China’s Health Care – A Sector in Transition

The following is a summary of APCO Worldwide’s Greater China region chairman Kenneth Jarrett’s keynote speech at “Health of a Nation: New Prescriptions for China,” a forum hosted in partnership by PublicAffairsAsia and APCO Worldwide on Sept. 6, 2012, in Shanghai.

China today is not going to be the same China tomorrow. The country is undergoing rapid social, economic and political transformations. And one of the most important transformations taking place in China right now is within health care. Thus developing an understanding of where China is headed is absolutely crucial for businesses operating in this market.

China is making exceptional strides in health care. In the early 1970s, before China embarked on its unprecedented road to development, life expectancy was less than 62 years, less than 2.5 percent of GDP was spent on health care and one doctor served more than 1,100 people. Today, life expectancy is near 75 years and rising, health expenditures have doubled to more than 5 percent of GDP and China has five times as many doctors as it did in 1970.

In 2009, the Chinese government put forth a three-year blueprint to further improve the country’s health care system. The government has spent a staggering USD 125 billion to extend insurance coverage to more than two-thirds of the population and has worked to improve access to hospitals and clinics across the country.

Yet, as everywhere, challenges remain. The gap between rural and urban health systems remains large. Rural hospitals often lack equipment and manpower. But even in cities, access to good health care is difficult, with underpaid doctors, high drug costs and long lines at hospitals. In addition, as China develops, lifestyle-related diseases increase in prevalence with 17 million new chronic disease patients each year. Another key challenge is China’s rapidly aging population. The share of the population aged 65 years and older will increase from 8 percent today to about 14 percent in 2025.

As a result of these developments, affected citizens and their loved ones are demanding affordable medicine and quality health care services. The Chinese government is making some key transitions to overcome these challenges; some of the key reforms we can expect over the next few years include:

• Deepening of medical insurance coverage. Previously, the government focused on expansion – taking coverage from a mere 15 percent in 2003 to more than 95 percent of Chinese citizens today. But coverage in many cases is superficial, with some regions, particularly in rural areas, only minimally covering basic medical services. Consequently, the government seeks to move from expanding coverage to deepening coverage.
• The government is also boldly steering hospital reform into uncharted waters. In addition to administration and management reforms, the Chinese government has begun to move forward with the much-discussed move de-linking hospital revenue from drug sales.

Specifically, six cities across China are experimenting with removing the 10-percent to 15-percent markup on drugs, a markup from which hospitals derive up to 60 percent of their revenue and which is considered to be at the root of China’s over-prescription of drugs. This is a striking innovation. And while this move to eliminate markup is largely being applauded by health care experts, what are the effects on the health care community at large?

APCO talked to a 60-year-old patient in Xining, the capital of Qinghai and one of the cities piloting this reform. This man said that prior to the elimination, he spent RMB 12 ($1.89) on each box of his anti-hypertensive drug, and now only pays RMB 10.4 ($1.63) – for him, a significant savings.

But what about a more affluent Beijinger? Is a RMB 1.6 ($0.25) reduction impactful? And what about the impact on the prescribing behavior of doctors? Analysts are predicting that with the pressure to increase revenue for the hospitals removed, doctors will prescribe solely based on patients’ needs. But then, where does that leave hospitals, who have relied so heavily on drug markup revenues to operate — how will they make up for this significant loss of revenue?

The wide variety of stakeholders some with strong vested interests in maintaining the status quo will make any significant changes difficult. APCO is currently investigating these pilot reform initiatives and their potential impact on industry. Our findings will be available at the end of September.

Given the wide array of reforms currently underway, what do these important health care transitions mean for China? And what do they mean for foreign businesses, many of which are involved in these efforts?

First, the share of health care spending for Chinese citizens will fall. And with more money in pockets, the effect on the Chinese economy could be significant. The government has long advocated that the country’s economy must move toward consumption as a key driver of growth, and conventional wisdom holds that Chinese are famous savers – largely for potential health emergencies which have the ability to bankrupt families. Growth in Chinese consumption has the potential to drive global growth. Countries around the world, including the United States and Europe, could potentially see the creation of millions of jobs with the sole purpose of selling goods and services to China.

That’s what China can do for foreign businesses, but what about the reverse?

China is certainly not alone in making these kinds of health care transitions. No matter where you are in the world, aspirations are essentially the same—provide citizens with access to the best possible care while ensuring affordability. And companies in the health care field are at the forefront of developing innovative solutions to these demands.

Multinational health companies, with operations around the world and billions of dollars invested in R&D, have a unique role to play in helping to pilot new, innovative health care solutions in China. Best-in-class examples include Novo Nordisk, which sponsors research at the China Academy of Science, cooperates with government on a national disease management program and implements a community outreach and education campaign to change how diabetes is perceived and managed. To strengthen R&D cooperation with local companies and to enhance R&D efficiency, BMS implemented a “String of Pearls” strategy, under which it acquires or develops partnerships with local Chinese companies by either leveraging their pre-existing R&D endeavors or pursuing new research in other diseases.

Many other foreign multinationals are applying their know-how to the China market, making all of these initiatives too numerous to mention. However, nearly all of these companies have prioritized public affairs in China. These companies understand that with the government leading the charge to reform the country’s health care system, the public affairs angle matters. They are working closely with the Chinese government to apply their most innovative health care solutions to China.

*APCO Clients – Novo Nordisk and BMS in China.