China Healthcare Reform: Past, Present & Future

Transcription

1 China Healthcare Reform: Past, Present & Future

2 A Need for a System Overhaul While China s 3 years of economic reforms have achieved significant success, its healthcare system has fallen behind. From 1978 to 21, China s GDP 1 increased at a 15.8% CAGR while its total healthcare expenditure 2 only grew at a 1.6% CAGR. The existing system was plagued with problems of affordability and accessibility. (%) 2 1 Low Expenditure Total Health Expenditure as a % of GDP, for Selected Countries 3, USA 9.6 UK 9.5 Japan Low Accessibility 6.9 South Korea 6.8 Viet Nam 5. China 4.4 Malaysia 4.1 India Percentage 4 of Prospective Outpatients 5 and Inpatients that Failed to Receive Hospital Treatment, Thailand 36.4% 38.5% % 35.9% 48.9% % 37.6% % Outpatient Inpatient Low Affordability (%) India Out-of-Pocket Healthcare Expense 6 as % of Total Health Expenditure, Viet Nam 36.6 China 34.2 Malaysia 31.3 South Korea 14.4 Japan 14. Thailand 11.8 USA 1. UK Note: 5 For outpatients, statistics are calculated on within in first two weeks basis Source: 1,2 Ministry of Health, 211, China Health Statistics Yearbook 211 ; 3,6 WHO, 212, Global Health Observatory Data Repository ; 4 Ministry of Health, Sep 29, An Analysis Report of National Health Services Survey in China, 28 2 China Healthcare Reform Copyright 212 by Grail Research

3 New Demographic Challenges Just as in western countries, China s aging population and changing disease spectrum will put more pressure on the system. These demographic drivers have heightened the sense of urgency for healthcare reforms. Aging Population Age Distribution of the Chinese Population 1, 2 25E 1% 27.1% 21.4% 19.% 18.% 16.1% 16.% 5% 63.1% 66.8% 65.4% 6.% 58.8% 56.6% % 9.8% % 15.6% 21 22E 21.9% 23E 25.1% 24E 27.4% 25E 14 years years 6 years and above Rising Chronic Disease Rate Prevalence of Chronic Diseases in China 2, Prevalence Rate 2% 1% % 12.3% % 28 Non-communicable chronic diseases (NCDs) are the leading cause of death in China, accounting for close to 7 percent of the disease burden Population aging could compound the NCD burden by at least 4 percent by 23 if effective measures are not taken to prevent and control NCDs and promote healthy aging World Bank, Jul Source: 1 China Academy of Social Sciences, Trends of China s Aging Population ; 2 Ministry of Health, Sep 29, An Analysis Report of National Health Services Survey in China, 28 ; 3 World Bank, Jul 211, Toward a Healthy and Harmonious Life in China: Stemming the Rising Tide of Non-Communicable Diseases 3 China Healthcare Reform Copyright 212 by Grail Research

4 Dominance of Public Hospitals Amidst Underlying Structural Issues China s public hospitals receive the majority of the country s medical resources and have market dominance. However, the funds are insufficient and the hospitals are entrenched with supervision and control issues, impacting the efficiency of public healthcare service. Public Hospital Dominance Number of Beds 2, ,75,118 3,387,437 3,12,773 2,882,862 2,445,12 Revenue of Public Hospitals as a % of Total Revenue for All Health Institutions 1, % 94% 91% 89% 89% 88% 87.6% Public Hospitals Others Public Hospitals Others Structural Issues China s governmental funding to public hospitals has long been insufficient, driving hospitals to seek profits from excessive medicine sales which results in increased corruption, financial burden, and social unrest Under the current healthcare system: Effective supervision is absent: High knowledge barriers make patients unable to assess their healthcare quality or consumption, while the current insurance system is incapable of supervising public hospital prescriptions The price of medical services and the salary of medical practitioners have been controlled at a very low level, driving doctors to seek grey income Medical resources and talents are largely biased towards public hospitals, resulting in weak grassroots healthcare, especially in rural areas Source: 1 Bank of China Investment Banking Group, Apr 212, Focus on the Pathway and Direction of China s Healthcare Reform ; 2 Ministry of Health, China Health Statistics Yearbook 211 ; SWS Investment Strategy Forum, Jul 212, Reform, Change and Opportunities 4 China Healthcare Reform Copyright 212 by Grail Research

