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Martec China Medical Reform

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  • 1. 2009 China Medical Reform and Its Implications The Martec Group September, 2009 MARTEC ®
  • 2.
    • China Healthcare System and Challenges
    • Medical Reform Policies
    • Implications
    Agenda
  • 3. Chronology of China’s medical reform. 1985 1992 1994-1998 2005 2008-2009
    • China launched market-oriented reforms. Public hospitals began to make their own incomes by mobilizing medical workers and improving hospital efficiency, in face of tightening government funding
    • Market-oriented medical reform started
    • Special medical services, including better nursing, specialty care, and specialty ward emerged
    • In 1994, medical insurance system was initiated in some pilot cities in Jiangsu and Jiangxi provinces
    • In 1998, urban employees basic medical insurance were initiated around China
    • The State Council issued a research report, indicating that the reforms over the last decade was unsuccessful
    • In 2008, the new medical reform plan which aims to benefit public welfare was open to public opinions;
    • In April 6th, the State Council issued two documents, signifying start of the 2nd Medical Reform;
    • A budget of RMB 850 billion will be financed in 2009-2011 reform;
    • Essential Drug List and Medical Insurance Drug List will be released in later 2009.
    Source: Xinhua News Agency; Ministry of Health; Martec analysis 2000
    • Several policies were imposed:
      • Expanding coverage of urban employees basic medical insurance system
      • Medicines purchased through open tender
  • 4. Significant imbalance of healthcare service resources between urban and rural areas. Source: Ministry of Health Number of Medical Institutions in 2008 Number of Hospitals by Grade in 2008
      • Urban Area
      • Concentrated with 80% of total healthcare facilities. Majority of urban healthcare facilities are affiliated with Ministry of Health (MOH) or local Bureau of Health. For example, in Shanghai, only 5% of hospitals are private
      • 60-70% of patients receive healthcare services in Level III and Level II hospitals, whereas only 30-40% patients go to Level I hospitals, and Community Health Centers (CHC). MOH suggests that 65% of outpatient and 77% of inpatient should go to CHCs
      • Three major factors limit private hospitals’ development: outside of BMI coverage; difficulty to attract top physicians due to technical title certification and research & learning limitations; higher tax compared to public hospitals
      • Rural Area
      • 70% of total population, only have 20% of the healthcare resources
      • Private clinics dominate rural healthcare market. In Guangdong province, over 80% rural clinics are private
      • Government wants to increase number of government run health centers, but insufficient funding has restricted development of rural healthcare providers, which are characterized by poor quality standards and lack of basic equipment
    Private Society 126,089 3,432 304 3,198 3,887 136,943 173,777 6,975 39,860 24,260 19,712 269,375 Total 6,373 469 38,636 8,598 9,777 68,258 Government 41,315 3,074 920 12,464 6,048 64,174 Clinic Hospitals Institutions Health Center( Rural) Health Service Center for Community (Urban) Outpatient Department Total 4,989 First Level 19,712 Total 6,751 6,780 12 328 722 1,192 Hospital Others B Class A Class Level Second Level C Class Third Level
  • 5. The total healthcare expenditure has been increasing rapidly, and the portion paid by individual is still high. Billion RMB China Total Healthcare Expenditure (1985 – 2007) CAGR: 18% ( From 2000 to 2007) 1048.81 458.66 215.51 74.73
    • The total healthcare expenditure has been increasing rapidly in the past few years
    • CAGR from 2000 to 2007 was 18%, much higher than China average GDP growth
    • Although the percentage of expenditure by individual decreased from 59% to 45%, it is still too high compared to 10%-20% in other countries
    • 2015 healthcare expenditure is estimated at RMB 2,400 billion; government’s target is 30% by individual, 30% by government, and 40% by company groups & insurance companies
    • Healthcare expenditure distribution is unbalanced between coastal area and inland area, between rural areas and urban areas.
    • A quarter of total expenditure is for Beijing, Shanghai, Jiangsu, Zhejiang and other rich coastal areas
    • West areas only account for 5% of the total expenditure
    45% 35% 20% 59% 26% 15%
  • 6. Controlling drug cost is the main method to control overall medical expenses. The growth rate of Outpatient and Inpatient Expenditure (2001 – 2008)
    • Key Drivers of Drug Cost Increase:
    • Porfit from selling medicine is the major source of income for public hospitals, which causes medicine being over priced.
    • The drug tendering process did not meet its purpose of controlling drug cost:
      • Pharmaceutical companies launch “new drugs” with slightly modified chemical structure and new name, to avoid bidding with drugs in the same category and created sole bidder situation, pushing up drug prices
      • Neither hospitals nor pharmaceutical companies have incentive to reduce drug price.
