical Product Outsourcing.) Companies have found it fairly easy to comply with this regulation; therefore, implementation has been quite smooth. The MII has formulated requirements pertaining to the amount of hazardous substances that may be used in a product, but to date, the agency has not mandated inspection.
Meanwhile, the State Food and Drug Administration (SFDA) finally released and implemented its much-anticipated new product registration regulation for in-vitro diagnostic reagent products (see China News, June 2007). These products now must be registered as a medical device, but the testing and registration material remains similar to pharmaceutical registrations. Implementation of this regulation has been not been quite as smooth as it was for the MII’s RoHS Law. Ambiguities and problems keep this implementation a bumpy road.
In September, the SFDA also released a new draft of the top regulatory regulation for medical device registrations (see China News, November/December 2007). The Regulation on Supervision and Administration of Medical Devices (Official Draft of Revision of State Council Decree 276) was widely expected by the industry to be revolutionary in removing the pitfalls of the previous regulations. To the dismay of many, however, this new draft fails to address the most sensitive issues, such as registration review time, registration renewal and clinical trials. Instead of simplifying the process, this new regulation makes it more difficult for Chinese companies to register high-risk products. Class III products would be required to be reviewed by provincial FDA offices first before they could be reviewed by the state registration office. Given the lengthy review process and inadequate manpower and capabilities of the local FDA offices, companies view this change as detrimental to their ability to get new products to market quickly. The lack of commitment to improving registration review times also generated a public outcry about the SFDA’s inefficiency and lack of management. Although the first draft of the regulation has been out for months now, the SFDA has yet to incorporate public comments into a second draft.
China’s Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) was busy last year, too, as it issued a new regulation pertaining to imported medical devices. Administrative Measures on Examination and Supervision of Imported Medical Devices (Decree 95) would require that certain high-risk medical products must be inspected before importation is permitted. Ever since the regulation was unveiled last June, the AQSIQ has been bombarded with intense attention from the international medical community, which views the measure as an unfair practice against imported products—as well as a violation of World Health Organization rules. As a result of the vehement objections from governments and trade groups around the world, the AQSIQ has postponed implementation of this regulation indefinitely.
Going into 2008, all the existing regulations described will be further tested and modified to close any loopholes and ambiguities. In addition, the SFDA may release another version of its top-level medical device regulation. Given the complaints by Chinese companies about the agency’s leniency toward foreign producers’ quality systems and design controls, the SFDA may add requirements for foreign manufacturers to prove that they have adequate quality systems and design control processes (certifications such as ISO 13485 and the EC Design Examination Certificate), at the time of product registrations. And, despite the setback on Decree 95, the AQSIQ and China Customs will continue to monitor imported products closely. Inspections on product labeling and document verification certainly will intensify. Companies that are exporting to China need to be extra vigilant in compliance of Chinese requirements—consider yourself forewarned.
New Healthcare Policies and Programs Set to Arrive
Faced with escalating healthcare expenditure, deteriorating foundational healthcare systems and excess purchase of high-end medical products by hospitals, and in response to public resentment of the high costs associated with medical treatments today, the National Development and Reform Commission (NDRC), a top-level macroeconomic management agency under the State Council, has initiated new policies and allocated funding aimed at re-establishing foundational healthcare networks and insurance programs for the general public. Starting with rural and unprivileged areas, several collective healthcare insurance programs have been implemented since 2003 and proved to be successful in managing the basic healthcare needs of the general population. Next on the NDRC’s agenda is establishing other similar programs in various counties. The NDRC said it plans to launch new healthcare reform programs in 2008 that will dramatically restructure the current healthcare systems by providing a safety net through non-profit public hospitals as well as advanced care through private health providers.
At the same time, the Ministry of Health (MOH) reinstated control over purchases of high-end medical equipment (see March 2007 China News) to curb excessive spending by hospital, increase use of technology already installed and demand public bidding for each new purchase.
To reduce public health burdens, the NDRC and MOH jointly issued new restrictions on retail prices for some popular drugs and medical treatments, such as computed tomography scans. Reductions to patient prices for certain treatment (or the price charged to the patient) are between 10% and 25%. Manufacturers, especially those who make consumables, only can sell their products now by participating in public bidding programs jointly organized for eight cities and provinces. Such bidding has dramatically reduced the end-user’s cost by 25% in the first year and 6%-8% per year thereafter. The problem remains, however, that despite government’s good intentions in controlling costs through the bidding system, the program has been riddled with mismanagement due to a lack of expertise about the products and technology as well as bad decisions to purchase inferior products in pursuit of low prices.
Looking ahead, the central government has announced that it will further reform the healthcare system—one measure will be the establishment of four separate systems—public health, health services, health prevention and drug supplies. Along the way, the central government will continue to increase healthcare investments. New rural collective healthcare programs will be implemented around the nation, with higher reimbursements by the government. Pricing controls and large high-end equipment procurement restrictions will remain in effect and even broaden. With more money to be spent in the rural and under-developed provinces, demand will continue to grow in those areas. As a result of all the changes ahead, companies will need to adjust their expectations for the market and design an appropriate marketing and sales strategy for China.
Some Manufacturers Face Uncertainty; Others WIll Prosper
In the coming years, industry consolidation, aided by new investments into the healthcare industry by financial investors from China and abroad, will accelerate. The stronger players will be able to take advantage of new investments to acquire new technology and intellectual property ownership to develop future products and markets. Their economies of scale and large range of product lines also will allow them to maneuver through difficult times in the lower-tier market, while using political ties and connections to influence policies and regulations in the future. Small-scale manufacturers, however, may have a much harder time staying above water in China with all these changes.
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Before the new healthcare reform is finally unveiled, it is hard to predict the impact the medical industries will experience. It is certain, however, that the Chinese regulatory agencies will use regulations to further restrict the erosion of inferior products in the market. Pressures from the market, government policies and regulatory agencies will further push the restructuring of the industries, injecting more professional practice and ethical business relationships among the players. As the industry matures and technology and new products emerge, we can expect a healthy 14%-16% (at minimum) annual growth for the industry in the next five to 10 years.
