Tucked away in a corner of Beijing’s Sanlitun bar district stands the Sanlitun Community Health Service Center. On CHINA ECONOMIC REVIEW’S visit on a Saturday morning in April, shortly after the government released its blueprint for health care reform, traffic in the facility was light, with only a skeleton crew of hospital staff serving weekend duty. The 50-year-old, three-story clinic has recently completed a nearly one-year renovation process, and for this at least one patient was thankful.
“In the past the health center was much smaller – there were fewer rooms, and they didn’t offer a full range of traditional Chinese medicine services,” said Zhang Shurong, a 79-year-old woman receiving an IV transfusion for cerebral thrombosis. “Most senior citizens come here for minor illnesses because the service and treatment are good.”
Zhang, a former employee for a hospitality company, said she goes to the larger Sino-Japanese Friendship Hospital for checkups that require more extensive equipment and expertise. For basic treatment, however, she prefers the clinic.
Should the government’s reforms go according to plan, more patients like Zhang will seek basic treatment in small clinics, putting facilities like this on the front lines of health care in China.
Action stations
The measures outlined in the State Council’s health care blueprint demonstrates both the strength of Beijing’s resolve and the scope of the problem. The US$123 billion that will enter the system through 2011 has been described by analysts and insiders as both a major step forward, and an inadequate amount to truly affect change. Much of the money and effort will focus on providing 90% of the population with basic health insurance coverage within three years. The government also wants to develop a national network of health care providers, building a hospital for every county while expanding and upgrading rural and urban clinics and community health centers.
The end goal is to bring about a sea change not only in how health care is paid for in China, but also in how it is delivered. Although sources stress that reform is still in its early stages, they believe this goal cannot be reached without cooperation from the private sector.
“You have a situation where the government is expanding coverage and there’s also a high area of unmet medical needs. That’s what will be driving growth well into the future,” said Joe Jimenez, CEO of Novartis Pharmaceuticals.
Insiders across health care-related industries see extending basic health insurance coverage as the source from which much of the potential business opportunity will flow. Once covered by some kind of plan, people will be able to afford a broader range of products and services – and the rising tide will lift all boats.
“What we’re seeing is a move back towards a more socialist type of healthcare system. It’s an extremely big move … China is clearly putting a flag in the ground,” said Robert Pollard, director of Synovate Healthcare China, a consultancy.
History lessons
Health care in China used to be free to all, an integral part of the social safety net that was chief among the purported benefits of the command economy. In the 1980s, the country shifted to a market-oriented system which, combined with more complex medical needs, left many without basic coverage. Since then, a variety of insurance initiatives have emerged, leaving citizens covered by a patchwork of state and employer programs.
Few dispute that health care in China, in a broad sense, has improved vastly since the early years, but out-of-pocket expenses for treatment have ballooned. A study last year conducted by the medical journal The Lancet found that the average cost of a single hospital admission in China is almost equivalent to the average annual per capita income.
The system is unsustainable even for those lucky enough to have jobs. Xu Guoping, a 28-year-old Shanghai native who works as a driver, suffers from complications in his urinary tract, which requires frequent hospital visits. In 2007 he received US$132 in health insurance reimbursements from the government, but each visit costs him over US$70.
“If I earn US$150 per month now, half of my money goes to the hospital. How can I make a living?” he asked in the busy waiting room at Shanghai’s Huashan Hospital.
The big picture
Viewed in a wider context, these high out-of-pocket expenses also contribute to a macroeconomic dilemma. Policymakers have long dreamed of recalibrating China’s economic growth model so it relies more on domestic consumption and less on investment and exports. The shift is complicated by people’s propensity to save rather than spend, an attitude often tied to fears of future illness or incapacity – and having to shell out for the treatment.
“Making households more relaxed about spending by strengthening the role of the government in health, education and social safety is important to lowering the household saving rate,” said Louis Kuijs, a senior economist with the World Bank’s China office.
He believes the proposed medical insurance reforms would have a significant impact, while noting that one can’t “expect miracles from one policy.”
The pharmaceutical industry is likely to be one of the big winners from increased health insurance coverage. According to IMS Health, a consultancy, China’s ex-factory pharmaceutical sales in 2008 were US$24.5 billion, compared to US$9.5 billion in 2004. Growth is expected to continue apace.
Jimenez of Novartis believes the increased insurance coverage, combined with rising levels of diseases in China such as hypertension and cancer, will help his firm deliver double-digit sales growth over the next few years. Novartis is in the process of doubling its local sales force.
According to Gideon Lo, an analyst with DBS Vickers in Hong Kong, reform will also spur consolidation in the domestic pharmaceutical market, trimming the fat from a bloated, inefficient sector.
What remains unclear at this stage is the effect the forthcoming “essential drugs list” will have on the industry. Drugs on this list will be stocked at hospitals, clinics and private pharmacies, with prices set by the government. Mandy Chui, China country principal for IMS Health, estimates that the list will comprise around 400 drugs, about half of which contain chemical molecules currently sold by multinational pharmaceutical companies. She expects Beijing will press multinationals to lower prices should their drugs be included in the list. The firms will most likely be given a transitional period to lower their prices for drugs no longer covered by patents.
While analysts believe the essential drugs list, as well increased basic health care coverage, will certainly help bring down out-of-pocket expenses, they will hardly be a panacea for China’s health care financing troubles.