5 Reforms Extend Over the Next Decade China s current healthcare reform agenda was first published in March 29. The plans are set out until 22, covering key components that aim to add up to a comprehensive overhaul of the system Initial Stage A major goal was to optimize the Basic Healthcare system by: Continuing the expansion of the national Basic Medical Insurance (BMI) Enhancing the Essential Drug List (EDL) system and implementing stricter price controls over medicines Improving the quality of grassroots health institutions (such as community health centers, township health centers and village clinics) Expanding the Public Hospital Reform pilots with a focus on banishing excessive medicine sales Second Stage The goal of the second stage is to deepen the reforms of the Basic Healthcare system: BMI is targeted to reach near-universal coverage The EDL is to be gradually fine-tuned with further applications to grassroots health institutions Public hospital reform pilots are to be deepened across verticals, e.g. separation of supervision and operation, separation of prescription and dispensing Final Stage Based on the reform results of the two previous phases, final adjustments are to be applied to the healthcare system Source: The Central People s Government, P.R.C, Mar 29, Opinions of the CPC Central Committee and the State Council on Deepening the Reform of Healthcare System ; JP Morgan, Oct 211, Medicine for the Masses China s Healthcare Reform: Progress and Future Steps ; Deloitte, 211, The Next Phase: Opportunities in China's Pharmaceuticals Market 5 China Healthcare Reform Copyright 212 by Grail Research

6 Key Focus of Healthcare Reform The focus of this round of healthcare reforms can be summarized into three major themes: basic medical insurance, grassroots healthcare, and public hospital reform. Approach There are two main parts to the approach of this round of healthcare reforms: Increase funding to demand-side segments, i.e. patients Reform the supply-side system, e.g. medical insurance, healthcare providers 1 Basic Medical Insurance The government aims to: Expand basic medical insurance coverage Increase funding to the basic medical insurance system Equip the BMI system with new roles (e.g. health expenditure control), by reforming payment methods 2 Grassroots Healthcare To boost grassroots-level medical services, China plans to: Invest in grassroots health institutions which have been long neglected and unable to provide quality healthcare services Establish a capable primary care system with a focus on rural areas Divert the majority of patient traffic in China from high-tier public hospitals to grassroots health institutions 3 Public Hospital Reforms The key targets for public hospital reform are: End excessive drug sales and stop drug sales from being the primary revenue source for public hospitals Increase the efficiency and transparency of public hospital operations by enforcing structural changes, e.g. separation of prescription and dispensing as well as separation of management and operations Source: Sinolink Securities, Mar 212, China s Healthcare Reform: to Improve Basic Medical Insurance, Enhance Grassroots Healthcare, and Reform Public Hospitals 6 China Healthcare Reform Copyright 212 by Grail Research

7 National BMI System will Assume New Functions The national basic medical insurance system will be enhanced to help the government achieve sustainable near-universal coverage, effective expenditure control, and healthcare quality improvements. Maximize Coverage China s current Basic Medical Insurance system contains three integral parts: Urban Employees Basic Medical Insurance (UEBMI) is mandatory for the employed urban population, while Urban Residents Basic Medical Insurance (URBMI) is voluntary for the urban population not covered by UEBMI, e.g. college students and the unemployed New Rural Cooperative Medical Scheme (NRCMS) provides basic healthcare insurance to the rural population who voluntarily participate. The funding for this program comes from both the government and residents Basic Medical Insurance System Urban Employees Basic Medical Insurance (UEBMI) Urban Residents Basic Medical Insurance (URBMI) New Rural Cooperative Medical Scheme (NRCMS) Urban Rural During the first phase of China s healthcare reform, the national insurance coverage has been aggressively expanded to over 95% of the total population China plans to sustain and further expand the near-universal coverage Assume More Roles The BMI system is to assume the supervisory role as a third-party platform between the demand and supply sides, leveraging payment reform to control health expenditure, improve healthcare quality, etc. Currently, BMI reimburses all prescribed items covered in the reimbursement list, forming neither supervision nor control over prescriptions of public hospitals In the future, current item-based payment may be replaced by global budgets (predetermined total reimbursement for each hospital), capitation-based budgets (predetermined total reimbursement per capita), or disease-relatedgroup method (predetermined reimbursement for each type of disease treatment pathway) Source: The Central People s Government, P.R.C, Mar 29, Opinions of the CPC Central Committee and the State Council on Deepening the Reform of Healthcare System ; ChangeCe Thinktank, May 211, To Increase Utilization Efficiency of Health Resources is to Turn Governmental Focus on the Demand Side 7 China Healthcare Reform Copyright 212 by Grail Research

