What Does 2015 Have In Store For China's Healthcare Economy? | Healthcare and Technology news | Scoop.it

For companies and investors working in China’s healthcare economy, it would be a mild understatement to say that 2014 was a year where the signal to noise ratio was pretty high. Lots of interesting new policies, but certainly also many ongoing disconnects between the best intentions by the central government, and what infrastructure and reimbursement mechanisms will actually benefit Chinese families and further incentivize industry.

Overall, with the exception of the jaw dropping fine the Chinese government levied on GSK, the government created lots of space for the private sector. This meant the market for medical devices, pharmaceuticals and new healthcare services across China remained strong. Companies benefited from being in China, and they will likely also benefit in 2015. Having said this, what are the most important issues within China’s healthcare economy that are going to present themselves in 2015? There are seven issues we are focusing on, which follow as questions companies and investors should monitor over the course of 2015.

1. Many of the biggest healthcare reforms are done, such as allowing foreign investment in hospitals and senior care as just two examples; but, what the healthcare economy needs now are more incremental but fundamental policy changes. A good example of this is the need to expedite reforms around allowing doctors to practice at multiple sites. Another good example of is around home healthcare, a sector where we have been working a lot over the last three years. China has made very positive steps forward to allow WFOE structures (100%, or Wholly Foreign Owned Enterprises), in healthcare and senior care; however, specific types of primary care, clinics and home healthcare remain within the purview of China’s Ministry of Health, with a regulatory scheme that does not know how to adequately discern between these different types of service providers. Consequently, companies who want to provide higher acuity healthcare services that cannot cost-effectively take place within a hospital setting, many times find themselves getting routed through a regulatory system originally designed to handle large hospital projects. These approval processes lack the sort of flexibility and streamlining that smaller footprint healthcare delivery models need. What happens in practice is either foreign companies end up operating outside of their formal license scope, or they get a cumbersome work-around approved from regulators that has too many gaps and dead ends. Most of this type of reform is needed on the healthcare delivery side of things, where China most needs foreign direct investment, but where regulations also lack the flexibility to adjust requirements based on the delivered service acuity.

2. Funding increases to the CFDA. Coming out of the December US-China Joint Commission on Commerce and Trade held in Chicago were some very positive commitments by China to address what pharmaceutical companies have called their China “drug lag.” This occurs when new therapies are not allowed into the China market because China’s FDA has standards inconsistent with those other countries have already harmonized around a set of global standards. This hurts Chinese patients and obviously burns precious time that newly patented medicines have to access the China market. Beyond the drug lag question, the same meeting in Chicago also yielded positive news on the country’s pledge to accelerate approvals for specific medical devices. These are promising developments that address some long-standing concerns that have been causing problems for western multinationals; however, what everyone needs to watch is whether or not the CFDA in turn receives the kind of additional budgeted funds to actually build the infrastructure, training programs and tracking systems that will ensure these promises are matched to newly developed capabilities. Absent these sort of major investments, the drug lag and sluggish device approvals could remain contentious issues.

3. Hospital funding, with specific attention to doctor’s pay. Of all the problems the last twenty-four months should have taught everyone interested in China’s healthcare economy, none is more important than the ongoing difficulties the country’s public hospitals have paying their bills, and how inadequate doctor compensation remains. The roots of every corruption scandal we have heard take place within China’s hospitals have these problems at their core: China’s public hospitals are sorely under-funded, and its doctors under-paid. Want to fundamentally address the corruption problem in China’s hospitals? Crackdowns like what happened between the summer of 2013 and the end of last year will only net short-term results. Longer-term reform requires doctors who do not have to seek out supplementary gray income from pharmaceutical companies, families and hospital management. One of the biggest problems in China’s public healthcare system is that the recent crackdown proves to be short-term, and the structural reimbursement and compensation problems are not addressed. If that proves to be the case, in another couple of years, the government will again be forced to make a lesson of another company, and in the mean time Chinese families will suffer.

