Wednesday, June 13, 2012

China – Healthcare reform in China

Nowhere in the world is the dual healthcare challenge of price control and expanded coverage more clear than in China. 

The human need for expanded coverage is acute; yet, finding policies that will empower industry to meet these challenges many times run at cross-purposes with the short-term cost containment objectives of government planners.  Some western multinationals are already becoming cynical about the balancing act between these two sets of priorities.  It is worth pointing out that for all the suspicion over whether China can find a way to both expand coverage and incentivize industry, the country has managed to avoid some of the more draconian options like those India has put forward in the pharmaceutical sector (thus far that is).

For those unfamiliar with India’s approach (which has, to the country’s credit changed since the 2005 patent reforms), the Indian Patent Act of 1970 recognized only process patents.  In addition, what protection was provided to pharma companies was paltry by comparison to what most of the world provided (India provided 7 years of process patents versus the developed world’s standard of 15 years).  The resulting burgeoning of generic drug production in India was largely a reflection of thirty years of reverse engineering by Indian companies who could see into previously protected processes.  This policy stance by the Indian government was successful in expanding access to drugs for the average Indian consumer (it was also – and perhaps most importantly – successful planting the seeds for India to become a global superpower in the production of generic drugs).  Can China avoid something similar that would be good for it in the short term, yet disadvantageous for industry in the long term?  Perhaps, although the emphasis being placed on the Anhui Model and the widely growing fear that it will spread into medical devices and diagnostics are not encouraging signs.

On this point, it is also worth mentioning that thus far at least the sorts of forced technology transfer the Clean-Tech and advanced manufacturing industries from North American and European companies seeking to enter China have had to deal with have largely been avoided by healthcare companies with similar market entry objectives.  Whether this continues to be the case is, in my mind, very much an open question.  Traditionally, the more a particular industry, strategic economic sector, or policy stance comes into focus by the Central Government, the more difficult it is to wall off these matters.  Regardless, as the 12th 5 Year Plan makes extremely clear, the Chinese government understands it must do a foundationally better job expanding health care coverage to the masses if it is to encourage the evolution of the Chinese economy and promote social stability.  Reforming the existing healthcare system, and creating new mechanisms for delivering care (in particular for the rural population) are high priorities for Beijing.

With this in mind, I recently spoke with Christina Ho, J.D., M.P.P..  Christina is an Assistant Professor of Law at Rutgers, and former a Fellow and Project Director of the China Health Law Initiative at the O’Neill Institute for National and Global Health Law at Georgetown University Law Center.  Christina is one of the world’s leading experts on China’s healthcare reform process.  I had first encountered her work in the superb report “Implementing Health Care Reform Policies in China:  Challenges and Opportunities” published by the Center for Strategic and International Studies (CSIS).  She has also written a very good article for China:  an International Journal titled “Health Reform and De Facto Federalism in China.”

In the CSIS report, Christina provided what I think is one of the best summaries of China’s approach to healthcare reform:  “China’s health system has spanned the antipodes of potential health system models, ranging from a pure government delivery model to one radically driven by profit incentives, and now China is seeking a hybrid to suit its hybrid economy.  After an extensive and remarkably public debate that featured clashes between ‘government approach faction’ and ‘market approach faction,’ China has settled on a mixed vision that guarantees a level of basic universal health security while permitting market space to meet additional demands.”  To me, successful entrepreneurs, businesses and investors who want to find a way to access China’s healthcare market will keep what Christine calls this “mixed vision” in mind.  For those reading this who are curious to learn more about the policies that embody this mixed vision, I highly recommend Christina’s “Health Reform and De Facto Federalism in China” article as it captures the tension between not only the public-private features of this matter, but also the uniquely Chinese federalist issues that undergird much of this.

For those unfamiliar with Yanzhong Huang at the Council of Foreign Relations, who has put forward the provocative conclusion that healthcare under Mao was actually better than what the average Chinese (and in particular the rural Chinese) have access to today, Christina’s CSIS analysis adds some much needed context.  There she writes, “… with economic reform, health care began to be treated much like any other economic sector; the guarantee of central support dried up, and local governments treated care providers like enterprises that are responsible for generating revenues to achieve solvency.  The overutilization of higher-priced drugs and tests, the denial of care to those without means, and other cost, quality, efficient, and equity problems that emerged stemmed from these ‘profit’-driven incentives.”

The role of profit-generation is likely to remain problematic as China’s reform process advances.  Christina shared with me that China “might not have thought through a comprehensive enough framework that allows for the various public and private actors to pursue their own interests without compromising the public good.”  For pharma, the Anhui Model is a good example of this; however, I am coming to believe that China’s approach to incentivizing direct investment in hospitals is likely to be another.  China has on two occasions tried to encourage private investment in public hospitals.  The first round was poorly received because the facilities operated were dogs (some were actually offered at no cost to try and get foreign operators interested), and because an outsider could make very few changes to the compensation schemes for public employees.  When in late 2011 China announced you could make an investment in hospitals it rectified one of these errors by not limiting those hospitals where the investment could be made; however, thus far at least foreign investors have to keep the compensation schemes the same, have significant limitations on how they can extract profits from the entity, and cannot access the yibao reimbursement scheme.

For China, the tension between the role of the government as a payer and that of private industry is one that has to be carefully resolved.  Christina fears that China might make some of the same mistakes Russia made when faced with similar challenges.  In the CSIS report, she shares “When Russia attempted to institute a system of managed competition in its health system, direct supply-side subsidies continued to represent such a large portion of providers of overall revenue that demand-side insurance purchasing never achieved enough leverage to exert a transformative force.”  During our conversation, Christina added that what Russia illustrated was “as you transition away from a single channel pricing mechanism you need to make sure money is flowing through payers … business, insurance companies, or ministries empowered to act as the insurer … now, the Ministry of Health hopes to hang onto as much of this turf as is possible; they jealously guard this where we want to see China allow additional payers exert more influence on the healthcare system by encouraging pay for performance.”

One question I wanted to pursue with Christina was whether she was on the whole skeptical or hopeful about the trajectory of China’s healthcare reforms.  She shared that on the whole “the framework is pretty good … a betting person would say it will be good enough .. the ongoing interactions and adjustments I see happening over time will likely work out the kinks – on the payment side in particular – the Chinese government has such a vested interest in seeing this work; their commitment to reform is so explicit … they have to use every tool at their disposal to make this a success.”

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