IMS Asia-Pacific Practice Leader Mandy Chui explains the major points of China’s new Healthcare Reform and provides a general overview of its short-term and long-term implications. With expanded medical coverage and the development of new medical services, Mandy notes what pharma companies can expect from the upcoming changes.

1. Unlocking the potential of China Healthcare Reforms
By Mandy Chui,Practice Leader,PMA,Asia-Pacific
Despite sustained economic growth during the past 30 years,
China’s per capita healthcare expenditure remains one of the
lowest among the emerging markets, with more than 50%
of total expenses paid by the patient. Due to decentraliza-
tion and reduced role of government in healthcare funding,
resources have become inequitably biased towards large hos-
pitals and urban centers. Rural areas and primary healthcare
institutions have been under-funded,and out of pocket bur-
den to the individual have been escalating (18 times more
OOP payment compared to 20 years ago).
After numerous attempts to address these concerns,the Chi-
nese State Council formally announced in 2009 an ambi-
tious and far-reaching plan called the“Implementation Plan
for Deepening Pharmaceutical and Health System Reform
2009-2011” aimed at providing basic, affordable medicine
and healthcare coverage for 90% of the country’s 1.3 billion
population and developing a national network of health care
providers in both urban and rural areas.
UEBMI: Urban Employee Basic Medical Insurance • URBMI: Urban Resident Basic Medical Insurance • NRCMS: New Rural Cooperative Medical System
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             
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             
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               
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2. • The government has allocated RMB 850
billion in incremental healthcare spend-
ing (approximately USD 125 billion) from
2009 to 2011 to implement the reform
plans, focusing on five pillars (Figure 1).
• The primary focus is to increase the de-
mand side by broadening medical insur-
ance coverage to 90% of the population
through three insurance schemes (UEBMI,
URBMI, NRCMS) with improved ben-
efits (Figure 2).
The UEBMI has the best benefits coverage
among the 3 schemes (both severe diseases
and a number of chronic and/or common
outpatient diseases) while the URBMI cov-
ers mainly inpatient medical expenses and
very limited outpatient therapies for severe
diseases. Rural residents are covered under
the NRCMS, which mainly covers severe
diseases and basic essential medical care.
• An additional focus of health reform is to
increase the supply side by establishing a
3-tier healthcare services provision system
(village clinics, township centers, county
hospitals) in rural areas and building more
community health centers (CHCs) and sta-
tions in urban areas. It also aims to provide
basic affordable medicine to healthcare in-
stitutions through establishing an Essential
Drug System with controlled ceiling prices,
centralized procurement and distribution
with zero drug mark-ups at the hospital
level.
By instituting management of prices, the
reform seeks to limit hospital incentives to
over-prescribe, and thereby rationalizing
drug usage and improving efficiency.
• An increase in government funding (es-
timated to be growing at more than 20%
CAGR over the next 3 years) in improving
the supply and demand side of healthcare
will significantly benefit the pharmaceuti-
cal market by increasing drug consumption.
•The reform will not fundamentally change
the market overnight,as changes and subse-
quent implementation policies will be ex-
ecuted over time. Large urban hospitals will
still remain the core market for multi- na-
tional companies
• Out of pocket burden to patients will re-
main significant as URBMI and NRCMS
typically cover severe inpatient treatments
and provide limited coverage for common
and / or chronic outpatient treatments.
• There will be significant variation in in-
terpreting and implementing reform poli-
cies at the provincial level due to different
levels of economic development and avail-
ability of local government funds.
• Building of a primary healthcare serv-
ice sector is occurring at different paces in
different provinces. There is considerable
resistance from patients to seek treatment
from CHCs and rural centers due to a per-
ceived lack of qualified providers and medi-
cal equipment in rural areas and the less de-
China HealthCare Reform Framework
Trend Commentary
UEBMI: Urban Employee Basic Medical Insurance • URBMI: Urban Resident Basic Medical Insurance • NRCMS: New Rural Cooperative Medical System
Figure 2:Three Medical Insurance Schemes
• UEBMI, establishing in 1998, financed by
payroll taxes paid by employers and employees.
•URBMI, starting in 2007, financed by gov-
ernments and participants.
•NRCMS, beginning in 2003, contributed
jointly by central and local governments, and
participants
UEBMI
NRCMSURBMI
BMI
Figure 1: Five Pillars of China Healthcare Reform
Affordability
Accessibility
Basic Medical
Insurance
System
Essential Drug
System
Public Hospital
Reform
Equitable
Public Health
Services
• Provide equal access of
public health services in
urban and rural areas.
• Improve infrastructure
of specialized institutions
such as mental institutes,
women and children centers.
• Develop the primary healthcare
services network.
•Build 2,000 county hospitals,
3,700 urban community health
centers and 30,000 community
healthcare stations.
• Increase medical insurance coverage
to over 90% of population by 2011.
•Increase premiums and reimbursement
rate for 3 insurance schemes.
•Initiate pilot reforms of public
hospitals to gradually eliminate drug
mark up.
•Separate hospital supervision
and operation.
• Set up national
EDL with provincial
on-line purchasing,
ceiling price and
zero mark up.
Primary
Healthcare
Service

