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The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
The Promise & Peril of China's Healthcare Reforms - February 2014
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The Promise & Peril of China's Healthcare Reforms - February 2014

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Mr. Shobert kicked off the event by talking about China’s priorities in the early 1980’s, which then only consisted of massive economic development plans. Shobert discussed how China, like America …

Mr. Shobert kicked off the event by talking about China’s priorities in the early 1980’s, which then only consisted of massive economic development plans. Shobert discussed how China, like America during the industrial revolution, compromised their personal health for economic wealth. He then spoke about China’s foreign direct investment life cycle. He explained that foreign companies in China are welcomed
when needed, but are eventually shown the door when domestic counterparts are able to replace them.

According to Shobert, this phenomenon has been happening since the medieval days of Chinese emperors and dynasties.
Mr. Shobert extensively talked about the promise of China’s healthcare economy. He talked about the billions of dollars spent by the Chinese on healthcare every year, and he showed a survey that explained how the Chinese value healthcare spending above anything else. He discussed the geographic differences of China, which is one of the biggest countries in the world and the home to 1.3 billion people. He then highlighted how motivated the government is in seeking the best healthcare for all their people.

Shobert also talked about the perils and the challenges of China’s healthcare economy. Initially, he gave generalized comments regarding business laws not being implemented and applied to local companies. He highlighted how global pharmaceutical companies are coping with this disadvantage, and he also touched based on the challenges of building a medical staff/team in China.

Towards the end his speech, Mr. Shobert emphasized the expectations of the Chinese economy. He said he believed that the glory days in the 1990’s and early 2000’s of double digit growth every year have passed, and we could expect China to grow “only” at around 7.5% of its GDP per year.

Nevertheless, he reminded everybody that China is still a land of massive growth, and that big opportunities remain for
companies seeking to do business there.

