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European Biopharmaceutical Review

One Country, Two Markets

China is a nation that is divided on its healthcare system due to its social class segregation. The Chinese government is facing mounting pressure to implement significant changes

China is bifurcated into two distinct healthcare and biopharmaceutical markets. The urban market has been rapidly growing for two reasons; young people migrating to cities in search of jobs, and government policy mandating the physical relocation of whole regional populations into increasingly urban settings. With these trends comes the concomitant increase in the onset of western syndromes and diseases such as obesity and diabetes in the urban setting. This leaves the rural population, which, while dwindling, will remain substantially large, and is primarily comprised of an aging population still suffering from third-world diseases with less access to health resources. The divide between urban and rural in China has historical roots. From 1950 to 1980, Chinese residents were either registered as ‘urban’, working industrial jobs, or ‘rural’, working in agricultural settings. The same resident registering system is in place today, though this line is somewhat blurred through economic development and urbanisation. Nevertheless, the binary healthcare system still has its implications in modern China.

The Gap Between Urban and Rural Healthcare

China has already entered the stage referred to as an ‘aging society’ by the United Nations, and this demographic shift will last for decades, or perhaps the remainder of this century. The Chinese population is ageing at an unparalleled speed as a result of longer life expectancy and the one-child policy begun in 1980. The model used in the latest UN World Population Prospects projects that the Chinese elderly population will keep growing until 2050, when the population over 65 will reach 331 million – one quarter of the total – and 2.8 times of that of 2010. Under current projections, China will become an ‘aged society’ with 14 per cent of its population over age 65 by 2025, and a ‘super-aged society’ with 20 per cent of its population over age 65 by 2035.

Rural China will bear a much heavier burden of the elderly population compared with urban areas. Although both urban and rural areas started out with similar percentages of the elderly at the beginning of this century, the numbers are projected to diverge dramatically. The percentage of the elderly population in rural China will lead the urban by six per cent in 2020, and by 10 per cent in 2030, and this separation remains elevated through 2050. The rural to urban migration is the root cause of this large discrepancy. 230 million rural residents with an average age of 28 have migrated to the cities seeking employment opportunities. The more developed provinces in the east currently have, on average, higher percentages of elderly populations than the less developed western ones. This degree of difference between the rural and urban areas extends to within the provinces themselves. Larger gaps are seen among the most developed coastal provinces in eastern and southern China, including Zhejiang, Jiangsu, Guangdong and Fujian. In these provinces, the rural elderly population is on average five per cent higher than that of the urban population, which is much higher than the national average of 2.4 per cent.

Historically, healthcare spending is unevenly distributed between urban and rural China. From 2001 to 2007, rural healthcare spending grew a meagre 2.6 per cent per year, while urban healthcare spending grew by 21.5 per cent annually.

Moreover, economic development has not occurred in rural areas as much as in urban China, resulting today in large differences in living standards. In 2010, the average per capita urban income was RMB 21,033 ($3,375.49), approximately four times that of the average rural resident, at RMB 5,919 ($949.91). Low income depresses rural spending on health. In 2010, per capita spending on rural healthcare was RMB 666 ($106.87), or only 28 per cent of the total RMB 2,315 ($371.50) spent on healthcare by an urban resident.

Public healthcare resources, providing the majority of healthcare services in China, are also heavily concentrated in urban China. There are approximately 22,000 hospitals in the whole country, 10,000 serving the rural area and the rest serving urban areas. Despite the similar number of hospitals in both rural and urban China, the geographic range and provision of healthcare resources are at opposite extremes. The Ministry of Health grades public hospitals into three classes, with Class 3 being the most advanced. Over 90 per cent of Class 3 hospitals are located in the cities. Rural hospitals are disadvantaged in resources, employing just 33 per cent of all healthcare professionals and with 36 per cent of the total hospital beds in the country, despite serving the majority of the population.

Bridging the Gap

In 2009, after much public debate, the government initiated its latest round of healthcare reforms. The initial phase of the reform was to be carried out from 2009 to 2011, aiming to expand healthcare coverage and establish a baseline acceptable medical system throughout the country. During this period, the government has added RMB 850 billion into the overall effort, which resulted in large increases in public portions of total expenditure, and a decrease in the amount of private out-of-pocket expenditures.

The healthcare reforms constructed an insurance system with multiple plans to cover 95 per cent of the population (see Figure 1). The Chinese government gradually began to reshape the healthcare system in 1998 by setting up the first programme, the Urban Employees’ Basic Medical Insurance (UEBMI). This was established for urban employees, which shifted programme funding from government to employer and employee contributions. The Urban Residents’ Basic Medical Insurance (URBMI) covers people that fall outside of UEBMI, including migrant workers, students, urban residents without employment, and dependents of UEBMI enrollees. The third plan, the New Rural Cooperative Medical System (NRCMS), was first established in 2003 and is now covering the 840 million rural residents who comprise 64 per cent of the Chinese population.

