Healthier people, healthier economy

Once upon a time, when China was unambiguously a communist country, its healthcare system was a success. In the three decades following the establishment of the People's Republic in 1949, the average lifespan nearly doubled and infant mortality went down five-fold. Good healthcare provisions no doubt played a major part.

Then came the market reforms of the early-1980s and the system fell apart. Provision of healthcare fell behind the need to boost GDP and eventually the central government withdrew funding, putting more pressure on local governments.

"When the system turned to a market-orientated approach, the cities on the east coast which received the most foreign direct investment were in the best position to invest that money into healthcare, while the inland provinces were not able to keep up," said Robert Pollard, director of market research firm, Synovate Healthcare, in Beijing.

Patients were forced to pay ever-greater out-of-pocket expenses for their care. The situation nowadays is that the ill often have to foot big bills that can drive them into poverty or avoiding treatment altogether, while the healthy try to keep large chunks of their income in the bank just in case the worst does happen. This is why the government guidelines for medical reform, released last month, are so important. The plan is to upgrade the healthcare system by 2020 into something that provides affordable and effective medical treatment to both rural and urban citizens. It will affect everything from hospitals and clinics, and healthcare financing, to the drug delivery system.

"What we're seeing with the new plan is a move back to a more socialist approach to medicine by providing for the majority," said Pollard.

If successful, the sick will not be the only beneficiaries: the economy as a whole could undergo a fundamental change, and several business sectors -- drug companies, medical equipment manufacturers and insurance companies -- will all be affected.

Medical reform has been a long time coming, with plenty of stops and starts over the past decade. What makes things different this time is that the government has already announced how much it is going to spend on the initial phase, namely Rmb850 billion ($125 billion) during the next three years.

A poor system

The main problem that needs to be addressed is the inefficient manner in which healthcare is delivered. Local clinics lack credibility for even common illnesses, so even if someone has a cold they will often not seek primary care, but rather go straight to a hospital. Therefore a subset of hospitals is caring for the full spectrum of illnesses, from the mildest of ailments to the most serious conditions.

"It's the academic hospitals with the good reputations that people go to," said Jon Zifferblatt, managing director of General Biologic, a Shanghai-based healthcare consultancy and information provider. "They open their doors in the morning and people flood in. It's a bit like going to see a doctor in a train station." And for many rural citizens, going to a hospital might not be an option since it could be too far away or too expensive.

One way to tackle this inefficient aspect of the system is to reduce the level of dependence on the top-level hospitals. To do this there are plans to build or upgrade 8,700 hospitals -- 3,700 in urban areas and 5,000 in rural areas -- and 11,000 community clinics by 2011. These new facilities will be scattered across the country and building them could provide temporary work opportunities to migrant workers who have returned home after losing their jobs in the big cities.

Off the back of the new hospitals and clinics, sales of medical equipment are expected to increase. Each clinic has a list of devices that it must stock, which will turn out to be a shopping list for many new or underequipped centres. The focus will be to buy domestically-produced equipment, thereby helping out several US-listed Chinese companies. Two such companies that are considered well placed to take advantage are Mindray Medical International and China Medical Technologies.

But the success of these new clinics will depend on more than just how well-equipped they are. The difficult part is to make sure that the clinics are staffed by qualified doctors, thereby restoring trust in the system. The government has to find ways to incentivise good doctors to work in what could sometimes be remote locations.

The other main problem with the healthcare delivery system is that it is not always working in the interest of patients. Government funding for hospitals has gradually diminished, while at the same time the state imposes price control on many services. The result is that hospitals often over-prescribe drugs, or sell expensive patented drugs with a high mark-up. The hospital benefits financially from this because not only do they prescribe the drugs, they dispense them too. Hospitals in China make around 60% of their revenues from prescribing drugs, compared to the 10% to 20% that is typical in Western countries. In the draft guidelines, released last year, there were plans to separate the prescribing and dispensing of drugs. But in the final document these were only introduced as a pilot plan, suggesting that the government has decided not to tackle the hospital inefficiencies head on, but indirectly through improvements in the financing of treatment.

Efficiency through insurance

While around one-third of the announced money has been allocated towards infrastructure and the Ministry of Health, two-thirds is going towards social security funds. More money for social security funds means both that more people will be covered by the state medical insurance and that reimbursements and subsidies given for healthcare will increase.

"The question is who should have the power to control the healthcare system? Naturally, [the social security funds] do not have the incentive to maximise hospitals' profits," says Jinsong Du, healthcare analyst at Credit Suisse. Du says the financing reform will bring improvements in three stages. First, higher levels of insurance coverage and reimbursements will increase the demand for healthcare services -- and to meet the demand the government will be provoked to spend more on medical infrastructure.

In the medium term, the large buying power of the funds will mean that they will be able to impose greater levels of efficiency on the hospitals. A fund will only pay for drugs that it believes are necessary, which should therefore reduce the problem of over-prescription. Instead of treating pre-existing conditions with medicine, preventative medicine could become more attractive, which will benefit vaccine and diagnostic makers.

Finally, over the long term the general population will become more aware of the benefits of insurance and differing levels of healthcare services, which will in turn educate them about the benefits of private medical insurance. Once used to the idea of being insured, individuals will be more likely to take out private insurance, that will in turn help the nascent private healthcare sector, which, as of 2007, only accounted for 3% of the hospital market.

"If the majority of the country is served by a sufficient public system," said Zifferblatt, "the private for-profit sector might find itself in a better space to grow." If insurance catches on, the ramifications on the Chinese economy could be huge. At the moment, the country's high savings rate is the government's biggest obstacle to stimulating consumption -- a kind of self-imposed taxation to protect against unemployment and poor health. But if the population starts paying small, but regular insurance premiums rather than keeping large chunks in the bank, China could eventually evolve into more of a consumer society.

This article was first published in the May issue of FinanceAsia magazine.