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  • 1. THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY Friday, February 21, 2013 www.HealthIntelAsia.com
  • 2. CONTEXT www.HealthIntelAsia.com
  • 3. China-Specific Healthcare Context • • • • • • Rapidly maturing pharma pipeline w/ key drivers of revenue and profit coming off patent. Commercial impact of key new research, such as the human genome getting “cracked,” has thus-far been illusive. Conquering communicable disease has extended life times, but increased overall cost as more chronic diseases become longterm, treatable conditions. Role of government in healthcare unclear (Regulator only? Payer? Provider? Both?) Globally emerging middle class. • • • • Access and affordability continue to be problems. Healthcare, environment and corruption vie for the top three concerns of Chinese people and their government. Healthcare in any society is a political good, but problems in China’s healthcare economy embody many of the frustrations Chinese have about what they have given up in exchange for economic growth. Many of the inputs to a healthcare system are targets of China’s 12th Five Year Plan. Foreign companies need to understand, and incorporate, these realities. www.HealthIntelAsia.com THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY Global Healthcare Context
  • 4. Accessing Healthcare in China • • • While today China’s government can accurately state that >95% of the country’s rural dwellers have government provided healthcare insurance, in 1999 only 7% did. Divides between rich/poor/middle class and urban/rural persist. Inadequate clinical capabilities in rural areas forces people to China’s larger cities, creating greater burden on an already strained public hospital system. Affording Healthcare in China • • • • • • In 2000, the WHO ranked China 188 of 191 countries globally regarding “fairness of healthcare finance.” 56% of rural Chinese do not bother to follow up on doctor recommendations because of expense. WHO estimates that 50% of China’s rural poor find themselves in “entrenched poverty” due to healthcare costs. Ubiquitous “red envelope” practices reflect a broken funding mechanism that places enormous financial strain on families. This same broken funding mechanism has led to hospital administrators and doctors prescribing un-necessary medicine, diagnostic procedures and medical interventions. 2012 Pew Global Attitudes Project found that between 2008 and 2012 anxieties over China’s healthcare system had more than doubled. But, why? www.HealthIntelAsia.com THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY Organizing China’s Healthcare Context
  • 5. • • • Christina Ho, Fellow and Project Director of the China Health Law Initiative at Georgetown and Yanzhong Huang of the Council on Foreign Relations have written on how China’s modernization did not result in the same sort of improvements in healthcare outcomes as other emerging economies w/ lower rates of GDP growth experienced. When China’s “Barefoot Doctor Brigades” were disbanded, China’s only functioning primary care system was eviscerated. The Barefoot Doctors were not sophisticated, but they created better outcomes for the average Chinese than what they have today. www.HealthIntelAsia.com THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY Why Healthcare in China Deteriorated Over the Last 30 Years
  • 6. • • • • • China’s economic reforms resulted in the dismantling of large parts of the state’s involvement in the economy. State Owned Enterprises (SOEs) were shut down, privatized, or modernized. Many of the healthcare benefits and pensions the average Chinese once received from the government were severed. These good and necessary steps had a bad and unintentional effect: the “broken rice bowl” was not replaced by similar investments from the private sector. China’s central government was so focused on modernization and its many down-stream implications that it overlooked healthcare. www.HealthIntelAsia.com THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY Breaking the “Iron Rice Bowl”
  • 7. Water Pollution 70% of China’s rivers are too polluted to provide safe drinking water. Air Quality PM2.5 poses immediate cardiovascular and long-term cancer problems. Smoking Between 300-350m smokers. Western Diets Hypertension, cerebrovascula r disease rates, diabetes, etc. are all on the rise. Demographics No country will get as old or as rich as fast as China will. By 2050, 1/3 of China’s population will be 60+. Ratio of elderly in need of support today is 16:100, by 2050 that will be 64:100. www.HealthIntelAsia.com THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY The Trade China’s People Have Made
  • 8. China’s Priorities - 2014 1. 1. 2. 3. 4. Economic development. Economic development. Economic development. Economic development. 2. 3. 4. Transition from infrastructure and export-led economic growth, • Towards domestic consumption and, • Capturing higher valueadded, technology-rich industries. Healthcare access & affordability. Environment. Corruption. What happens to an industry within China during this sort of re-prioritization? www.HealthIntelAsia.com THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY China’s Priorities - 1980
  • 9. WFOEs ReCalibrate Expectations, Or, In Special Cases, Exit China Life Sciences, Today China Recognizes It Needs Foreign Investment & Expertise WFOEs Complain of Rules in China Being Designed to Favor Domestic Firms China Tentatively Opens – FDI Catalog Is Revised JVs Dissolve, Domestic and Foreign Former Partners Now Compete Foreign Participation Limited, Largely Via Hong Kong & Macao Entities JVs Practically Necessary, Even Though FDI Catalog Says WFOEs Permissible www.HealthIntelAsia.com Hospitals, 2012 Revision THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY The Lifecycle of Foreign Direct Investment (FDI) In China