4. On-line prescription sales get piloted. If you are broadly familiar with China, you will recognize the thinking about how China’s healthcare system, while badly behind today, could emerge with some really innovative and disruptive ideas simply because of the need for such drastic, paradigm-shifting ideas and the infrastructure paucity that exists today. This has happened in other sectors such as telecommunications, where China leap-frogged the west simply because China did not have to deal with legacy-issues. Could China achieve something similar in healthcare? If they can, one area to be watching is within the on-line sale of prescriptions. Lots of questions remain around this, including supervision and how distribution channels between businesses and consumers will be monitored. We have already seen Alibaba make public their intention for this to be one of the company’s strategic areas of focus over the next year, and a number of China’s largest pharmaceutical retailers are getting their own infrastructure prepared to deal with the point of sale, oversight and delivery requirements. Watch this space closely, because it has the potential to also address a major thorn in the side of China’s public healthcare: how and where primary care is accessed (or, as the case tends to be, how it is not accessed).

5. Telemedicine is getting ready to be a huge platform in China. We already know that Alibaba and Ping’an are making investments in telemedicine. This is because for on-line pharmaceutical sales to be legal in China, a doctor’s consult is still required. Think that is purely a formality? In the short-term it could be. But in the long-term, this could prove to be an important step in re-directing how and where Chinese families seek out initial primary care consultations. Today, too much of this happens within the public hospital system. Tomorrow, it is entirely possible telemedicine could provide Chinese families with the ability to get basic primary care services. The integration between telemedicine, on-line prescription sales, on-line scheduling of follow-up diagnostic or specialty physician appointments, and electronic medical records could be a game changer for China’s healthcare system.

6. Does the Chinese government expand the yia bao (China’s version of Medicare) and allow foreign, for-profit hospitals to benefit? China deserves a lot of respect for how much progress it has made with coverage levels of its national insurance plan (now at 98% of the country’s population). Cynics are quick to point out how little this plan actually covers; those more positive about this view the national insurance plans as a foundation upon which the government can build. 2015 needs to be a year where the amount of coverage increases (which will inevitably put more pressure on things like what is included on the Essential Drug List), where new procedures are covered, and where more flexibility around where a consumer chooses to use their government plan is accommodated.

7. Will the government, either through its Anti-Monopoly Laws (AML) or anti-corruption probes, focus on any more domestic or foreign companies within the pharmaceutical or medical device sectors? For all the hand wringing about how the GSK crisis was going to impact multinationals, as of today the waters have calmed down. Will additional AML or anti-corruption cases drop in 2015? Perhaps. If they do, three things will be important. First, does the Chinese government follow-through on its commitment made in Chicago last December to allow foreign companies to bring counsel in with them when the company in question is facing a government board for a potential AML case? Second, how do the cases balance out between foreign and domestic companies? Third, is the nature of the behavior egregious or does it reflect the “rules of the road” for what companies have found is required to do business in China?

For most of the last twenty years, pharmaceutical companies could count on their growth rate within China to roughly be double that of the country’s growth rate. An 11% GDP growth rate meant your baseline for growth that year was 22%, and a number of companies out-performed this. Now, with China’s more concerted effort to build a sustainable healthcare system, the government has turned its attention on price controls, reimbursement policies, and tendering methods that all work to control costs while also expanding access. Overall, the most critical factor to positive growth within China’s healthcare system is out of any company’s control: the stability of China’s economy.

Policy makers in China deserve an enormous amount of credit for successfully navigating two economic crises not of their making (the 1997 Asian financial crisis, and the 2008 American Great Recession). What remains to be seen is how the country will navigate a structural financial crisis entirely of its own making, a process that may very well be underway now. Should China’s central government find itself having to shuffle around the state’s financial resources away from planned healthcare spending towards supporting banks alongside municipalities and SOEs with bad debt, the planned public investment in China’s healthcare system could falter. This would cloud the picture for investors and companies in this sector simply because in such a moment, the Chinese government could again come to believe that it was in the Party’s best interest to re-direct popular frustration away from the government, towards business.   The resulting shift in China’s political winds could greatly complicate the efforts multinationals and institutional investors have made in China and make the turmoil of the last eighteen months pale in comparison.