Three weeks ago, CCTV reported the drug kickback scandals in six 3rd class public hospitals. All the doctors involved were penalized. This CCTV report has continued to be a hot topic in multiple WeChat public accounts that I monitor to gauge for our clients how the on-the-ground reality for pharmaceutical companies is changing. In order to assess the real reaction by physicians towards this CCTV reporting, I had a few conversations with some of my old doctor friends from 2nd and 3rd level hospitals in different cities. Without exception from all of these talks, all of them expressed a kind of pessimism about their future as a physician in the public hospital system.
From these doctors’ point of view, the “Three Mountains” that could well drive to lead them to exit the public system would be medical violence, high workplace pressures due to their crazy workload, and tough requirements to publish papers in order to have access to career promotion. As they put it to me, the low income without drug kickbacks will be last straw to likely lead them to leave.
From our perspective, if the anti-drug kickback does push some doctors to leave the public hospitals, this could actually be the result that the government wants.
First, let’s make clear why the doctors might choose to exit the public hospital if they can no longer receive kickbacks from drug sales.
Banning drug kickback has been listed as one of the top five goals in China’s 2017 healthcare plan. Although similar efforts have been attempted multiple times in the past 20 years, under the macro-environment of anti-corruption advanced by President Xi over the last several years, we believe it is more serious this time. To say that differently, based on my interviews with multiple physicians in China about how they perceive this effort, their view is it is more serious, and more potentially harmful to their career and livelihood if they are caught than ever before. It is clear there is no way for doctors to access the same level income as before, even though the price of medical services were increased, unless the government steps up and across the board addresses physician compensation. It remains to be seen whether or not this will happen, not only because of funding challenges, but also because physicians in China are still seen as servants of the people, and as such, their ability to derive levels of compensation within the public system commensurate with their peers in other regional Asian economies, would be inconsistent with much of China’s political orthodoxy. There are two policies that reinforce the government’s fixation on kickbacks and drug pricing (and that, notably, look past the issue of physician compensation):
1# Policy: “Two Invoice,” which means “one invoice from pharmaceutical manufacturers to distributors and another invoice from pharmaceutical distributors to medical institutions”. With the application of the policy, after the centralized bidding procurement (CBP) , the drug prices were 30% lower than before. One of the direct results of the lower drug price is that there is much smaller revenue markup that drug manufacturers or distrubotrs cannot offer the bribe to the drug tendering officers, hospital managers and doctors. Among the three beneficiaries, doctors are the one to face this reality first.
2# policy: “Zero Mark-Up,” which means “no price mark-ups on any drug dispensed by a healthcare institution.” With the policy’s application, the revenue of a hospital drops dramatically. In return for the reduced income of a hospital, the government has promised to compensate the loss from drug sales by increasing the price of medical services and offer financial subsidies to the hospitals. However, none of the policies bring enough substitute revenue that compensates for the hospital’s the loss on drug mark-up from 15% to zero. First, the price increasing was limited to surgery, rehabilitation, nursing, traditional Chinese medicine. At the same time, price reductions were applied on the test and treatment by large medical equipment, such as CT and MRI. As the result, a hospital can get roughly 5% increased revenue by adjusting medical service prices. Second, the government subsidy could not pay for the hospital on time and by the appropriate amount. A report showed that in Hunan province, more than 35% government subsidies were not provided to the hospitals.
Second, why do we think the result of doctors’ leaving would be what the government wants? Because it will finally result in an increased balance between the public insurance funded “multi-tiered medical system” and “public hospital’s privatization.” In other words, these policies will drive physicians out of the public hospitals where they are over-worked and under-paid and into private hospitals where they will be treated more like a professional clinician would expect. If that sounds like an in-direct way to reform China’s public hospitals, that’s because it is.
Think about these doctors in big hospitals, who work more than 60 hours per week with an extremely heavy workload and great personal risk to their safety. They are highly educated and have to continue dto study, do research and publish academic papers to maintain their job. With the distorted medical service fee ceiling, if the doctor’s income could be maintained at a reasonable level before, drug kickback was how. Now, with the sudden cut off of under-table income and no proper solution to compensate the lost, it is easy to see doctors’ frustration, or desperation. What will the doctors do?
One possibility is that the doctors will simply live with the low income, but will not work hard as before for less workload and risk. Then the patients will have to turn to lower level healthcare facility for services. If this happens, the government promoted solution around “multi-tiered medical system” might finally work. We know that in the past 9 years, whatever the government invested and promoted, such as upgrading the environment and equipment of grass-root facility, training the clinicians, reimbursement more for lower level facility, patients were still willing to flood into the crazy busy big hospitals because they could offer the better quality medical services from the well-trained doctors. From 2009 to 2013, governments invested more than RMB 1,300 billion on infrastructure upgrades as well as the purchase and maintenance of big equipment. However, the percentage of medical services happening in grass-root facilities dropped from 61.8% in 2009 to 59.1% in 2013. As a healthcare reform expert, Hengpeng Zhu, said ”the big hospitals worked like the pump to attract the patients in the market and drain out the public medical insurance fund.” So when the doctors in the big hospitals have no incentive to service so many patients, the new patients’ flow to grass-root facilities will have to happen. And this time, the government does not need to invest so much money to attract the patients to fulfill the “multi-tiered medical system.”
The second possibility is that doctors will leave the public system, which is called “Get Rid of Bianzhi”. In the past 6 years, all levels of government have been working hard to promote the human resource reform to accelerate the privatization among public hospitals, which was thought to reduce financial burden and optimize production efficiency. However, the past experience has told us: “Get Rid of Bianzhi” (or human resource reform) was the biggest barrier in the process of public hospital privatization, even though the private capital has strong State Owned Enterprise (SOE) background, it is still very hard to attract the employees give up their Bianzhi. Last month, when CR Healthcare started the M&A process on the 4th affiliated hospital of Jilin university, all of the employees protested against the SOE background investor and made the M&A come to a grinding halt. Fortunately, with the dramatic shrinkage of income and multiple policies to favor practicing at multiple institutions, we believe and have already seen more and more capable doctors leave the public sector to start up their own physician group, or join in private sectors, which definitely will change the landscape of China’s healthcare market.
Last July, a central government officer said in public, “the healthcare reform was the only one reform that make all stakeholders unsatisfied … which was caused by too much administrative intervention.” The 18th CPC Central Committee Plenum already clearly confirmed “making the market power play a decisive role in the allocation of resources.” Healthcare in China is one of the few industries that is dominated by planned economy. The huge potential deficit of universal medical insurance fund push the reform by market economy. Fortunately, unlike the SOE reform in 1990s’, China government seems to have chosen a more progressive strategy on healthcare reform. The anti-drug kickbacks might just be the trigger for an earthquake in China’s public hospitals.