  • 10. WFOEs Re-Calibrate Expectations, Or, In Special Cases, Exit China China’s Domestic Technology Development Goals Begin to Fundamentally Change the Landscape in China China Recognizes It Needs Foreign Investment & Expertise What do the life sciences mean to China today? MNC Pharma Gets Protected Status to Engage China (early 90s) 1. Control: Captive Domestic Manufacturing 2. Cost: Price Controls 3. National Economic Development: Moving Up the Global Value Chain Product Offerings of MNCs Get Market Acceptance, Utilization Goes Up, Price Pressures Intensify Life Science Companies Agree to More Actively Participate in China, But w/ Older Technologies China Begins to Move into API, Generics, Lower Technology Niches in the Global Supply Chain www.HealthIntelAsia.com THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY Applying This Life Cycle to Bio-Tech
  • 11. • • Access and Affordability will drive China’s policies. Healthcare in China will remain an extremely political issue. • • • • • Because the reimbursement scheme in China remains broken, economic rent will continue to be extracted in unconventional ways. • • In America, our conflict is over the role of government in healthcare. Few in China question the government’s responsibility for healthcare. In China, their conflict is about whether modernity was worth the price average families are having to pay, the much greater costs they will have to face tomorrow, and why the government has been so ineffective addressing these concerns. Foreign companies that fail to recognize the role of domestic political forces in how China’s government responds to business are in for some nasty surprises. Foreign companies need to understand that compliance issues are not going away. The market’s current structure has too many incentives built into it that foster corruption. Uneven application of compliance standards will result in a “tax” on foreign businesses. China plays a unique role in life science MNCs revenue and profitability. • And China wants its own domestic champions in these same sectors. www.HealthIntelAsia.com THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY Context Take-Aways
  • 12. THE PROMISE www.HealthIntelAsia.com
  • 13. 1. 2. 3. 4. The Scale & Scope of the Need Massive Government-Led Infrastructure Spending A Growing Middle Class China’s Government Is A Motivated Partner www.HealthIntelAsia.com THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY The Promise Within China’s Healthcare Economy
  • 14. • • • 2009 investment by China’s central government of RMB 1.13 trillion into healthcare. 12th 5 Year Plan (5YP) has RMB 4.4 trillion specifically planned for healthcare. Government plans to add: • • • • • • 150,000 primary care physicians in next 5 years. 2,000 new county hospitals. 29,000 new township hospitals. 5,000 existing hospitals upgraded. 95% of all Chinese covered by expanded national insurance. Expanded national drug formulary (EDL), access to new diagnostics and medical devices for treatment of chronic diseases. www.HealthIntelAsia.com THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY The Promise – Massive Government Led Infrastructure Investment
  • 15. China Government Healthcare Spending – Actual Spending Growth & Year-Over-Year Percentage (%) Increase 2,500.00 40 35 2,000.00 30 25 1,500.00 20 1,000.00 15 10 500.00 5 0.00 0 2003 2004 2005 2006 2007 Billion RMB 2008 YOY Growth (%) www.HealthIntelAsia.com 2009 2010 2011 THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY The Promise – Massive Government Led Infrastructure Investment
  • 16. Where China's 2009 Healthcare Reform Went New Rural Co-Op and Urban Residents Insurance 12% 7% 45% Insurance Subsidies for Enterprises in Difficulty Indigent Patients Medical Aid 24% Public Health Awareness Investment 9% Primary Care & Public Hospitals Upgrade & Construction 2% Drug Subsidies Other 1% www.HealthIntelAsia.com THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY The Promise – Massive Government Led Infrastructure Investment
  • 17. • Middle class, as defined by between $10-60,000 USD per year income. • Roughly 300 million person market today. • The most bullish projections suggest that between 700800 million people in China could ultimately work their way into this group. • Strong preference for spending on healthcare and education. www.HealthIntelAsia.com THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY The Promise – A Growing Middle Class
  • 18. • • • Enormous pilot activity within China’s healthcare delivery sector. • Community Healthcare • Home Healthcare • Long Term Care Insurance • Public/Private Hospital Partnerships Offering incentives to privatize public hospitals (“20% by 2020”). • Around 4,000 company owned & run hospitals to be privatized this decade. • Wants to sell off VIP wards at public hospitals. Overall FDI friendly environment – particularly for healthcare service providers and life science companies. • Changes to FDI catalog. • Relaxing WFOE in healthcare delivery. www.HealthIntelAsia.com THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY The Promise – China’s Government Is A Motivated Partner
  • 19. THE PERIL www.HealthIntelAsia.com
  • 20. 1. 2. 3. 4. 5. 6. Misplaced Economic Enthusiasm Misunderstanding Where Profit Resides Excessive Fixed Asset Investment Market Acceptance of Private Healthcare Rising Technology Transfer Expectations Uneven Application of Rules & Regulations www.HealthIntelAsia.com THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY The Perils Within China’s Healthcare Economy
