Unlocking the Potential of China Healthcare Reforms

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IMS Asia-Pacific Practice Leader Mandy Chui explains the major points of China’s new Healthcare Reform and provides a general overview of its short-term and long-term implications. With expanded medical coverage and the development of new medical services, Mandy notes what pharma companies can expect from the upcoming changes.

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Unlocking the Potential of China Healthcare Reforms

  1. 1. Unlocking the potential of China Healthcare Reforms By Mandy Chui,Practice Leader,PMA,Asia-Pacific Despite sustained economic growth during the past 30 years, China’s per capita healthcare expenditure remains one of the lowest among the emerging markets, with more than 50% of total expenses paid by the patient. Due to decentraliza- tion and reduced role of government in healthcare funding, resources have become inequitably biased towards large hos- pitals and urban centers. Rural areas and primary healthcare institutions have been under-funded,and out of pocket bur- den to the individual have been escalating (18 times more OOP payment compared to 20 years ago). After numerous attempts to address these concerns,the Chi- nese State Council formally announced in 2009 an ambi- tious and far-reaching plan called the“Implementation Plan for Deepening Pharmaceutical and Health System Reform 2009-2011” aimed at providing basic, affordable medicine and healthcare coverage for 90% of the country’s 1.3 billion population and developing a national network of health care providers in both urban and rural areas. UEBMI: Urban Employee Basic Medical Insurance • URBMI: Urban Resident Basic Medical Insurance • NRCMS: New Rural Cooperative Medical System                                                                                      
  2. 2. • The government has allocated RMB 850 billion in incremental healthcare spend- ing (approximately USD 125 billion) from 2009 to 2011 to implement the reform plans, focusing on five pillars (Figure 1). • The primary focus is to increase the de- mand side by broadening medical insur- ance coverage to 90% of the population through three insurance schemes (UEBMI, URBMI, NRCMS) with improved ben- efits (Figure 2). The UEBMI has the best benefits coverage among the 3 schemes (both severe diseases and a number of chronic and/or common outpatient diseases) while the URBMI cov- ers mainly inpatient medical expenses and very limited outpatient therapies for severe diseases. Rural residents are covered under the NRCMS, which mainly covers severe diseases and basic essential medical care. • An additional focus of health reform is to increase the supply side by establishing a 3-tier healthcare services provision system (village clinics, township centers, county hospitals) in rural areas and building more community health centers (CHCs) and sta- tions in urban areas. It also aims to provide basic affordable medicine to healthcare in- stitutions through establishing an Essential Drug System with controlled ceiling prices, centralized procurement and distribution with zero drug mark-ups at the hospital level. By instituting management of prices, the reform seeks to limit hospital incentives to over-prescribe, and thereby rationalizing drug usage and improving efficiency. • An increase in government funding (es- timated to be growing at more than 20% CAGR over the next 3 years) in improving the supply and demand side of healthcare will significantly benefit the pharmaceuti- cal market by increasing drug consumption. •The reform will not fundamentally change the market overnight,as changes and subse- quent implementation policies will be ex- ecuted over time. Large urban hospitals will still remain the core market for multi- na- tional companies • Out of pocket burden to patients will re- main significant as URBMI and NRCMS typically cover severe inpatient treatments and provide limited coverage for common and / or chronic outpatient treatments. • There will be significant variation in in- terpreting and implementing reform poli- cies at the provincial level due to different levels of economic development and avail- ability of local government funds. • Building of a primary healthcare serv- ice sector is occurring at different paces in different provinces. There is considerable resistance from patients to seek treatment from CHCs and rural centers due to a per- ceived lack of qualified providers and medi- cal equipment in rural areas and the less de- China HealthCare Reform Framework Trend Commentary UEBMI: Urban Employee Basic Medical Insurance • URBMI: Urban Resident Basic Medical Insurance • NRCMS: New Rural Cooperative Medical System Figure 2:Three Medical Insurance Schemes • UEBMI, establishing in 1998, financed by payroll taxes paid by employers and employees. •URBMI, starting in 2007, financed by gov- ernments and