Chang-Hong Whitney03.14.08
The 2007 China medical market was filled with adjustments, policy changes, personnel shuffles and slowed growth. Despite the market downturn, China’s import and export statistics still recorded an overall healthy gain of 12.77% from January to November 2007 compared to the same period in 2006. Importation amounted to $6.38 billion, representing 18.53% growth compared to the previous year.
Medical devices comprised 39.47% of all medical imports. Industry watchers estimated that the Chinese medical device industry generated 40 billion RMB ($5.4 billion USD) in revenue in 2007, and the market is projected to reach about 50 billion RMB ($6.7 billion USD) to 55 billion RMB ($7.4 billion USD) in 2008.
Looking forward in 2008, the Chinese medical market is entering a new phase of steady growth—but it will be heavily influenced by government policies and regulations. A few areas are worth noting as we move forward.
National Healthcare Reform
For the past two years, healthcare reform has been one of the top priorities for the central government. Rebuilding the deteriorated basic healthcare system and reducing healthcare cost to ordinary citizens are the main objectives of this reform. Major consulting firms, think tanks and collaborative groups formed by government agencies, research institutes and leading healthcare professionals have submitted up to 10 reform plans to the central government. The final discussion and formulation of the policy are in progress. According to the Ministry of Health, the long-anticipated healthcare reform plan was expected (as of press time) to be released sometime this month.
Early comments by various agencies about this plan revealed that the new healthcare system is a structure supported by four beams (systems) and eight pillars (mechanisms). The four systems are public health, health service, health insurance and drug supply; the eight mechanisms are healthcare management, implementation, investment, pricing formulation, supervision, science/ technology/personnel assurance, information and legal. The overall objective is to establish a basic healthcare assurance that covers people from all walks of life—from cities and townships to villages—improving healthcare service to every citizen.
Many believe this new reform plan will have a profound impact to the healthcare market and provider communities. More policies should be expected from various government agencies as a result. One of the health reform plans in particular calls for a national healthcare commission to coordinate the efforts from various ministries.
New Collective Insurance and Government Subsidies
The Ministry of Finance allocated 11.4 billion RMB ($1.54 billion USD) in 2007 for the new village collective health insurance program. This program was implemented among 80% of the rural counties and districts in 2007 and will expand to all rural areas in 2008. The central government also increased the government health subsidies from 40 RMB per person to 80 RMB per person for the rural poor and the low-income uninsured population in cities. At least 750 million farmers and 300 million uninsured citizens in cities and towns will contribute to a collective health insurance program and receive the government health subsidies, making the combined healthcare fund to the amount of 150 billion RMB ($20.3 billion USD) in 2008. Such purchasing power is an incentive for many manufacturers to design special strategies to service this segment of the market.
However, it must be noted that patients in this market segment have limited financial capabilities in seeking basic healthcare. This undoubtedly also is a segment that is heavily controlled through the government pricing control and other mechanisms. Drug and equipment prices will be kept low artificially. Considering the low-tech nature of the products needed and the local advantage Chinese companies have, foreign companies—unless they have a local presence and the right product mix—may lose out to their Chinese counterparts in this area.
Hospital Purchasing Regulations
As discussed several times in this column in 2007, the central government has taken steps to mandate price reductions for medical procedures. With the release of the health reform plan and the national insurance program for basic healthcare, more programs are expected to further reduce costs to patients. Hospitals will need to improve service revenue through upgrading their hardware and putting more emphasis on service. As a result, medium and high-end purchases are likely to continue to a certain extent.
Pricing control and centralized purchasing programs (through public tenders) do help curb escalating healthcare costs. However, the negative impact of the pricing control by the government largely is on small- and medium-size manufacturers that make less profit on sales and have no cutting-edge technology or brand name to sustain their existence. Public tenders also encourage competition on price, which may create a false sense of market price and reduce corporation profitability, jeopardizing new product development in the long run.
SFDA’s Objectives in 2008
The State Food and Drug Administration (SFDA) recently published its plans for 2008. The objectives that relate to medical device manufacturers and distributors are as follows:
• Continue re-examination of registration documents for high-risk medical products. In keeping with the SFDA’s program (begun in June 2006) to inspect medical manufacturers and review the registration documents of approved products, the SFDA reported it had completed 19,817 factory inspections by November 2007. Only 412 of the companies inspected passed. Of 29,472 registrations (Class I and Class II products) reviewed, 2,977 were found to be incorrect or lack of substantial information. (The review for Class III high-risk product registrations was initiated in 2007 and, thus, comprehensive data are not yet available.)
• Expand the trial program of having an authorized quality staff member in place at drug manufacturing facilities. As an additional step to achieving GMP, drug companies are required to have on staff an “Authorized Quality Person” who is solely and personally responsible for ensuring product quality and overseeing the release of new products to the market. Although this requirement is still in experimental stage and only applies to drug manufacturers, it certainly will be adopted for device manufacturers in the near future.
• Enhance daily supervision of medical device companies. For drug companies, the SFDA already has initiated an on-site inspector program in which SFDA-designated personnel conduct daily supervision of a manufacturer’s operations. Although device manufacturers have not been subject to such close scrutiny, the agency will step up its efforts on routine and random inspection of device manufacturers as well.
• Expedite the implementation of medical device quality system regulations. Quality systems have been the weakest link in Chinese companies, and the SFDA is determined to change this. In 2006, the agency released a trial version of new quality regulations for sterile, disposable and implantable products. After more than a year of experimentation with selected companies around the country, the SFDA seems ready to speed up implementation with more companies.
• Improve regulations and inspection standards for random quality testing of products on the market. Supervision of products on the market has been a steady practice for the SFDA for a few years. Now, the agency seeks to improve and standardize this program.
• Improve management, coordination and supervision of serious adverse incidents. The SFDA’s regulations on adverse incident reporting, product re-evaluation and market release have been implemented since 2006. Reporting structure and guidelines have been in place as well. In 2008, the agency will work towards improving the existing system and regulations in this area.
• Enforce production supervision on large volume infusion drug manufacturing. This program was implemented following two fatal incidents caused by counterfeit infusion drugs and is expected to continue this year.
Along with all of these objectives, the SFDA has been in tense discussions about the new top-level regulation for management and supervision of medical devices. The agency released Regulation on Supervision and Administration of Medical Devices (Official Draft of Revision of State Council Decree 276) in September and invited public comments. After receiving more than 100 responses, the agency is in the process of reformulating the regulation and expects to announce a new version later this year. For more information on the original draft, please refer to the November/December 2007 column (“China Combats Negative Press With New Medical Device Regulations”).
* * *
After a stormy 2007, the Chinese market is welcoming a more calm but regulated era. With new policies, initiatives and requirements coming out from various agencies and the central government, medical companies must be ready to adjust their strategies and reassess their opportunities in the Chinese market. The good news is, despite the market downturn and increased regulations, the Chinese medical market is believed to be able to sustain its average 14% growth annually in the coming years.