  • 21. • • • • • • • “Trees do not grow to the sky.” China has successfully defended itself against the 1997 Asian and 2008 US/EU financial crises; but, The country has yet to face a structural financial crisis of its own making. Lots and lots and lots of bad debt floating around the country – everywhere (businesses, central government, municipalities). China is in the midst of a very awkward economic transition. There are very real dangers about getting caught up in the “Middle Income Trap.” These possibilities would alter many of the economic projections specific to China’s middle class, and the government’s ability to continue expanding healthcare reimbursement. www.HealthIntelAsia.com THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY The Peril – Misplaced Economic Enthusiasm
  • 22. • • • • • • Roughly $1.7 billion invested capital into China’s domestic hospital sector last year. Why? CN Healthcare’s research found that almost all of the profit that China’s privately-owned hospitals generate – regardless of the market segment they serve – is made in the sale of pharmaceuticals and devices. Today, even in the high-end private VIP niche, profit does not reside in the delivery of healthcare services. Paying for services – even healthcare – remains a challenge in China. What do your organization’s clinical pathways, pharmaeconometrics look like if the only variable is input cost of the consumables? www.HealthIntelAsia.com THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY The Peril – Where Profit Resides
  • 23. • There is a lot of fixed asset spending taking place across China. • New hospitals are directly tied to political advancement within local government. • Already reports of massive under-utilized capacity; • Not because the demand is not there, but because the hospitals do not have staff; and, • Because healthcare continues to be a consciously rationalized expenditure by Chinese consumers. www.HealthIntelAsia.com THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY The Peril – Excessive Infrastructure Spending
  • 24. McKinsey: What Drives Affluent Chinese into Private Healthcare 25% 20% Private ≠ Better Higher Acuity = Public Hospital 15% 10% 5% 0% General Medicine (Check-Up) Cosmetic Surgery (Eyelid Surgery) OB/GYN Pediatrics www.HealthIntelAsia.com Oncology Cardiology THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY The Peril – Market Acceptance
  • 25. • • • Could China achieve in the life sciences what it did in clean-tech? • Create the most amenable location in the world for innovation to be trialed. • Foster public/private, academic/i ndustry partnerships to accelerate key technologies. • Fill the western financial capital gap between government, VCs, and industry. What will China’s technology transfer expectations be for market access? Are today’s WTO protocols adequate to address both the needs of China and its trading partners in the life science sector? www.HealthIntelAsia.com THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY The Peril – Technology Transfer
  • 26. • • • This past summer’s GSK scandal: • GSK is alleged to have routed $489 million to bribe hospital officials and doctors. • Use of 700 travel agencies to wash the money. • Peter Humphrey and his wife arrested on charges of violating China’s data privacy act. Sinopharm, the largest pharmaceutical distributor in China, just charged w/ same thing GSK was this summer. But what are these companies really guilty of? www.HealthIntelAsia.com THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY The Peril – Uneven Application of Rules & Regulations
  • 27. • How should industry interpret this past summer’s GSK scandal? • Reforming the Healthcare Economy • • • Xi Jinping’s Anti-Corruption Drive • • When is the broken reimbursement system going to get fixed? When are doctors going to be paid more? Why disproportionately crack down on foreign vs. domestic players? China Is Becoming a Less Hospitable Place for MNCs to do Business • Certainly fits w/ critiques of China by other business groups. • What really are your options? www.HealthIntelAsia.com THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY The Peril – Uneven Application of Rules & Regulations
  • 28. WHAT SHOULD BUSINESSES & INVESTORS DO? www.HealthIntelAsia.com
  • 29. • • • • • • Reframe your expectations about growth in China. Be clear-eyed about the political risks you will face. Recognize the un-even application of standards will continue. • Compliance, compliance, compliance. • That means for you and your distribution channel. Distinguish between what you can do yourself, and what you need government partners to accomplish. • Businesses can address issues like the Anhui Pricing Model. • Businesses are less powerful to address changes such as: • revisions to China’s IP laws specific to life sciences, • compulsory licensing, • compliance standards being un-evenly applied to foreign versus domestic firms, • technology transfer for market access expectations, and • what it takes to actually get a therapy on the EDL. • These issues are all on the radar screen in Washington DC. Meet China as it is, not how you want it – or perhaps even need it – to be. Get back to the basics: new ways of talking to your market, new products, new models, new disruptive innovations. www.HealthIntelAsia.com THE PROMISE & PERIL OF CHINA’S HEALTHCARE ECONOMY What Should Businesses & Investors Do?
  • 30. For more information: Rubicon Strategy Group, LLC Two Union Square 601 Union Street, Suite 601 Seattle, WA 98101 www.RubiconStrategyGroup.com www.HealthIntelAsia.com Phone: 206-652-3572 QUESTIONS? www.HealthIntelAsia.com

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