      • The agency fee increases the drug price
    • Insurance companies have limited influence over pricing system, so that the drug price could not be properly supervised
    • Doctors’ pursuit of kickback intrigues doctors to prescribe high-priced drugs
    9.6 9.1 2004 8.8 7.5 2005 0.2 1.4 2006 5.2 9.1 2001 10.9 6.4 2002 8.7 8.6 2003 6.3 5.5 2007 9.5 Cost Growth per Inpatient 2008 Cost Growth Rate ( %) 7.6 Cost Growth per Outpatient
  • 7. China healthcare security system Matrix.
    • Basic
    • Aim to benefit people with lower income, funded by government since 2003, however, facing long-term problems with funding, coverage and low level service
    • Primary
    • As the main insurance structure, Basic Medial Insurance (BMI) is expected to cover over 90% of the total population by 2011. In 2009, around 60% of the urban population and 91% of the rural population have been covered by BMI
    • The surplus of BMI fund is around 30%, much higher compared to percentages in other countries, which means BMI fund is not effectively utilized to cover healthcare expenditures
    • Supplementary
    • The market for commercial healthcare insurance is still immature and leaves great potential for development
    The Crisscross Structure of Chinese Healthcare Security System Basic Primary Supplementary Commercial Healthcare Insurance By individual/corporate groups/society Rural Residents Urban Residents Urban Employees Government supplement, charity donation, individual paid Corporate supplement insurance New rural medical cooperative system Urban residents basic healthcare insurance Urban employees basic healthcare insurance By individual/corporate groups/society Urban medical assistance Rural medical assistance By government
  • 8.
    • China Healthcare System and Challenges
    • Medical Reform Policies
    • Implications
    Agenda
  • 9. The main principles of this new medical reform. Public welfare Grassroots medical institutions in rural areas Government investment Four systems
    • The key trend and characteristic of this medial reform is the emphasis on “ public welfare”. It is the first time for central government to state that “every Chinese citizen should share the basic medical service and insurance”
    • The cardinal attention of this reform is paid in grassroots medical institutions and medical institutions in rural areas
    • Different from the previous medical reform, this reform emphasizes government-lead mechanism, rather than market-orient mechanism
    • The basic medical institution is consisted of four systems:
      • public healthcare system
      • medical service system
      • medical insurance system
      • secured pharmaceutical supply system
    Long-term objective : to set up a healthcare system that covers all urban and rural residents by 2020, which should be safe, effective, convenient and affordable.
  • 10. The 2009-11 implementation plan specified 5 key initiatives focusing on expanding BMI coverage and public hospitals reform. Equalize services in rural and urban areas Launch a pilot program for public hospital reform Source: MOH, State Council publications Increase medical insurance coverage Build a basic medicine system Upgrade grassroots medical institutions Five key initiatives specified in the 2009-11 implementation plan
    • Population covered by basic medical insurance schemes will increase to 1.2 billion by the end of 2009
      • Target to cover over 90% by BMI, to increase coverage from 60% to 90% in urban areas is the biggest challenge in next two years
      • Per capital subsidy of urban residents and rural residents will increase from 80 RMB in 2008 to 120 RMB in 2011
    • Essential Drug List is important in building up the basic medicine system: medicines included in the EDL will be purchased through open tender and unified distribution will be applied
    • Other healthcare institutions shall use essential drugs according to regulations set by the central government
    • The government will increase investment in lower level medical infrastructure, especially hospitals at county and village levels, and community health centers in less developed cities
    • More effort will be spent on public health to increase the service levels in rural areas and equalize public health services between rural and urban areas
    • The government will try out pilot programs to reform public hospitals in terms of their administration, operation and supervision
  • 11. Hospital system reform will greatly benefit private hospitals. Public Hospitals
    • Talent Release
    • Allow physicians’ multiple-location practice
    • Enjoy same benefits as public hospitals on research, technical post certification, and continued education, etc
    • Government encourage private hospitals
    • Some public hospitals will transform into private hospitals as acquired by private enterprises
    • Non-public investors are encouraged to sponsor non-profit hospitals
    • Public Welfare Function
    • Public hospital is “ public welfare” instead of profitable institution
    • VIP ward cannot exceed 10% of public hospital’s total service
    • The revenue of public hospitals will be compensated by prescription fees, technical service fees, and government investment; drug price margin will be banned
    • Since August 2009, around 100 pilot hospitals are under the process of reforming.