8 Enhance Grassroots Healthcare & Essential Drug List China aims to have a capable primary care system, which is crucial in rural areas. This is to be done by boosting grassroots health institutions and deploying the essential drug list system. Further Establish Essential Drug List The Essential Drug List (EDL), established in 29, aimed at overhauling China s medicine procurement and prescriptions, with a focus on grassroots health The EDL covers ~3 types of essential medicines, including both western and traditional Chinese medicines (TCM): Prices of essential medicines are government-controlled, for the purpose of decreasing medication expenditure All essential medicines also fall under the National Reimbursement Drug List (NDRL), allowing higher reimbursement rates than non-essential medicines All grassroots health institutions are to be equipped with essential medicines. Other health institutions are expected to regard essential medicines with higher priority than the non-essential medicines Under the EDL system, provincial governments are granted certain independence in localizing their EDLs, with a minimum of 9% consistency between the national and localized provincial lists stipulated Enhance Grassroots Health Institutions Strengthening grassroots institutions is deemed extremely important during this round of reforms Grassroots institutions will receive increased government funding The general practitioner pilots and training are to be actively conducted to counteract the lack of healthcare professionals in the rural health system A functional primary care system, centered around grassroots health institutions, will handle most local patients in the future (USD 2 ) Urban and Rural Health Expenditure per Capita 1, % Urban Health Expense per Capita Rural Health Expense per Capita Note: 2 Converted at CNY 1 = USD.1589 Source: 1 Ministry of Health, China Health Statistics Yearbook 211 ; JP Morgan, Oct 211, Medicine for the Masses China s Healthcare Reform: Progress and Future Steps ; Frost Sullivan, Apr 211, China Healthcare Policy Study 8 China Healthcare Reform Copyright 212 by Grail Research

9 Promote Traditional Chinese Medicine Traditional Chinese Medicine (TCM) is an important mainstay of primary care in China especially for the rural areas. Plans to raise TCM coverage will reinforce primary care capability development. Increase TCM Capabilities The coverage of TCM resources will be expanded especially for grassroots health institutions TCM Resource Coverage Targets 1 by 215 1% of cities at prefecture-level equipped with TCM hospitals 95% of Community Health Centers equipped with TCM departments 7% of Community Health Stations being able to provide TCM services 7% of TCM hospitals in cities at county-level reaching 1st class of second-level 2 9% of Township Health Centers equipped with TCM departments 65% of Village Clinics being able to provide TCM services Promote TCM Utilization China is devoting more resources to increase TCM utilization Numbers 3 of Beds in TCM Hospitals, E (Thousand) 1, % E (MM Visits) Visits to TCM Hospitals, E 8 9% E Registered TCM Doctors & Assistant Doctors, E (Thousand) 8 4 5% E Note: 2 Hospitals in China are categorized into 3 levels (level 3 being the highest), and each level is further categorized into 3 classes (1 st class being the highest) Source: 1,3 SATCM, June 212, The 12 th Five Year Plan on TCM Industry Development 9 China Healthcare Reform Copyright 212 by Grail Research

