Chinas Healthcare Reforms and Medical Devices

China’s Healthcare Reforms and Medical Devices

Ames Gross

China has gained economic strength despite the global recession of 2008-2010. As the world’s second-largest economy behind the United States, China’s gross domestic product growth of 10.3 percent in 2010 was significantly stronger than Organisation for Economic Cooperation and Development (OECD) countries’ average of 3 percent. (Founded in 1961, OECD is an international economic organization based in Paris, France, that includes 34 countries and was created to stimulate economic progress and world trade. For more info, visit www.oecd.org.)

With a huge population of more than 1.3 billion people, a strong economy and growing consumer market, China is a prime destination for Western companies’ medical products.

China plans to have a basic healthcare insurance system for its entire population by 2020.However, the government needs to overcome current challenges of healthcare affordability and accessibility. For this reason, China unveiled new healthcare reform guidelines in 2009 that are being implemented through 2011.

Key Points to Consider

The size of China’s growing consumer market isn’t enough to tackle the many hurdles that the country faces in implementing large-scale healthcare reform.

Major healthcare issues for China to tackle include:

• Imbalanced healthcare development between rural and urban areas;

• Operational weaknesses in the public health sector;

• Lack of government investment in healthcare; and

• Increasing medical expenses forits citizens.

In addition, the country’s reform efforts aim to:

• Strengthen China’s public healthcare service system, especially in rural areas;

• Improve management and supervision of public medical institutions;

• Increase basic medical insurance coverage for its citizens; and

• Allow more affordable pharmaceutical drugs on the market.

Approximately $125 billion was allocated for the initial three years of the reform plan (2009-2011). About two-thirds of the $125 billion has been allocated to healthcare recipients, mainly through subsidized insurance programs. One-third is allocated to healthcare providers, especially those at county-level hospitals and clinics.

Healthcare Development in Rural and Urban Areas

To enhance China’s healthcare infrastructure, county-level hospitals and clinics in urban and rural areas will further be developed. The government will fund the construction of 2,000 county-level hospitals and an additional 5,000 clinics by 2011. These hospitals provide healthcare services at lower costs than large city hospitals.Low-income groups will have access to more affordable healthcare treatment once these new county-level hospitals and clinics are established.

About $10 billion out of China’s $125 billion healthcare reform has been allocated for medical device purchases by hospitals and clinics in the country. We expect more demand for medical devices coming from these newly established healthcare facilities.

Larger urban hospitals are expected to provide support to small, local hospitals in terms of personnel, specialized expertise and equipment. To provide better treatment to low-income patients, the government aims to provide additional training to general practitioners in smaller and less-sophisticated healthcare institutions.

More Affordable Drugs

To further assist China’s low-income groups in terms of healthcare availability and affordability, the government also expanded the National Reimbursement Drug List (NRDL) in 2009 and further issued the Essential Drug List (EDL).

The NRDL is China’s main reference for drug reimbursement for basic medical insurance. The NRDL contains 2,127 drugs, which has 277 more drugs listed than the previous NRDL (revised in 2005). The additions to the NRDL list means more drugs are reimbursed through medical insurance.

The EDL, on the other hand, lists all essential medicines to be used at public health facilities, retail drugstores and medical institutions in China. These medicines are sold to patients at government-controlled prices in China healthcare institutions at a shared (co-pay) low price.

Prices of EDL drugs are fixed. No commission is paid for their prescription. This implies that there is no mark-up on these prices. As a consequence, the EDL drug prices will be reduced by as much as 50 percent. These drugs offer very low margins amid a competitive generic drug market in China.

Greater Private-Sector Opportunities

In December 2010, China took steps to promote private investment in healthcare services. New policies now allow the private sector to participate in the restructuring and management of Chinese state-owned hospitals. The aim is to convert some public health institutions into private ones.

Foreign investors will be able to participate either in joint ventures or as wholly owned foreign enterprises in the hospital sector. This is a big step from the previous restriction, where wholly foreign-owned hospitals and clinics were not allowed in China. With regard to hospital joint ventures, the previous limit of 70 percent in foreign shareholding is expected to be lifted gradually. There also are steps to simplify the business application processes for foreign participation and more equitable tax rates between state-owned and privately owned medical institutions in China.

During the next few years, new wholly owned foreign hospitals as well as hospitals under restructuring will open new opportunities for foreign medical device companies. Private investments into these Chinese hospitals will include the procurement of new medical devices for diagnostic imaging, medical disposables, implants, and cardiovascular equipment.
With an expanding medical device market in China, growth in this segment should exceed 15 percent per year through 2015.

Currently, the total market value of key medical devices in China is about $8 billion. The market size of these medical devices in the Chinese market is illustrated in Chart 1.
 

More Affordable Healthcare

One of China’s ways to improve healthcare affordability and accessibility is through basic medical insurance coverage for all. With the healthcare reform, China aims to have 90 percent of the population covered by medical insurance by the end of this year. By 2020, China aims to have its entire population covered by medical insurance. Whether the percentages can be achieved remains unclear for now. In 2009, approximately 60 percent, or 350 million out of 580 million people in the urban areas were covered by the basic medical insurance.

The full implementation of basic medical insurance will boost demand for drugs and medical devices in China. There will be an increasing number of patients who can afford medical care, as well as patients who are less price-sensitive to treatment costs. Patients also are able to receive needed therapy for longer periods of time, without the constraint of unaffordable medical costs.

Nevertheless, as the government spends more, it also will control costs through other means. These include price cuts and reimbursement cuts, mainly through expensive pharmaceutical products.

Tighter MedicalDevice Regulations

On Dec. 27 last year, China’s State Food and Drug Administration announced 96 new industry standards concerning medical devices in China. Thirty-four of these new industry standards are mandatory, while the remaining 62 are recommended. The mandatory standards will be regulated beginning June 1, 2012. The recommended industry standards cover sterile medical equipment packaging testing methods, dental root canal devices and orthopedic transplant devices, among others.

With the increased focus on the quality and availability of urban and rural healthcare, there also is strong growth potential for high-end, advanced medical devices. This segment is dominated by foreign medical device companies. Demand also should increase for medical devices that detect or combat chronic diseases associated with changing lifestyle habits.

With increasing healthcare awareness in China, the country’s total healthcare market is expected to triple from the current estimate of more than $200 billion to more than $600 billion by 2020.

Ames Gross is president and founder of Pacific Bridge Medical, a Bethesda, Md.-based consulting firm that helps companies doing business in the Asia market. A recognized national and international leader in the Asian medical markets, he founded Pacific Bridge Medical in 1988. PBM has helped hundreds of medical companies with business development and regulatory issues in Asia.