    • Strengthen Management
    • Define responsibilities and authority of government and hospital management, exploring governance structure based on hospital management committee
    • Set up a supervision body for drug cost control, the usage of drug in EDL, etc.
    Private Hospitals
  • 12. The government will build a national basic medicine system based on an Essential Drug List. Uniform price across the province Source: MOH, State Council publications Definition of basic medicine system Linked with medicine insurance Prioritize listed essential drugs in prescription
    • Basic medicine system includes an Essential Drug List( EDL) of basic medicines purchased through open tender
      • Essential medicines used in government-run health care institutions, shall be purchased through open tender organized by institutions designated by provincial governments, and unified distribution by distributors selected through the open tender is also required
      • ~307 chemical/biologic medicines and ~300 TCM will be included, all of which will be included in the Basic Medical Insurance reimbursement list
      • -the list is yet to be finalized
    • All medicines included in the essential drug list will be covered by medical insurance programmes with a higher reimbursement rate
    • The policy states that urban community health centers, township hospitals, and grassroots medical institutes should be stocked with all basic medicines on EDL. They do not have to use these exclusively, however
    • All other health care institutions must use essential medicines as regulated
    • Open tender procurement and direct delivery will be used for the essential drugs in order to reduce intermediaries and to effectively set uniform price across each province according to the national guidelines for basic medicines on EDL
      • Central government determines the guiding retail prices of essential medicines
      • Based on the result of tender, provincial governments set the unified purchasing prices within the range of the government-guided prices, with the distribution charge included in the purchasing price
  • 13. RMB 850 Billion Demand Side RMB 200 billion for basic medical insurance: New rural cooperative medical program + urban residents medical insurance Supply Side RMB 260 billion one-off subsidy to distressed/bankrupted enterprises employees RMB 90 billion public health fund for all citizens ( about 20 RMB per person) RMB 10 billion one-off investment for medical insurance organizations Rural/ urban health basic infrastructure Investments in public hospitals, esp. TCM, mental hospital, children’s hospital
    • Majority of the investment is invested in lower level institutions, and citizens with lower end living standards
    • The total amount of RMB 850 billion will be invested equally each year in 3 years
    • Among the RMB 850 billion investment, RMB 332 billion will come from central government while the rest from local governments
      • In 2009, the total budget of healthcare expenditure from government is RMB342 billion, among which RMB 118 billion is from central government
      • Basic healthcare infrastructure and some specialized hospitals are prioritized in total investment
    Source: analysis of Gu Xin, Professor of Beijing University The detailed explanation of the 850 billion investment.
  • 14.
    • China Healthcare System and Challenges
    • Medical Reform Policies
    • Implications
    Agenda
  • 15. The feasibility for new funding systems of public hospitals are yet to be tested.
    • Raise prescription fees and nursing fees to reflect values of healthcare services
    • Under such system, the total healthcare cost may increase, even though 15% drug sales markup is removed
    • A guiding principle of this medical reform is “government-led” and “government investment”
    • Major investment areas include basic infrastructure, key academic research development, retired government employees, and public health service, etc.
    • It is not just about investment amount, but also priorities
    Prescription & Nursing Fees Government Investment
    • Hospitals will need to take on drug distribution and storage. If drugs are sold at “ zero” markup, hospitals need to charge drug service fee to cover its costs - How to charge, in what rate?
    • - By drug sales amount or by drug volume?
    Drugs-related Service Fees The policy of public hospital funding system is to replace drug sales revenue with the following three revenue streams: I am not worried about funding of public hospitals. I think the biggest challenge for medical reform is “ where to invest” and “how to invest”. It’s necessary to invest in basic infrastructure in rural areas, but there are also things that may not cost a lot of money. These could be equally important, yet we have not put in enough efforts in these tasks. If we don’t work on these, the reform will not be successful. Why there is such a prevalent complaint on “ too expensive to visit the doctor”? The government should put in efforts to guide patients to visit CHC, which cost very little. Currently doctors in CHC are well qualified to meet basic healthcare needs. President of a top 3A hospital
  • 16. Private hospitals and high-end healthcare service will develop rapidly.
    • Private hospitals are not covered by the basic medical insurance as most public hospitals are
    • Professional certifications for physicians, nurses, or pharmacists could not be obtained in private hospitals; physicians, nurses, and pharmacists could not get technical post certification promotion in private hospitals, as well
    • Although private hospitals can enjoy a tax break in the first three years, they generally shoulder heavier tax burden than public hospitals, which position public and private hospitals in unfair competition arena
    • Allow physicians practice outside of their registered hospitals
    • VIP ward in public hospitals cannot exceed 10% of hospital’s total revenue
    • Enjoy same benefits as public hospitals on research, technical post certification, and continued education, etc.