10 Public Hospital Revenues to Undergo Structural Changes Public hospital revenue reform is key to improving healthcare affordability and quality for individuals. The government plans to put more controls on medicine sales while loosening that of medical services. Cut Personal Healthcare Expenditures Due to systemic issues and insufficient funding, China s public hospitals have been aggressively seeking alternative profits leading to over-prescription of drugs and physical examinations, not only resulting in heavy financial burdens for individuals and the insurance system but also translating into problems like strained doctorpatient relationships and high cautionary savings As a result, price control is a key reform area to cut individual health expenditure Average Medical Expense per Outpatient in Public Hospitals 1, Average Medical Expense per Inpatient in Public Hospitals 2, ,2 (USD) % 3% 19% 52% 3% 18% 52% 29% 18% 52% 29% 18% 51% 3% 19% (USD) % 25% 32% 44% 25% 31% 44% 25% 31% 43% 42% 26% 27% 31% 31% Drug Examination & Treatment Other End Excessive Drug Prescriptions Sources of revenue and profit for public hospitals are to be altered: % medicine price mark-up through public hospitals may become mandatory Government health expenditure is to be increased to plug budget holes for public hospitals Due to historical and systemic problems, doctors are insufficiently paid in China and thus seek grey income from drug sales. In the future, price control over medical services provided by public hospitals is to be relaxed to reflect the true market value of doctors and foster a healthy revenue source Source: 1,2 Ministry of Health, China Health Statistics Yearbook 211 ; The Central People s Government, P.R.C, Mar 29, Opinions of the CPC Central Committee and the State Council on Deepening the Reform of the Medical and Health Care System 1 China Healthcare Reform Copyright 212 by Grail Research

11 County-level Public Hospital Reform Trials China chose to begin public hospital reform trials at county-level hospitals for various reasons. It is hoped that through these pilots, feasible models will emerge that can be applied on a larger scale. Start at County-Level The rationale to pilot at county-level hospitals includes: The difficulty of reforming higher class hospitals is expected to be significantly greater. Early-phase pilots in county-level hospitals will provide valuable experience that can be applied to future reforms County-level hospitals represent a small proportion of China s hospital traffic, indicating controllable impact and financial pressures China s government plans to equip county-level hospitals with more crucial roles. In the future, the government expects the majority of hospital traffic to be handled by local county-level hospitals and grassroots health institutions Healthcare Capacity of County-level Hospitals 1 (as % of Total), 211 Number of Institutions 47.% 53.% Beds 28.8% 71.2% Visits 12.1% 87.9% County-level Hospitals Others The difficulties of public hospital reform come from different levels of the system. One cannot isolate the reform at any level Pilot programs being run in 3 county hospitals and in leading urban hospitals. It is just a matter of time before a new model emerges as a result of these experiments, but the process will be messy George Baeder, Senior Vice President, Quintiles Dec 212 Source: 1 Ministry of Health, China Health Statistics Yearbook 211 ; The Central People s Government, P.R.C, Jun 212, Opinions of the State Council on the Reform of County-level Public Hospitals 11 China Healthcare Reform Copyright 212 by Grail Research

12 Systemic Reform Will Impact All Nodes Changes will present new opportunities throughout the healthcare value chain. At the same time, some areas will face challenges due to consolidation and pricing pressures. Healthcare Reform Plan Pharmaceutical and Medical Device Manufacturers 1 3 Healthcare Distributors 2 Hospitals Retail Pharmacies Grassroots Health Institutions 4 Consumers 5 1 Pharmaceutical, medical devices and healthcare IT manufacturers will face promising industrial development in terms of market size and growth 2 Consolidation of distribution leads to opportunities for big players with financial strength, operational excellence and business model innovation 3 The reform of public hospitals may translate into strategy changes for pharmaceutical players, medical device providers, distributors and retailers 4 If the enhancement of grassroots healthcare institutions goes as planned, EDL and TCM markets will see significant growth 5 Private health insurance has a growth trajectory for the long run Source: CICC, May 28, Healthcare Industry Analysis 12 China Healthcare Reform Copyright 212 by Grail Research

13 Growth Prospects for Pharmaceutical and Medical Device Manufacturers Healthcare reform will gradually release and readjust patients buying power. Inherent needs, increased consumer awareness and enhanced buying power will spur demand for medical treatments. Promising Prospects for the Pharmaceutical Industry China s pharmaceutical market is projected to grow at a CAGR of 16.1% from 211 to 216, fueled by increasing demand from both cities and counties China Pharmaceutical Market Size 1, 211E 216E (USD Bn 2 ) E E E 16.1% E E Robust Growth in the Medical Device Market China s medical device sector is expected to have robust growth with a CAGR of 19.7% 2 from 211 to 216, mainly fueled by construction of new hospitals, upgrades of grassroots health institutions, and rising patient demand China Medical Device Market Size 3, E E For pharmaceutical and medical device players, low cost quality products will bring in huge opportunity in line with the reform Ellon Xu, Associate Partner, Monitor Group Dec 212 (USD Bn) % E E 19.7% E 214E E E Note: 2 Converted at CNY 1 = USD.1589 Source: 1 IMS, 212, IMS Market Prognosis China ; 3 New Zealand Trade & Enterprise, Jul 212, Medical Devices in China 13 China Healthcare Reform Copyright 212 by Grail Research

