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Addiction to costly drugs saps health care
By Sean Maguire |
September 3, 2009, Thursday
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Print Edition
Print Edition
ON August 18, in the wake of April's dramatic health care reform plan, the Chinese government published regulatory price controls for the purchase of over 300 essential medicines, about 200 Western products and about 100 traditional Chinese medicines, which together constitute around 35 percent of total drug use.
Drug manufacturers, both Chinese and foreign, have been waiting with bated breath for a look at this list and are acutely sensitive to its effects on their respective bottom lines. Yet there is far more at stake here than the profitability levels in the pharmaceuticals sector.
Rates of domestic saving in China - some say up to 40 percent of GDP - have long been the bane of domestic policy makers intent on stimulating domestic demand, and with the export market in the doldrums, the pressure to liberate this ocean of bank deposits is becoming ever more pressing.
The dearth of adequate social welfare provision has been cited as the precipitating factor in the Chinese predisposition towards precautionary saving.
First among equals in the gallery of rainy day scenarios is the anxiety-inducing prospect of falling victim to the Chinese health care system.
Since health care provision was uncoupled from state funding in the early 1980s, market-oriented reforms have made illness and injury a costly prospect for those that fall victim in China. Ill-conceived market incentives have encouraged hospitals and clinics to treat pharmaceutical sales as one of their principal sources of revenue.
Patients are obliged to pay medical fees up-front, which are often inflated and poorly regulated.
To make matters worse, revenue was often drained away from hospitals as local governments divert funds elsewhere.
In a recently published survey, the World Bank identified escalating health care costs as a major cause of poverty in China.
This is backed up by a 2008 Gallup poll which reported that savings for sickness, injury and retirement were residents' top reported savings goals.
While more than two-thirds of those interviewed said that they were very or moderately worried about being unable to pay medical costs for a serious illness, this fear was most acute among rural Chinese, 76 percent of whom expressed worry about not being able to meet medical costs.
In response to the inequities of the current system, April's wide-ranging health reform plan promised a US$120 billion cash injection into the health care system. The plan had three main objectives: build more hospitals, insure more citizens and subsidize the cost of medication.
The annual cost of pharmaceutical products in China currently stands at around US$73 million, representing more than 45 percent of the country's entire health care budget, way above the OECD's international average of 20 percent.
Almost half the income from China's public hospital comes from profits on drug sales, with only between 5 and 9 percent coming from government support, so it's going to be a tough job to wean hospitals and clinics off this crucial source of revenue.
First step
The latest announcement on essential drugs is designed to be a first step in this process. Hospitals will be required to give preference to listed drugs and profits made from them will be phased out, with prices regulated by the government.
Health care providers will receive additional subsidies to purchase these drugs, but it remains to be seen whether these subsidies will prove sufficient to compensate them for lost mark-up and losses in commission from manufacturers.
The central government is committed to providing only 40 percent of the funding of these reforms, the rest is to be raised by cash-strapped local governments, which will feel the pinch in the absence of revenue from hospitals.
Another major challenge is to properly regulate hospital management and operational systems. Central to this is the introduction of competition mechanisms and a lowering of market access requirements in the private sector.
Steps have been taken in this direction with plans to discourage local government health departments from operating public hospitals, thus ending the unhappy scenario in which local government acts as both the owner of health care facilities and, at the same time, regulates the market to provide such services.
Measures are also afoot to refine the rights and duties of hospital proprietors and administrators, establish good corporate governance protocols and introduce a system of performance-related remuneration for clinical staff - a necessary reform of an outmoded business model.
(The author is counsel of AllBright Law Offices in Shanghai. The views are his own. His email: sbmaguire@allbrightlaw.com.)
Drug manufacturers, both Chinese and foreign, have been waiting with bated breath for a look at this list and are acutely sensitive to its effects on their respective bottom lines. Yet there is far more at stake here than the profitability levels in the pharmaceuticals sector.
Rates of domestic saving in China - some say up to 40 percent of GDP - have long been the bane of domestic policy makers intent on stimulating domestic demand, and with the export market in the doldrums, the pressure to liberate this ocean of bank deposits is becoming ever more pressing.
The dearth of adequate social welfare provision has been cited as the precipitating factor in the Chinese predisposition towards precautionary saving.
First among equals in the gallery of rainy day scenarios is the anxiety-inducing prospect of falling victim to the Chinese health care system.
Since health care provision was uncoupled from state funding in the early 1980s, market-oriented reforms have made illness and injury a costly prospect for those that fall victim in China. Ill-conceived market incentives have encouraged hospitals and clinics to treat pharmaceutical sales as one of their principal sources of revenue.
Patients are obliged to pay medical fees up-front, which are often inflated and poorly regulated.
To make matters worse, revenue was often drained away from hospitals as local governments divert funds elsewhere.
In a recently published survey, the World Bank identified escalating health care costs as a major cause of poverty in China.
This is backed up by a 2008 Gallup poll which reported that savings for sickness, injury and retirement were residents' top reported savings goals.
While more than two-thirds of those interviewed said that they were very or moderately worried about being unable to pay medical costs for a serious illness, this fear was most acute among rural Chinese, 76 percent of whom expressed worry about not being able to meet medical costs.
In response to the inequities of the current system, April's wide-ranging health reform plan promised a US$120 billion cash injection into the health care system. The plan had three main objectives: build more hospitals, insure more citizens and subsidize the cost of medication.
The annual cost of pharmaceutical products in China currently stands at around US$73 million, representing more than 45 percent of the country's entire health care budget, way above the OECD's international average of 20 percent.
Almost half the income from China's public hospital comes from profits on drug sales, with only between 5 and 9 percent coming from government support, so it's going to be a tough job to wean hospitals and clinics off this crucial source of revenue.
First step
The latest announcement on essential drugs is designed to be a first step in this process. Hospitals will be required to give preference to listed drugs and profits made from them will be phased out, with prices regulated by the government.
Health care providers will receive additional subsidies to purchase these drugs, but it remains to be seen whether these subsidies will prove sufficient to compensate them for lost mark-up and losses in commission from manufacturers.
The central government is committed to providing only 40 percent of the funding of these reforms, the rest is to be raised by cash-strapped local governments, which will feel the pinch in the absence of revenue from hospitals.
Another major challenge is to properly regulate hospital management and operational systems. Central to this is the introduction of competition mechanisms and a lowering of market access requirements in the private sector.
Steps have been taken in this direction with plans to discourage local government health departments from operating public hospitals, thus ending the unhappy scenario in which local government acts as both the owner of health care facilities and, at the same time, regulates the market to provide such services.
Measures are also afoot to refine the rights and duties of hospital proprietors and administrators, establish good corporate governance protocols and introduce a system of performance-related remuneration for clinical staff - a necessary reform of an outmoded business model.
(The author is counsel of AllBright Law Offices in Shanghai. The views are his own. His email: sbmaguire@allbrightlaw.com.)
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