Supersized Ambition

China creates a sweeping health insurance platform

China's attempt to establish a safety net to deliver primary healthcare to the world's largest population has implications for the global community, setting precedents for how to "do" comprehensive reform.

In October 2008, the Chinese government released a draft plan of its healthcare reforms for public comment—a version of which was subsequently approved by the State Council in early 2009 as the "Implementation Plan for Deepening Pharmaceutical and Health System Reform 2009–2011." Goals of the plan include:
» Provide healthcare coverage through basic medical insurance programs for at least 90 percent of the country's 1.3 billion people by 2011.
» Establish a system for ensuring the quality production, uniform distribution, minimal cost, and rational use of medicines on the national Essential Drug List (EDL). Roughly 250 drugs will be available to all.
» Strengthen primary care facilities with infrastructure upgrades and revise the way public hospitals are run.

To implement the plan, the government has budgeted $125 billion over the next three years—an increase of more than 20 percent for each year.

THE CHANGE

Over the last decade, China has been working to improve its healthcare system through incremental changes. But the push for major change began in 2005, prompted by a State Council report that found great disparities in healthcare access throughout the country. The Lancet calculated that the cost of an average hospital admission in China is equivalent to the average Chinese citizen's yearly earnings. Consequently, 35 percent of urban households and 43 percent of rural households have difficulty affording any form of healthcare.Under this proposal, by 2011 an additional 900 million Chinese will have access to a basic level of healthcare.

To deliver on this goal, the government is taking a more active role in overseeing how healthcare is delivered. It will now mandate that essential drugs are manufactured, procured, and distributed under stricter supervision with pricing guidelines and quality controls, and aims to gradually eliminate the percentage-based markup that hospitals charge on prescription drugs.

Fortunately, China's robust economic growth has given it the resources to finance such reforms. The government's reform plan is part of an enormous stimulus package intended to help the country weather the global economic climate. The plan outlines spending $586 billion over two years on infrastructure.

THE IMPLICATIONS

If plans proceed on target, China will have a considerable market for healthcare, with coverage by subsidized insurance rising fivefold over 2004 levels. What is unknown is how the needs of the newly insured will differ from those of the urban population. The disease profile of the rural Chinese population is different from that of the urban population, which until now has made up the lion's share of the market. Companies wishing to serve this newly insured population will need to understand how the incidence of disease varies by rural area, how to reach out to village clinics and township health centers, and how to choose the best commercial model to engage with various stakeholders.

The final scope of the essential drug list will set the tone for pharmaceutical opportunities. Branded generics, which have a strong position in the Chinese market, are apt to thrive in newly opened community health centers. Multinational players are already entering the branded generics business, which is mostly controlled by domestic marketers.

In general, off-patent drugs will be under great pricing pressure, and those on the EDL will be hardest hit as the government works to limit or remove profit margins all along the supply chain. The tradeoff will come with the increased volume that accompanies a spot on the EDL.

The pricing reforms that will be imposed on hospitals have the potential to discourage prescriptions on higher priced medicines offered by the multinational companies. As the government has expressed growing interest in using health technology assessments to make decisions about what drugs are accepted onto the national reimbursement list, R&D-based manufacturers must redouble their efforts to articulate the value of their therapies.

Still, many questions remain:
» Will the cost of drugs on the EDL be covered at 100 percent, or something less that would require patient contribution? What will happen to the innovative category of drugs that have been eligible for sale at a price premium?
» How closely will provincial governments follow central government guidelines when setting prices for essential drugs?
» To what extent will the drug markup in hospitals be eliminated, and how will that affect prescribing behavior?

Clearly, this is a situation worth monitoring, as the potential impact is unprecedented in China and beyond.