14 Essential Drug Market to be Driven by Grassroots Demand The essential drug market is expected to grow at a 25.7% CAGR from 211 to 215, primarily driven by the grassroots segment. Rise in Essential Medicine Sales China EDL Market Size 1, E (USD Bn 2 ) % % E 211E 212E 213E 214E 215E Market Share 1% 45% 5% 42% 13% % 29 China EDL Market Breakdown 2, E 43% 41% 4% 38% 36% 34% 43% 44% 44% 45% 45% 45% 14% 15% 16% 17% 19% 21% 21E 211E 212E 213E 214E 215E Hospitals Village-level Grassroots Healthcare Institutions Other Grassroots Healthcare Institutions EDL market will grow... But under the current system, with all the national, provincial and local tendering and lobbying, prices of EDL drugs turn abnormally low... Product Manager, a Global Pharmaceutical Company Dec 212 Note: 2 Converted at CNY 1 = USD.1589 Source: 1,3 Citi Investment Research and Analysis, Dec 21, China Healthcare Sector ; JP Morgan, Oct 211, Medicine for the Masses China s Healthcare Reform: Progress and Future Steps 14 China Healthcare Reform Copyright 212 by Grail Research

15 Distributors Need to Embrace Consolidation and New Business Models As price controls and public hospital reforms progress, viability for the market to support many distributors will be challenged. Consolidation of Pharmaceutical Distribution Market Currently, the pharmaceutical distribution market in China is highly fragmented Out of ~15, total players, the top 3 merely account for ~2% market share 1 As healthcare reform progresses: The distribution market will experience aggressive consolidation through competition and M&As Value-added services deeply connected to hospital operations will be increasingly important for distributors to survive and profit Retail pharmacy market will skyrocket if public hospital reforms, in particular the separation of prescription and dispensing, are radically executed Market Share of Top 3 Pharmaceutical Distribution Players in China and US 1, 211 2% 8% China Top 3 Players 97% US 3% Others In the Eyes of Experts Distribution consolidation has been underway for a long time, but it still has a very long way to go In the future, enforcement of higher quality standards and introduction of drug tracking through bar codes will accelerate the consolidation George Baeder, Senior Vice President, Quintiles Now there are thousands of distributors. As the reforms progress, there may be fewer layers of distributors, and there may be regional leaders Product Manager, a Global Pharmaceutical Company There is a possibility that there will be fewer layers of distribution. Yet the consolidation depends on the process of public hospital reform, since China s public hospitals enjoy monopoly over prescription and own power over the whole value chain Ellon Xu, Associate Partner, Monitor Group Source: 1 JP Morgan, Oct 211, Medicine for the Masses China s Healthcare Reform: Progress and Future Steps 15 China Healthcare Reform Copyright 212 by Grail Research

16 Growth Expected in Traditional Chinese Medicine As the government executes its plan to promote TCM utilization and increase the TCM reimbursement rate, this segment is expected to grow significantly. Strong TCM Growth Momentum Ahead Value of the TCM market is expected to reach USD 88.8 Bn by 215, fueled by increased government promotion and enhanced reimbursement policies The annual growth rate of the TCM industry is estimated to outperform China s GDP growth rate over the next five years China TCM Industry Value 1 and Annual Growth Rate, E China GDP 2 and GDP Annual Growth Rate, E 12 4,5 12.% % 3,373. (USD 3 Bn) (USD 4 Bn) 3, 1,5 2, E E In the Eyes of Experts We now understand that disease biology is much more complex than we thought 1 years ago. For example, multiple pathways are needed to effectively attack most tumors TCM works across pathways to treat a specific disease. So there may be insights come from TCM that are much more relevant to our growing knowledge of disease biology, or even redefine our thinking about biology In the near term, TCM indeed has a significant role to play, with reimbursement rates and TCM usage continuing to increase George Baeder, Senior Vice President, Quintiles Note: 3,4 Converted at CNY 1 = USD.1589 Source: 1 State Administration of Traditional Chinese Medicine, June 212, Twelfth-Five Year Plan on TCM Industry Development ; 2 IMF, Oct 212, World Economic Outlook 16 China Healthcare Reform Copyright 212 by Grail Research

