panacea for China's healthcare
reform By Benjamin A Shobert
Not since the earliest days of Deng
Xiaoping's reforms of the iron rice bowl in the
1980s has China faced as great a need for change
as the leaders currently face.
now, the government in Beijing recognized a
pressing need to reform the means by which social
services were provided. But unlike then, today's
reforms must occur in the midst of a
society that has already
experienced significant economic growth and has
already gone through a painful opening of formerly
public services to private competition.
For most Chinese, while their economic
futures have materially improved since Deng's
painful reforms were enacted, their access to
healthcare has actually deteriorated, a point
Yanzhong Huang, the Senior Fellow for Global
Health at the Council of Foreign Relations, has
made eloquently in his recent research.
Beijing's struggle to reform its
healthcare system brings political concerns,
social issues and business pressures together on a
collision course. While the need for government
and industry to collaborate on these matters is
obvious, whether China's pressing concerns in this
area will allow it to do so remains to be seen.
The ever-present temptation in China, to
simply resort to government-mandated policies
absent industry's guidance, is one the country has
already given into at a national level relative to
clean technology, and at a provincial level
through the Anhui pharmaceutical pricing model.
Healthcare reform in China should be first
and foremost a humanitarian concern. As the
country has modernized, dietary changes have set
in motion future crises as cardiovascular, cancer
and diabetes rates explode. Absent significant
improvements in cost-effective access to
healthcare, many Chinese are likely to find their
newly found wealth will quickly evaporate once
they or a loved one encounters a health crisis.
Attached to this humanitarian concern is the
obvious political challenge posed to Beijing if
expanded access and cost-effective coverage cannot
There are three dimensions to
the political matters China must face as it
reforms its healthcare system. First, the Chinese
will question whether their leaders made the right
choice when they opened the economy and smashed
the iron rice bowl.
Second, because access
to healthcare across the country varies widely -
with a predisposition towards better access along
the east coast and in population dense areas of
the country - the lack of healthcare reform adds
further tension to the urban-rural and rich-poor
divides that color much of China's politics.
Rural Chinese have long known that money
buys better outcomes; what is happening more
broadly within Chinese society is that an
awareness of the potential for better outcomes is
outpacing access to these enabling technologies.
Because of this, the third dimension of healthcare
reform must deal with the realization that as
Chinese are shown the potential life-saving
possibilities of modern medicine, many will find
them out of reach financially.
Consequently, it will be difficult to
prevent a certain cynicism from growing about the
role of additional market reforms, let alone the
primacy Western governments want Beijing to place
on the role of the free market in solving China's
healthcare problems. In this way, successful
healthcare reform is likely to color the country's
attitudes towards future economic reforms at both
a popular and policy levels.
to this, China has set in motion an impressive
series of reforms. In late 2011, it announced
further openness to outside investment in, and
ownership of, private hospitals. In mid-March, the
State Council put forward a detailed plan
illustrating how China would go about its
healthcare reforms as established in the 12th
This plan - called a
"roadmap" by lawyers Leon Liu and Teresa Lou at
McDermott, Will & Emery - emphasizes increased
investment in private clinics by investors from
Hong Kong, Taiwan and Macau specifically. In
addition, a range of incentives identified only as
"preferential treatment" but anticipated to
include tax incentives, land grants, and even
medical reimbursements are all presented as
integral to the reforms.
there appear to be several divergent trajectories
the country's reform process is on; whether these
reinforce or work at cross-purposes with another
remains to be seen.
The country appears to
have three distinct strategies it is pursuing. The
first, and most popular, is the expansion of its
medical insurance. Since 2009, when the Rural
Cooperative Medical System was expanded, basic
insurance has been made available to hundreds of
millions of people who previously had gone without
Coverage is small and
reimbursement remains inconsistent, but many
industry analysts believe this reform lays down
the basic framework for future expansions in
China's public insurance. Outside industry is not
yet certain what to make of these reforms.
The fact that a basic insurance framework
is evolving in China should mean the potential to
consume additional products and services; however,
it also increases the cost pressures these
providers will face.
In many ways, the
fear of industry is already being realized through
the second strategy Beijing is pursuing. As
evidenced by the troubling Anhui pricing model for
pharmaceuticals, China is showing its willingness
to ruthlessly focus on cost. What is perhaps most
interesting about the Anhui model is less the
specifics for how it goes about accomplishing
this, and more than it grew up organically at the
provincial level, where it has spread from Anhui
to some 17 other provinces.
provinces come under additional financial strain
related to exploding healthcare expenses, the
temptation to allow the Anhui model to migrate
from pharmaceuticals to diagnostics and devices
will be difficult to resist. The potential for
industry is to make up in volume what they lose in
margin; thus far, this trade is one
pharmaceuticals are not eager to make.
third strategy China is pursuing is to further
open every sector of its healthcare space to
outside investors. As previously mentioned, this
encouragement ranges from specialty clinics to
allowing public hospitals to be taken over by
private investors. This opening could prove to be
one of the more determinative steps Beijing has
Because hospitals in China generate
their revenue from prescribing drugs, the Anhui
model threatens their viability and is forcing
them to rethink how they generate revenue. Some
relief will be found as the central government
expands payment for services and procedures;
however, as these reforms play out, public
hospitals will be compared to private operators.
This comparison could have some unexpected
consequences. Private operators are likely to
initially have an advantage: they understand the
value Chinese will place on better service, let
alone better outcomes. Yet, it remains unclear
whether private operators can deliver healthcare
as cost effectively and consequently as broadly as
Beijing requires to resolve its crisis.
The greater the role of the government in
providing healthcare within China, the greater the
temptation on Beijing's part to use these early
foreign investments as models against which to
replicate and build their own competitive models.
Healthcare remains a bedeviling problem
for every nation, regardless of whether they are a
developed economy like that of the United States,
or a newly emerging economy like that of China.
Solutions around the world are always a hybrid
between government and free market participants.
But the challenge within China is in many
ways different: its newfound wealth has created
healthcare problems (obesity due to changes in
diets and cancers related to environmental
destruction as just two examples), but its
prosperity has not yet produced the ability for
most Chinese to prevent or resolve these problems.
Leaders in Beijing understand that as the
country continues to grow, one of the greatest
threats to its stability is access to healthcare.
Investors and business will need to keep in mind
that next to the country's need to secure natural
resources and protect its borders, no issue will
be as aggressively pursued and protected than the
development of a viable healthcare model.
Developing a successful system for
delivering healthcare in China is certainly a
great opportunity, but few sectors will be as
subject to government involvement, competition and
changing regulatory environment than healthcare
Benjamin A Shobert is
the Managing Director of Rubicon Strategy Group, a
consulting firm specialized in strategy analysis
for companies looking to enter emerging economies.
He is the author of the upcoming book Blame
China and can be followed at www.CrossTheRubiconBlog.com.
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