China: Big Rewards. Bigger Risks?

The world's fastest growing pharmaceutical market may one day be the largest. Breaking in could be industry's greatest challenge.
Oct 01, 2006

As pharmaceutical markets go, china is a land of opportunity fraught with complex challenges. Potentially the world's largest market for prescription drugs, China is also the fastest growing market among large countries. At the same time, the sprawling system of 17,000 hospitals—the most important drug-distribution channel in China—is fragmented and encumbered by Byzantine regulations.

Gu Gong, near Tiananmen Square in Beijing For hundreds of years, visitors have stood at the gates of China's Forbidden City
Dispensing medicine keeps underfunded hospitals profitable. More than 40 percent of hospital income derives from the sale of drugs and services. In fact, 80 percent of all prescription drugs in China are dispensed through hospitals. The rest are sold by independent, retail pharmacies. Wholesalers and domestic drug manufacturers routinely supplement the low salaries of doctors and hospital executives with kickbacks and other unethical prescribing incentives. (Unlike in most Western countries, Chinese doctors are typically employees of government hospitals.)

A complex supply chain drives up the retail price of medicine. After mark-ups by distributors and hospitals, what the consumer or provider pays can equal 20 times the price at the factory gate. Whenever government funding wanes, hospitals must find revenue elsewhere, which forces them to hike the cost of medicine further.

Large hospitals in major urban areas dominate the healthcare system, where services are concentrated in densely populated, top-tier cities like Beijing, Shanghai and Guangzhou. Although the bulk of China's population still resides in rural areas, including villages and towns, urbanization is accelerating. The old system of universal, state-subsidized healthcare has broken down and left many citizens unable to afford even the most basic treatment.

In theory, this coverage gap should be filled by health insurance—both privately funded and government subsidized—but so far the industry lags behind the demand. Cost hurdles seem insurmountable, nearly as overwhelming as the opportunity is compelling.

As diseases like severe acute respiratory syndrome (SARS) and avian flu originated in Asia and made headlines around the globe, the world health community will pressure China to address failings in the country's healthcare infrastructure.

The pharmaceutical industry is well positioned to support necessary reforms in China, leveraging its global experience to develop sound, successful cost-containment strategies. In lending this expertise, companies can hope to gain a foothold in the vast, complex, and growing market—a kind of quid pro quo. There are six key areas where pharmaceutical companies can play a significant advocacy role and help reshape the landscape of this new frontier.

1. PRIVATE INSURANCE Private insurance funded by member premiums should be developed with appropriate government support. Only three percent of the population is covered by private insurance funded by employers. Pharmaceutical companies can lead by example, providing private health insurance to employees. Moreover, they can help expand the private health insurance market by fostering relationships between local companies with key foreign and local health insurance providers.

2. AMICABLE SEPARATION Gradually, drug dispensing must be divorced from prescribing to eliminate the profit-motive, which often leads hospitals to write and dispense unnecessary prescriptions. Physicians and pharmacists must be involved in recasting the relationship between prescriber and dispenser. A pilot program should be designed to ensure an amicable separation from the outset. Economic incentives can fuel the growth of drug dispensers that operate independently of hospitals. Retail pharmacies, for instance, have begun selling drugs at a lower price than the cost charged at hospital pharmacies.

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