17 Healthcare Reform Provides Tailwind for investments in IT China s healthcare IT market is at an early stage, and there is significant potential for investments to increase the efficiency and connectivity of healthcare services. Increase in Health IT Investments To ensure functionality and efficiency of the reformed healthcare system, China s government is committed to increasing healthcare IT expenditure, driving market growth for the next five years China s healthcare IT market size is expected to reach USD Bn in 215, growing at a 2.5% CAGR during The healthcare IT market in China is still at an early stage, with investments made largely at the hospital and local government levels Popular investment areas include hospital management information systems and hospital clinical information systems China Healthcare IT Market Size 2, E Healthcare IT Expense as % of Total Expenditure of Health Institutions 3 in China & US, 29 (USD Bn) China US.8% 4.5% E 429.8% In the Eyes of Experts Health IT will be a huge opportunity The leverage of data mining and electronic profiles will bring in a new exciting market Ellon Xu, Associate Partner, Monitor Group Note: 1 Converted at CNY 1 = USD.1589 Source: 2,3 Guotai Junan Securities, Feb 212, Growth Expected for China s Health IT Market ; JP Morgan, Oct 211, Medicine for the Masses China s Healthcare Reform: Progress and Future Steps 17 China Healthcare Reform Copyright 212 by Grail Research

18 Private Health Insurance Expects to Gain from Opening Up the Market Reforms will open the gate for private health insurance players to increase their presence in a growing healthcare services market Emergence of Private Health Insurance China s healthcare reform plan clearly states the goal to cultivate private health insurance as a supplemental force to the national Basic Medical Insurance Currently, private health insurance companies play a very small role, however the corresponding market size of USD 8.4 Bn in 28, is not exactly insignificant As the reform further releases the potentials of private health insurance, the market is expected to gain momentum with a 21.9% CAGR from 28 to 22 For private health insurance players, opportunities arise in two major segments: Supplemental Coverage: Given that coverage and depth provided by public insurance will continue to vary significantly, private health insurance is appealing as a supplemental coverage option Program Management: As the health reform plan highlights, private health insurance providers are also encouraged to partner with local governments in managing the public insurance programs China Private Health Insurance Premiums 1 (USD Bn), 28 22E E 9.5 (USD Bn) 1 In the Eyes of Experts Under the new reform guidelines, private healthcare has a great future, e.g. specialized health centers For private health insurance, there is an issue that should to be closely watched: there is still no clearance on how private insurance could participate in the operation of national insurance programs yet Ellon Xu, Associate Partner, Monitor Group Source: 1 McKinsey, 21, China Health Care Reforms 18 China Healthcare Reform Copyright 212 by Grail Research

19 Conclusion China s healthcare reform plan is sending ripples through the industry in terms of changes, opportunities and challenges: For manufacturers, the reform means more than just stringent quality and price control. Decision makers will need to analyze the changing buying behavior of health institutions and distribution needs, and in a broader sense, the new rules of the game For distributors, critical strategic decisions have to be made ASAP: M&A, new business models, or exit? For investors and entrepreneurs with interests in the private healthcare market, there seem to be promising opportunities but they need to be carefully assessed at the local level to understand actual market implementation For insurance companies, a close watch is needed on the actions of central and local governments to catch new pilots and regulations For the seasoned and especially the new, success in China is never about copying winning formulas, rather it can only be achieved through true localization based on in-depth local wisdom. In this regard, Grail Research can help 19 China Healthcare Reform Copyright 212 by Grail Research

20 If You Are Looking to diversify your investment portfolios in China s healthcare sector Interested in analyzing marketing channels for healthcare products and services Looking at different customer segments needs and trying to identify new growth areas Formulating market strategies and developing long term plans to enter or expand in China (or elsewhere) Contact Us Grail Research (info@grailresearch.com) Copyright 212 by Grail Research, a division of Integreon No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means electronic, mechanical, photocopying, recording, or otherwise without the permission of Grail Research