Chang-Hong Whitney07.27.07
The implementation of a successful reimbursement strategy is critical to the success and financial viability of medical devices, and it increasingly is part of new product development (alongside regulatory preparation) for many western companies. When going to China, however, very few have paid attention to the reimbursement rates, which often are called “charge rates” in China. Retail prices frequently are set by distributors based on their interpretations of the market condition or dealer’s own profit margins. Despite the rapid growth of the Chinese medical market and influx of advanced technology, China’s reimbursement system has lagged behind. Many new products, procedures and treatments on the market are not clearly defined or associated with appropriate reimbursement rates, leaving hospitals to decide what to charge patients. Driven by revenues, many hospitals used various techniques to increase the fees for patients, contributing to the second largest social problem: high healthcare expense, as reported in this column in the June issue.
Several factors are influencing reimbursement rates in China, as follows.
Governing Bodies and Policies
Different from reimbursement in the United States and Europe, where the systems usually are universal within a country, the Chinese reimbursement system is fragmented, following guidelines from the central government, but managed by local government agencies.
The top-level pricing policymakers are the National Development and Reform Commission (NDRC) and Ministry of Health (MOH). The NDRC is under the State Council, responsible for macroeconomic policies, management and supervision. The MOH sets healthcare policies but does not have direct management responsibilities of all hospitals.
The two agencies made a joint announcement on July 20, 2000 in which the NDRC and MOH specified that the central government would stop mandating “government prices.” It will only set the top-level policies and principles, such as guidelines on how to calculate wholesale and retail prices, but delegate the power of price setting to local government agencies, mainly the provincial-level health bureaus and pricing bureaus. Local government is responsible for setting the pricing for medical practices based on factors such as the local economic condition, income levels, population and distribution. Local bureaus also can set price floating ranges for hospitals at difference levels. Top-level hospitals (Class IIIA) can enjoy an additional 15% above the published rates in some cities, while lower-level hospitals may see a downward float from the basic rates.
This announcement also explained that the NDRC and MOH are responsible for defining and publishing the items of medical procedures and the contents of each procedure. For new procedures not on the list, provincial bureaus have the authority to determine the reimbursement rates and report the decision to the NDRC and MOH.
What is most significant about this announcement is that the central government relaxed the pricing control on for-profit hospitals. These facilities are free to set their own procedure prices based on supply and demand. For-profit hospitals usually are privately funded by Chinese, international or joint-venture companies, offering adequate care to patients in a pleasant, friendly and clean environment. Because of their high charge rates, however, these hospitals usually are excluded by medical insurers. In large cities such as Beijing and Shanghai, government and private insurers cover up to two-thirds of the population, leaving only one third to private hospitals. So the free market pricing is every bit as competitive in the real world.
Diversity in Coverage and Pricing
As expected, the policy created a widely diversified pricing scheme in China. For one particular procedure, there could be different prices in different provinces and cities. Table 1 provides some examples.
Diversity also is reflected in the procedures that are covered by different cities. For example, Beijing has only one price for magnetic resonance imaging (MRI). Shanghai has three prices, separated for MRI of lower than 0.5 Tesla, MRI of higher than 0.5 Tesla and Chinese-made MRI. Guangdong Province has the most comprehensive list, consisting of 10 MRI procedures, from MRI lower than 0.5T to enhanced MR angiography to MRI guidance.
Reimbursement rates always are a good measure that hospitals use to assess their return on investment when purchasing equipment. In the past 20 years, foreign manufacturers have seen most of their advanced products bought by large hospitals in China. Favorable reimbursement rates and high patient volumes are two major factors for the exploding appetite for foreign products in large cities.
Applying for a New Reimbursement Rate
Different from the United States, where manufacturers have a responsibility to work with insurers to determine a reimbursement rate for their product, Chinese hospitals are the ones that need to initiate the request for a new reimbursement rate for any new equipment or procedure. A hospital needs to submit an application to the local health bureau first. The application includes information on the equipment; purchase price; life span of the equipment and use per patient; information on depreciation and repairs; as well as prices from other provinces for similar products or procedures. The health bureau’s evaluation is followed by the pricing bureau’s exam and audit. A public hearing may be held, if necessary. The final decision is made jointly by the health and pricing bureaus. The new price then is included in the published reimbursement rate list. A manufacturer only can assist the hospital in the process but cannot drive the activities.
In summary, the above might explain why reimbursement rates have been somewhat a mystery for international companies. For a country that is under centralized control, the reimbursement rate is one indication that regional differences are hard to overcome. Manufacturers need to study the reimbursement rates, medical insurance coverage as well as distribution of hospital types (for-profit or non-profit), along with other factors, to decide on its distribution strategy and retail pricing in China. The era when distributors could sell anything at any price to anyone has passed and was followed by a gradually market-driven pricing structure. At any time, one should always remember that “China is China.” It will always have its own flavors for those who care to savor—so stay alert.