participants. •NRCMS, beginning in 2003, contributed jointly by central and local governments, and participants UEBMI NRCMSURBMI BMI Figure 1: Five Pillars of China Healthcare Reform Affordability Accessibility Basic Medical Insurance System Essential Drug System Public Hospital Reform Equitable Public Health Services • Provide equal access of public health services in urban and rural areas. • Improve infrastructure of specialized institutions such as mental institutes, women and children centers. • Develop the primary healthcare services network. •Build 2,000 county hospitals, 3,700 urban community health centers and 30,000 community healthcare stations. • Increase medical insurance coverage to over 90% of population by 2011. •Increase premiums and reimbursement rate for 3 insurance schemes. •Initiate pilot reforms of public hospitals to gradually eliminate drug mark up. •Separate hospital supervision and operation. • Set up national EDL with provincial on-line purchasing, ceiling price and zero mark up. Primary Healthcare Service
  3. 3. • Reform initiatives are still evolving with uncertainties revolving around implemen- tation details, timing and variations by geography. Thus, careful assessment and monitoring of the development, especially at the provincial level is essential to devel- op more tailored strategies at the regional level. • Increase in geographic diversity will mean that companies need to develop a stronger regional infrastructure to under- stand and embrace this complexity and prioritize resource allocation. • With an increasingly complex and de- manding payor environment, companies need to strengthen the competencies of their local government affairs and PMA team in order to engage effectively at both central and local government level. • Emerging new market segments, such as CHCs and rural areas,where multinational companies were not used to play, will re- quire companies to rethink their business models and portfolio. General Implications From Reform NDRL implementation and pricing reforms will have the biggest impact in the short term veloped inland and western provinces. • Essential Drug List (EDL) remains a dou- ble-edged sword for multinational compa- nies with increasing volume due to man- datory usage of essential drugs for primary care institutions and hospitals, but substan- tially lower government controlled ceiling prices for off-patent drugs which are in- cluded in the EDL. • List (NRDL) in 2009 includes 1,140 western drugs, with individual provinces having the opportunity to further refine and expand on the list into Provincial Re- imbursed Drug Lists (PRDL). However, provincial expansion of drug lists is becoming increasingly challenging, and covered western drugs usually exclude high cost oncology agents and biologics. Upside Downside NRDL/PRDL implementation Expanded coverage of current uninsured Increased Insurance Benefit Negotiation mechanism for high price drugs Essential Drug System Public Hospital ReformPricing reforms Stricter Insurance Cost- containment Management TIMING 2010 2012 2020 Impact Development of Primary Healthcare services
  4. 4. • A window of opportunity exists for high priced innovative oncology and biolog- ics as the government, for the first time, has been exploring listing a select number of these drugs in NRDL with patient co- payment and negotiation mechanisms in place. • However, pricing reforms, which come with implementation of the EDL and expansion of the NRDL, will have sig- nificant downward pressure on prices for off-patent originator drugs as the gov- ernment intends to narrow the price gap between off-patent originators vs. gener- ics. Therefore, companies looking to play in the EDL segment will need to assess their current price gaps with generics and price-volume trade-offs carefully, simply dropping prices without understanding the competitive and regulatory environ- ment at the local level will be risky. • Medium cost innovative products, which are included in the 2009 NDRL, stand a good chance to have substantial volume increase. •To capitalize on this opportunity, compa- nies need to invest substantially to improve their sales penetration and mitigate poten- tial price cuts and generics erosion. • For new products, HEOR studies tai- lored to the needs of the Chinese market will become increasingly important in jus- tifying a premium price. For more information you can contact: Mandy Chui (mchui@cn.imshealth.com) or write us at info.sg@sg.imshealth.com Implications Across Product Types To optimize results, there are different areas you need to take actions immediately, in the near term and long term portfolioProductcompany Immediate Near-term Long-term Pricing & market access options Patient segment assessment Payer Strategies Internal alignment Evidence requirements Payer strategies Business model Organization structure Portfolio reassessment Channel assessment

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