Chang-Hong Whitney06.12.06
Chang-Hong Whitney |
A 2004 China Ministry of Health survey showed that while urban and rural incomes had risen in five years by 8.9% and 2.5%, respectively, healthcare spending in cities and rural areas had increased by 13.5% and 11.8%, respectively. Furthermore, statistics show that more than 60% of personal income is used or reserved for healthcare costs.
China Daily (April 4, 2006) reported that only 130 million of the 550 million urban residents have medical insurance—and some rural areas have no health insurance. While advanced medical technology has brought new treatments and medicines, Chinese citizens have increasingly found it hard to afford the care they need for both themselves and their loved ones.
In response to the public outcry on escalating healthcare costs and an inadequate healthcare network, the Chinese government is prepared to drastically improve China’s healthcare system. According to China Daily, the long-term goal is to build a nationwide medical insurance system by 2020 for every citizen; the short-term goal is to enact some other changes within the next five years.
This new directive is welcoming news to hundreds of thousands of Chinese. The question is, however, how will this directive and future policies impact the medical device industry and their suppliers?
Device Pricing Controls for Hospitals
The measure to cut healthcare costs starts with reducing hospital expenses, since lowering patient fees is the government’s top priority. To achieve this objective, the Chinese government has implemented various policies.
For example, the Ministry of Health (MOH) has required hospitals to purchase medical consumable products through public bid processes. To strengthen bargaining power, eight provinces joined hands to hold one procurement bid for disposable supplies (such as catheters) for the following year.
The MOH may further strengthen its pricing control by regulating the margin between the manufacturer’s sales price and the purchase price at the hospitals. For large capital equipment, MOH, which delegated the approval process to local health bureaus in the past, has centralized the approval authority and began to demand sharing of advanced equipment among hospitals in a geographic area.
Reimbursement rates may also be re-examined and guidelines set to reduce excessive prescription of tests. These measures have created concerns among hospital administrators as they contemplate new purchases and ROI calculations if the reimbursement scheme were to change. Large capital equipment producers may see some squeeze in their sales numbers, but it is still too early to tell.
Some Opportunities for OEMs
China was successful in administering basic care in 1960s through a network of healthcare workers and “barefoot” doctors. The market economy later demolished that structure. To revamp the basic healthcare coverage, the MOH and other agencies will now design policies to encourage establishment of neighborhood health centers, private clinics and doctors who can offer basic care at affordable prices. Non-profit hospitals and clinics will be established with government support.
This new initiative will be good news for the device manufacturers that provide basic testing or treatment devices. Home healthcare products and equipment will continue to enjoy increasing utilization in the coming years. In addition, telemedicine and remote diagnosis technologies may see some growth in areas where digital technology is present, to help reduce costs for patients.
For US and other companies operating in China to leverage the low cost manufacturing advantages, these market shifts may not affect them as much. On the other hand, those who are in the capital equipment business may find this that trend limits their sales through traditional channels; however, it may offer opportunities to broaden the territories and sell through creative financing and profit sharing programs.
Hospital Information System (HIS) and other specialty information systems, such as Radiology Information System (RIS) or Laboratory Information System (LIS), have been a heated topic as hospitals try to link with a centralized patient database for diagnostic and treatment histories. Patients who have to travel from local clinics to a regional, city or specialty hospital currently complain about having to repeat medical tests or examinations at each new facility. Patient data and records are not shared among facilities, thereby hindering diagnosis and treatment. The new healthcare reform may fuel changes to this approach if the government decides to mandate sharing of patient information among hospitals.
The MOH’s statistical information center recently signed a memorandum with Intel China to jointly develop an industry standard for storing and sharing electronic patient data, which will pave the way to a uniformed network throughout the country.
Advice for Device Companies
It is obvious that the wonderful days of “everything sells in China” are gone. Companies need to re-align their China strategy to sustain business in this market.
As the customer base changes, keep in mind these key ideas:
• It may be necessary to consider different product configuration, even de-feature existing products to fit the new customer needs.
• Improvement on marketing and promotion, as well as Internet sales, will be beneficial to cover wider geographic areas and reach less informed customers.
• Distributor networks may need to be examined to remove extra layers, as the future market prices may not provide the margin for multiple levels of distributors.
• Large equipment sales will be difficult unless companies explore leasing and financing options with financial institutions.
As the Chinese medical device industry matures, many of its products have been proven to have high quality and performance. It is about time to develop a China sourcing strategy to reduce product costs and to evaluate OEM or private label opportunities to include local-made products into the current product mix for the Chinese and the worldwide markets.
The Chinese healthcare reform is not at all an easy project. Reading up on the opinions, analysis and suggestions is like reading about the US healthcare reform. It is evident that this reform will take years—with many leaps and bounds. As the healthcare system shifts from semi-market driven to one that is more centrally controlled, more policies will shape the device industry and the market.
Despite these changes, one thing is certain: the Chinese healthcare market will continue its expansion as the personal income grows and the population ages. While this short period of restructuring is very necessary, those who continue on “the China train” should have an incredible journey.