No Panacea for China’s Healthcare Reform

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.

Then as 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 be provided.

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.

In response 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 five-year plan.

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.

Cumulatively, 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 any insurance.

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.

As the 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.

The 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 taken.

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 will be.

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. This post first appeared at Asia Times Online.

1 reply »

  1. Health care reform is not an social service to achieve. There seems to be flaws with most options that we have been presented here in the United States and Asia is now going to experience similar issues. Deciding how much of a roll that government should play in health care is in my opinion the underlying issue. Is allowing the government to make our health care decisions going to cause the quality of our care to decrease?