“A 100% publicly funded socialist system in a country the size of China is never going to work,” said Jamie Davies, London-based head of pharmaceuticals and health care for Business Monitor International, a consultancy and market research firm.
The door opens
The government has recognized that many people will need supplemental insurance in order to afford services beyond basic health care, and as such the recent blueprint envisages an expanded role for private health insurance. At present this area is small and, by most accounts, unprofitable. The China Insurance Regulatory Commission valued private health insurance at US$8.6 billion in 2008, up from US$3.8 billion in 2004. Property insurance, by contrast, was valued at US$34.2 billion in 2008 up from US$15.9 billion in 2004.
Nonetheless, foreign insurers are keen to enter what they see as a massive potential market.
Karhor Tan, CEO of CITIC-Prudential, the UK insurer’s China joint venture, said the blueprint represents the first time Beijing has specifically encouraged private insurers to help shoulder the burden of providing basic health insurance to the public. He projects that health insurance will eventually account for 20% CITIC-Prudential’s business. He did not say what proportion of business it accounts for now, though he noted that health insurance in a broad sense accounts for 8% of total life insurance in China.
However, insurers must still contend with the perception among most Chinese that their products are too expensive. Zhang Zhe, a 32-year-old Beijing resident who works at an international educational exchange program, looked into purchasing private health insurance for catastrophic illness after her husband had to undergo surgery for a benign brain tumor. She was scared off by the yearly price tag of US$878.
However, Tan believes that with the average health insurance premium in China coming in below US$60, many can afford the service. “Whether customers are willing to buy private health insurance depends on their understanding of the product, not its affordability,” he said.
It is an opinion shared by several new foreign entrants into China’s private health insurance industry: The market is approaching a tipping point, and they want to be ready. These firms believe their competitive advantage lies in the technological tools and deep experience they can bring to bear in providing more sophisticated products. According to Hocking Cheng, vice president of strategy and business development in the Asia Pacific region for US insurer Aetna, said that most domestic insurers are ill-equipped to deal with the complexity of the health insurance business. Consequently, their loss ratios have topped 100%.
“If you look at that kind of transaction volume coupled with the complexity of transacting with hospitals and providers, that’s a totally different game from the traditional life or property and casualty business,” he said.
Third party providers
New entrants must first maintain a representative office in China for two years before applying for a joint venture license. However, they may offer third party administrative (TPA) services to domestic companies while riding out the regulatory waiting period
WPMI, a firm made up of four large US insurance companies, including WellPoint, America’s largest insurer by enrollment, provides back-end services such as membership billing and claims processing to Sino Life Insurance and Taiping Life Insurance, as well as large employer groups. WPMI’s CEO John Domeika said his firm’s TPA business is also helping to pave the way for the company’s market entry, expected in 2011.
“It gives us on opportunity to have feet on the ground using our technology and our expertise to help the market and to help understand where health insurance is going within this market,” he said.
While a thriving private health insurance industry may seem inevitable in the long run, analysts believe profits will remain elusive for several years. The industry will also require state support, perhaps even some form of a public education campaign, in order to gather momentum. However, this may get pushed to the bottom of Beijing’s to-do list as it implements its own health insurance schemes.
But this is not the most daunting challenge facing insurers. China’s public hospitals and underpaid doctors operate on a fee-for-service revenue model, which encourages overtreatment and overprescribing of costly drugs. These practices not only threaten insurers’ ability to run an efficient business, but also the health of the entire system.
“If the payment system is not going to be changed, you will see further escalation of medical costs,” said Liu Yuanli, a senior lecturer with the Harvard School of Public Health.
The fee-for-service model also draws the top talent to the most famous public hospitals while encouraging them to see as many patients as possible. Patients consequently gravitate to these hospitals, often for minor complaints that could be dealt with at a health center, leaving clinics underutilized and further straining an already strained system.
Analysts say that any meaningful reform will require addressing hospital financing models and employee compensation. While Beijing’s blueprint aims to shift public hospitals to a non-profit model, there remains a paucity of detail.
“I am worried about whether the blueprint can address hospital reform,” said Liu Guoen, a professor with the Guanghua School of Management at Peking University and commentator on health care issues in China. Liu said the government’s plan includes some laudable goals. It intends to separate treatment from medication sales and allow doctors to charge higher fees for their services so as to compensate for the loss of revenue. Those changes, however, won’t cover the losses incurred by China’s hospitals and underpaid doctors should public hospitals move to a non-profit model.
One surgeon at a prominent hospital in Shanghai, who spoke to CHINA ECONOMIC REVIEW on condition of anonymity, was more blunt. “Patients come to our hospitals just as they would go to supermarkets. So the government places hospitals in the service industry but doesn’t allow them to make their own money. This is unrealistic,” the surgeon said.
No quick fix
Reform of this system will take years of work, and Chinese cities and provinces will experiment with a variety of solutions before identifying one that works. These may include allowing hospitals to form associations with community centers and rotate their doctors through a network under one brand. Private hospitals that specialize in certain forms of treatments could also rise to prominence and profitability. Foreign and domestic providers of elderly care and hospice services are expected to find a massive unmet market need brought on by a rapidly aging population.
Industry participants and analysts say it’s too early to predict the real implications of China’s health care reform. However, many believe that while reform will be messy, the momentum is unstoppable.
“It can’t get any worse because the people won’t let it,” said Harvard’s Liu. “The whole society has already passed a point of no return.”
