China Hospital Market – What Does the Economy Have to Do with It
As several reports have showed, the economy of China is slowing and is likely to keep facing headwinds over the coming few years. It is true that as the economy in China slows further, the healthcare system as experienced by individuals and operators is going to come under strain. However, during this slow down capital is leaving traditional industries like mining industry or construction at the same time capital is jumping into the healthcare industry, especially the China hospital market. Chinese property and investment company Wanda Group signed a MOU with Britain’s International Hospital Group (IHG) on Jan 6th, 2015 for the investment of 15 billion RMB to build three high level private hospitals in Shanghai, Chengdu and Qingdao. Columbia Pacific Management, a Seattle-based health care company, also has begun to emphasize investment in China’s hospitals rather than senior care facilities since 2014. When we analyze some of the key news over the last several months, we start to get a clearer understanding on why capital is chasing the opportunities of hospital investment in China as of late and what the possible opportunity for profit is in the future.
Medical Insurance in Trouble
Key Insight: The director of Ministry of Finance, Mr. Jiwei Lou, called for retired employees from non-SOEs to pay for medical insurance at the beginning of 2016.
This news was a very strong signal that China’s public medical insurance pool is facing the unbearable high pressure from ongoing deficits. Since the beginning of first round healthcare reform in 1991, the average annual growth rate of per capita medical costs is over 15% in China, which is much higher than the average growth rate of per capita GDP. The swelling aging population and the shrinking young population related to the one-child policy exacerbate the shortfalls in the public insurance funding pools. In addition, the limitation of management capacity of public medical insurance system, where pay-for-services is still the majority of insurance reimbursement methods and no effective mechanism to prevent the fraud on insurance cheating criminals. The exhaustion of public medical insurance fund is all but inevitable.
In the past few years, the government has tried to control the soaring medical costs by applying the following regulations: first, limit the annual total medical reimbursement amount for each hospital. Second, reduce the drugs’ pricing by applying second-round drug tendering to make sure the rule of “the lowest price win” on EDL (essential drug list) and RDL (reference listed drug). Third, require and promote the application of domestic medical equipment and devices in third class hospitals.
It seems the speed of insurance funding depletion was slowed down after these changes. However, patients’ and hospitals’ complaints became much stronger over the same period. In addition, more problems than complaints were created.
First, as every hospital has to face the annual insurance reimbursement budget falling short, usually in the last three months of a year, patients covered by the public insurance scheme might begin to be rejected or would have to pay out-of-pocket.
Second, several necessary drugs were withdrawn from the market because of the incredible low tendering price. Examples such as Dipyridamole for Coronary Heart Disease, Actinomycin D for children’s malignant solid tumors, Neostigmine Bromide for Myasthenia gravis are all common in China as a result of funding issues.
Third, drug safety and quality became a big problem under the low price pressure from government purchase. Without the tender, the domestic pharma competition on price is fierce enough because the generics market share in China is as big as 97%, where roughly 50 domestic pharmacies are producing the generics for the same one brand name drug. Now, the low-price-win drug tender rules forced the domestic pharms to reduce the price again which definitely will increase the risks on cutting the production cost illegally. Fourth, the unstable function and limited service capacity from the domestic medical equipment and devices caused lots of trouble for the hospitals, which increased the risks on medical violence.
In the coming 5 years, it is hard to see the same high economy growth rate as in the past 10 years, which is the biggest driver of investment in the public medical insurance. The messages from the government representatives on the current China’s National People’s Congress also showed the role of government will be the guard to protect the people in needs rather than all. So it can be participated that there is no possibility for the government to invest more to eliminate the deficit of public medical insurance in the future.
Commercial Medical Insurance Opportunity
As the reality of the big deficit public medical insurance is facing, we believe it is the opportunity for the commercial medical insurance companies to explore the China hospital market market by offering the options on the premium services or drugs outside the public insurance network. We also believe the combination between the commercial insurance and the private healthcare institutes will provide the optimized medical solutions for the influence middle class.