China Public Hospital Reform: A storm is coming
China has developed a set-in-stone timetable to conduct government-driven price management and reimbursement controls, which may be bad news for global pharmaceutical and medical device companies.
On 21 April, the National Health and Family Planning Commission of China announced its work plan for China public hospital reform in 2017, stating that all public hospitals have to control the increasing rate of overall medical expenses by maintaining a level below 10%.
In addition, drug markups will be cancelled in all public hospitals by 30 September, 2017. Except for Chinese herbal medicine, drugs will account for less than 30% of expenses in public hospitals of 200 major cities in China by the end of 2017. In addition, medical disposables will be controlled, keeping them under 20% of hospital revenue, regardless of drug sales. More than 100 diseases will be reimbursed based on their diagnosis-related group in these cities.
The core of the reform is to restrain the price increase of drugs and disposables to lower the cost for patients and healthcare systems. To reach the budget line, public hospitals will have to go through centralised procurement, directly adding pressure to the supplier and reducing supplier channels to decrease the purchase price of supplies. They will also further control of the use of medical supplies by using less expensive products and reducing unnecessary usage. As a result, average selling prices and the increasing rate of overall sales volume of medical supplies, especially high-end products, are likely to shrink. For example, the markets for top-notch orthopedic implants and advanced wound dressings are going to be largely affected.
According to GlobalData, the pharmaceutical industry in China is expected to grow at a Compound Annual Growth Rate (CAGR) of 25.6%, from approximately $417.6 billion in 2014 to $1.64 trillion in 2020. The Chinese medical device market is projected to double to approximately $50.8 billion in 2020, at a CAGR of 10.6%, from $30.3 billion in 2015. It will become more difficult for multinational corporations (MCS) to profit from this high-growth market during the forecast period. Despite public hospital reform, the newly launched 'two invoices' system and an increase in government initiatives to help local manufacturers will also hinder MCSs from accessing a bigger share of the local market. Strategic realignment needs to be implemented for MSCs to both better understand the unmet needs and continue experiencing market success in China.
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