China's Health Care Reform Promotes International Pharmaceutical Commercialization

03 August 2009 Publication
Author(s): James F. Ewing


James F. Ewing and Patricia Wu, Foley & Lardner LLP  

This article is part of our Summer 2009 edition of Legal News: China Quarterly Newsletter, Eye on China.

Since the founding of the PRC in 1949, the Chinese government has implemented an extensive program to improve the health care conditions of its people with the ultimate goal of providing insurance to 1.3 billion citizens by 2020. Although the number and quality of health care personnel and medical facilities has greatly increased since 1980, the current health care system has not kept pace with the economic expansion taking place during the past two decades, leaving many citizens without adequate care.

The vast economic reforms and open-door policy of the 1980s have led to rapid disintegration of the original rural cooperative medical service system. Unlike the urban population — whose health care was better provided for by the government and state enterprises before the economic reform as well as the new medical insurance system introduced after the reform — the majority of rural Chinese are left to pay out-of-pocket for health services. Often, hospitalization can cost more than an average person’s annual wage. The government has not provided a similar insurance system for the rural population after the rapid privatization of farming, thus leaving a large discrepancy in the availability of health care.

With its World Trade Organization (WTO) accession in 2001, China's health care sector, along with the rest of the economy, has opened up for global competition. China’s change in market structure and steady economic growth has allowed the country to emerge as one of the fastest-growing pharmaceutical markets in the world, increasingly attracting private and foreign investments. Yet despite an increase in health care spending, the majority of the population is with little or no health insurance, and most of the spending is privately paid. The market-oriented economic policy also led to the destabilization of the health care system, with the market driven by the promise of increased profits rather than the desire to bring quality patient care. A lack of government insurance subsidies has resulted in soaring medical costs despite price-reduction measures taken by the government; more than 20 consecutive measures have been taken in the past few years, but the public has yet to see any tangible benefits.

Other factors contributing to soaring medical costs are the current 15-percent mark-up policy on drugs sold in hospitals and loose regulation resulting in both the over-prescription of these high-priced medicines and an environment primed for rampant corruption. Many salaries of health care workers are tied to their ability to increase income generated for the hospital.

Stymied by the defects of its current health care system, the Chinese government has outlined goals to bring about a solid health care reform plan by: increasing government control and insurance coverage; alleviating the growing disparity in health care between the rural and urban populace; improving safety regulations for pharmaceuticals and manufacturing quality; and strengthening IP protection. With the third revision of China's patent law soon to be implemented, the desired changes will create both opportunities and challenges for domestic and foreign health care systems and overall pharmaceutical practices.

A significant part of the health care reform is an increase in health insurance subsidies guaranteed by the Chinese government. With more than $12 billion USD designated for reforming the health care system during the next three years, a wealthier and better-insured population will undoubtedly and significantly increase medical consumption. International pharmaceutical companies thus anticipate a large increase in demand for their products, especially high-end drugs. Additionally, the revision in patent law will put pressure on copycat drug makers, intensify patent protection, and foster overall innovation in the market. Other reforms in good manufacturing practices, new drug registration, public bidding for drug purchases, and hospital reforms will positively impact the health care and pharmaceutical industry in China.

Further, the supply of health care in China remains almost entirely public; hospitals, health care centers, and clinics are nearly all public. Soaring medical costs result from an "inelastic supply" of health care and a large increase in demand for care. With no insurance, the highest bidder gets the care, forever driving up costs. Private and foreign investment in privately owned hospitals and clinics should help to alleviate the strain on the market, but heightened Chinese nationalism brought about by the Beijing Olympic Games has created hurdles for foreign investment in the health care industry, specifically in the medical device and hospital sectors. Several policies have directly limited this foreign and private investment, including prohibition of wholly foreign-owned hospitals, limiting foreign investment to 70 percent in joint-ventures, and no duty exemption on import of medical devices by for-profit hospitals that have foreign investors.

Despite these investment hurdles, the pharmaceutical industry continues to be committed to the Chinese health care market with a wealthier, growing population demanding high-quality, world-class health care. In 2009, China's pharmaceutical market will become the seventh-largest market in the world; by 2020, China will have a market capacity of $220 billion USD — the second largest behind the United States. The over-the-counter (OTC) market will grow by 11.6 percent each year between now and 2010, thus making China the world's third-largest OTC market.

The health reform policies implemented by the Chinese will be welcomed by international pharmaceutical companies. With U.S. drug maker Pfizer, Germany's Bayer Schering, the United Kingdom's GlaxoSmithKline, and Switzerland's Novartis making in-roads to China, other foreign entities such as drug companies and hospitals are expected to help quickly increase the supply of medical care to meet the ever-increasing demand. By helping to create a more elastic supply in health care, not only will citizens receive the care they need, but the market can more efficiently operate and yield profits.

With a growing and aging population, a burgeoning middle class with disposable incomes, increased urbanization, and higher rates of chronic illness and disease, the Chinese health care system will demand much attention from pharmaceutical companies and health care industries.