3. • Reform initiatives are still evolving with
uncertainties revolving around implemen-
tation details, timing and variations by
geography. Thus, careful assessment and
monitoring of the development, especially
at the provincial level is essential to devel-
op more tailored strategies at the regional
level.
• Increase in geographic diversity will
mean that companies need to develop a
stronger regional infrastructure to under-
stand and embrace this complexity and
prioritize resource allocation.
• With an increasingly complex and de-
manding payor environment, companies
need to strengthen the competencies of
their local government affairs and PMA
team in order to engage effectively at both
central and local government level.
• Emerging new market segments, such as
CHCs and rural areas,where multinational
companies were not used to play, will re-
quire companies to rethink their business
models and portfolio.
General Implications From Reform
NDRL implementation and pricing reforms will have the biggest impact in the short term
veloped inland and western provinces.
• Essential Drug List (EDL) remains a dou-
ble-edged sword for multinational compa-
nies with increasing volume due to man-
datory usage of essential drugs for primary
care institutions and hospitals, but substan-
tially lower government controlled ceiling
prices for off-patent drugs which are in-
cluded in the EDL.
• List (NRDL) in 2009 includes 1,140
western drugs, with individual provinces
having the opportunity to further refine
and expand on the list into Provincial Re-
imbursed Drug Lists (PRDL).
However, provincial expansion of drug lists
is becoming increasingly challenging, and
covered western drugs usually exclude high
cost oncology agents and biologics.
Upside
Downside
NRDL/PRDL implementation
Expanded coverage of current uninsured
Increased Insurance Benefit
Negotiation mechanism for high price drugs
Essential Drug System
Public Hospital ReformPricing reforms
Stricter Insurance Cost-
containment Management
TIMING
2010 2012 2020
Impact
Development of Primary
Healthcare services

4. • A window of opportunity exists for high
priced innovative oncology and biolog-
ics as the government, for the first time,
has been exploring listing a select number
of these drugs in NRDL with patient co-
payment and negotiation mechanisms in
place.
• However, pricing reforms, which come
with implementation of the EDL and
expansion of the NRDL, will have sig-
nificant downward pressure on prices for
off-patent originator drugs as the gov-
ernment intends to narrow the price gap
between off-patent originators vs. gener-
ics. Therefore, companies looking to play
in the EDL segment will need to assess
their current price gaps with generics and
price-volume trade-offs carefully, simply
dropping prices without understanding
the competitive and regulatory environ-
ment at the local level will be risky.
• Medium cost innovative products, which
are included in the 2009 NDRL, stand a
good chance to have substantial volume
increase.
•To capitalize on this opportunity, compa-
nies need to invest substantially to improve
their sales penetration and mitigate poten-
tial price cuts and generics erosion.
• For new products, HEOR studies tai-
lored to the needs of the Chinese market
will become increasingly important in jus-
tifying a premium price.
For more information you can contact:
Mandy Chui (mchui@cn.imshealth.com)
or write us at info.sg@sg.imshealth.com
Implications Across Product Types
To optimize results, there are different areas you need to take actions immediately, in the near term and long term
portfolioProductcompany
Immediate Near-term Long-term
Pricing & market
access options
Patient segment assessment
Payer Strategies
Internal alignment
Evidence requirements
Payer strategies
Business model
Organization structure
Portfolio reassessment
Channel assessment