Why healthcare is the new frontier in creative China

18 Apr 2017

China’s economy is maturing – and so is its population. As China's demographics change, healthcare is taking on greater importance for consumers and the wider economy, with total spending in the sector projected to almost triple over 10 years, from $US357 billion in 2011 to $US1 trillion in 2020. 

Recognising the growing importance of healthcare, the Chinese government has announced reforms to the sector, which it hopes will drive many of the innovations needed to cater to an older, longer living population. These reforms, set out in its 13th Five Year Plan (March 2016), will focus on three key areas: improving infrastructure; reducing the price of treatment; and increasing health insurance coverage. 

According to Macquarie healthcare analyst, Wei Li, one of the greatest challenges the government faces is improving infrastructure. 

“There are nearly 30,000 hospitals in China," Li says. “However, the 1,000 large, government backed hospitals in the major metropolitan areas tend to monopolise resources, attracting the best doctors and medical insurance funding." 

As Chinese people grow wealthier, however, they are also prepared to pay more for medical care. This has spurred a rise in privately owned hospitals - a trend being actively encouraged by the government. 

It offers tax breaks to businesses that invest in private hospitals and has relaxed the foreign investment rules, so that overseas businesses can own up to 100 per cent of a private facility in some pilot regions. But, perhaps most importantly, it has removed a restriction preventing doctors from working at multiple sites. This will give private hospitals the chance to compete on salary with their larger counterparts and attract more - and better quality - staff. 

That matters because doctors are not well paid compared to other professions in China. Many of the best students choose careers in more lucrative fields and there is a shortage of qualified physicians. This is another challenge the government is tackling, announcing its intention to increase the number of qualified doctors by 40 per cent over the next five years. 

While changing China's healthcare infrastructure may take some time, Li sees the potential for more short-term gains in the government's other two areas of reform - reducing the drug prices and increasing health insurance coverage. And much has already been achieved, says Li. 

“Before 2002, only around 30 per cent of China's population had health insurance," explains Li. “By 2012 that figure was already over 95 per cent."

Despite this, healthcare is still expensive for most Chinese people, with co-payments and out-of-pocket premiums the norm. The reforms will increase the level of subsidies and look to provide depth as well breadth to insurance cover. 

The government has also helped reduce the cost of pharmaceuticals through the drug tender system and drug price negotiations. The challenge though lies in ensuring quality - which is where innovation and a new emphasis on R&D have a part to play. 

“China currently has more than 5,000 drug manufacturers - most of them small," Li says. “Very few of these produce a quality product and even fewer have a significant R&D pipeline." 

As Chinese consumers increasingly demand branded over generic and traditional drugs, Li believes that many of the small manufacturers will no longer find it viable to keep producing.

Li says this should lead to a period of rapid consolidation within China's pharmaceutical sector - one that will advantage bigger companies that already produce a quality product and can afford to invest in further innovation. 

This trend should also be hastened by two factors: a strengthening of intellectual property laws and a relaxing of foreign investment rules. The latter has already encouraged international pharma brands to enter the Chinese market. 

“These foreign companies bring in new creativity and have a positive impact on the R&D chain," Li says. 

Some domestic pharmaceutical companies have been busy acquiring international businesses and bringing their research and development back to China. Although, in line with China's shift towards domestic consumption, their focus is on selling to a local market rather than on exporting. 

However, given that the number of Chinese people over 65 is expected to rise from 100 million in 2005 to more than 329 million in 2050, concentrating purely on sales close to home makes commercial sense. 

“China is not going to compete with India as a generics exporter on prices. But with such a large domestic market to sell to that won't matter," Li concludes.

For more information on the report 'From Made-in-China to Created-by-China' contact Macquarie Research.

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