    • Medical reform encourages investment from different sources into the public hospitals. This will likely eliminate public hospitals’ tax advantages
    • VIP wards in public hospitals are major provider of high-end health service currently, however, the services provided by VIP wards is rather limited. With the increase of high income segment and increasing requirements of high-end healthcare services, there is a big market potential for private hospitals
    • China may follow Hong Kong’s model: the general public go to public hospitals while the wealthy individuals go to private hospitals
    Three Inhibitors for private hospitals Medical reform policy over private hospitals Potential for private hospitals
  • 17. Investments from medical reform will expand pharmaceutical market, resulting in both opportunities and challenges for foreign pharmaceutical companies. Influence over pharmaceutical industry Influence over pharmaceutical companies Measures taken by foreign pharmaceutical companies
    • Investment in new rural cooperative medical system will nourish RMB 40 billion market for healthcare industry, and community healthcare market will nourish RMB 50-290 billion market for healthcare industry; As a result, it presents great opportunities for pharmaceutical companies
    • For drugs in Essential Drug List, government has the power to set price due to bidding system and government purchase. Pharmaceutical companies will lose pricing power for drugs in the list
    • On one hand, most of the drugs from foreign pharmaceutical companies could not be included in the Essential Drug List, for the “convenience, effective and cheap” principle for the government in setting up essential drug list
    • On the other hand, hospitals and drug stores are not confined to only sell essential drugs, and hospitals have around 5% autonomy to decide drug purchase, which gives some space for high-priced foreign drugs
    • If a drug is included in Essential Drug List, its price will drop significantly due to bidding system, this will hurt foreign pharmaceutical companies’ profitability
    • Foreign pharmaceutical companies are not willing to give up the lower-end market. Therefore, they are tying to lobby the government on high-priced drugs’ inclusion in Essential Drug List and Basic Drug Insurance List
    • Many foreign pharmaceutical companies are increasing sales forces to penetrate into community and rural market
    • Many foreign pharmaceutical companies are shifting focus to compete in generic market
  • 18. With the increased government investment in lower-end market, the need for lower-end medical device will increase rapidly. Medical Device Investment Plan in Lower-end Market
    • It is planned that around 310,000 healthcare institutions need to upgrade their medical devices, which means a total demand for medical devices of over RMB 100 billion
    • Government has more power in purchasing medical device and it has preference over local medical device manufacturers. In the long run, it might enhance the competitiveness of local medical companies
    • Due to the increased government investment in public hospitals, the government has more power in purchasing decision making; accordingly, the phenomenon that “over-stock of large-scale medical devices in hospitals” might change, this presents a challenge for foreign medical device manufacturers
    • Similar to foreign pharmaceutical companies, the foreign medical device companies need to adjust their product structure to capture lower-end market
    Fetal monitor Unltrasonic diagnostic equipment 250,000 Maternity and child care center 1,000,000 200,000 Planned Investment ( RMB/ Institution) Ventilator Pain cure system X-ray machines ECG machines Equipment purchase examples Chinese medicine hospitals Medical Institutions Township health center
  • 19. Healthcare service, commercial health insurance, healthcare information technology will be the hot spots for investment. Healthcare service
    • Around half of the companies listed in Nasdaq are related with healthcare industry, however, only few are listed in Chinese stock market
    • With the progressing of medical reform, private hospitals, high-end healthcare service, and high-end commercial healthcare insurance will be the hot spots of investment
    • There is great investment opportunity in pharmaceutical companies, medical device companies, channel management, and hospital management, etc.
    • Commercial health insurance is positioned by this medical reform as the supplement to social security insurance
    • The social security bureau is playing the roles of colleting, managing, and supervising the healthcare insurance fund, it should transfer some of these functions to commercial insurance companies
    Healthcare informational Technology Investment ( 2007-2011E) Commercial insurance Healthcare information
    • Healthcare information technology industry will grow rapidly
    • Long-distance consultation is expected to grow, with healthcare IT support
    • Healthcare IT basic infrastructure buildup is greatly needed in lower-end market
    • Electronic Medical Record will be an uprising trend
    0.1 billion CAGR: 17%
  • 20.
    • Thanks!
    • Contact Information
    • Kai Guo Juliet Zhu
    • Partner Senior Analyst
    • Tel: 0086 21 6246-2121 ext 228 0086 21 6246-2121 ext 206
    • Direct Tel: 0086 21 6246-2779
    • Email: [email_address] [email_address]