NRCMS is expanding aggressively, aiming to narrow the spending gap between urban and rural healthcare. Programme funding is achieved through government allocation and premiums from rural residents at approximately 60 per cent and 40 per cent respectively. Through NRCMS, funding per capita has more than doubled from RMB 113 in 2009 to RMB 246 in 2011. The funding target set for 2015 is at RMB 360, and at that time total NRCMS funding will reach about RMB 400 billion, doubling even that of 2011 and funded primarily by the government (see Figure 2).

As well as spending increases, the rural healthcare delivery system is also receiving more attention. From 2009 to 2011, RMB 72 billion was budgeted to improve the rural healthcare delivery system, with an emphasis on strengthening the county level hospitals. The goal to set up one Class 2 hospital in each rural county was first proposed as a part of the healthcare reform started in 2009. With the new plan to further expand the number and quality of rural hospitals through 2020, and with support funding of RMB 109 billion, hospital projects are likely to continue to be rolled out.

Using hospital revenue as a proxy, we project that from 2011 to 2020 the rural healthcare market will grow at double the rate of the urban market, despite being much smaller (see Figure 3).

Opportunities and Challenges

The current and future rural hospital projects provide a stream of opportunities for suppliers. The construction cycle for a new hospital is usually around two years to two and a half years. Once the infrastructure is set up, the next order of operations is to supply medical equipment. Subsequently, connecting flow of patient data via hospital information systems for better efficiency quickly follows. Therefore, hospital building projects started in 2009 now constitute real opportunities for technology and solutions providers. In a third stage of opportunity, we can see hospitals embracing the need to implement new and advanced diagnostics to provide more aggressive, proactive medical care that in the long run saves the system money. These three areas will be the first to benefit.

Medical Equipment

The high-end medical equipment market in China is dominated by a few multinational corporations (MNC), including GE, Philips and Siemens. Chinese companies are focused on the mid to low tier markets, which are made up by Class 1 and 2 hospitals in less developed areas. However, the market landscape is already changing. Recently, domestic companies such as Mindray, Neusoft and Anke are starting to move into the high-end market and challenge MNC incumbents (see Figure 4). On the other hand, MNCs such as GE and Carestream are not satisfied with only the high-end market. GE, for instance, has started its ‘Spring Program’ to extend its focus to Class 2 hospitals in rural areas by designing new, lower cost products specifically for this market segment.

Healthcare Information Systems

In 2011, the Ministry of Health (MOH) released its roadmap for building out the healthcare information system as a part of the 12th Five- Year Plan, for which annual funding of RMB 9.2 billion will be provided to approximately 2,800 hospitals. The recently announced ‘Health China 2020’ contains plans to invest another RMB 61 billion on healthcare information system build-outs from now through 2020. From 2012 to 2015, the yearly funding for healthcare IT sums up to RMB 16.8 billion, the majority of which will be implemented at the county level. The Chinese healthcare IT market is very fragmented, with well over 500 providers competing for market share. No company currently holds a dominant position in this market and most of the players are small regional providers who are helped by the fact that uniform standards have not been set up as a framework to guide implementation. Some notable players in the healthcare IT industry are listed in Figure 5. Emergent leaders will be invited by the government to participate in setting the standards for a unified Chinese healthcare information system, which will give them significant advantage. In the future, we expect to see intense M and A in the industry to consolidate market share and gain geographic positioning, through which a few winners will emerge to integrate Chinese healthcare IT across the country.

Medical Diagnostics

Diagnostic solutions are likely go in several different directions to fit the needs of hospitals at various levels. Class 3 hospitals are in dire need of automated high throughput state-ofthe- art solutions in order to deal with overflowing patients. Tests that are not time-sensitive will be outsourced to third-party testing centres where the greater scale brings higher efficiency. Class 1 and 2 hospitals will pay much greater attention to cost as they generally have smaller budgets, and serve a population with fewer financial resources in the less developed areas. Point-of-care tests (POCTs) that can be performed with reasonable accuracy with minimal training and infrastructure will be popular with lower level hospitals and grass roots healthcare organisations where it is not possible to train limited numbers of staff to perform the large array of tests. Some of the major Chinese companies are listed in Figure 6.


Although we see current events directly benefiting medical equipment, healthcare IT and diagnostics sectors, they are by no means the only sectors that will see market opportunities. China as a country is growing old and will remain so for a very long time. The government is shifting its resources in order to get ready for the coming demand and pressure on the country’s healthcare system. Therefore, this trend will benefit any sector player whose technology and product/service offerings can help to provide better healthcare more efficiently. Both domestic and foreign pharmaceutical companies are facing their own unique set of difficulties when accessing the rural healthcare market. Domestic companies are getting squeezed by higher costs and the government’s efforts to control drug expenditure. The National Development and Reform Commission implemented the Essential Drug List and the Medical Insurance Reimbursement List to not only serve as a guideline for reimbursement, but also to set the maximum price for pharmaceuticals. Foreign pharmaceuticals are facing a different set of problems with limited market access and low affordability. Currently, patented drugs are given a pricing premium and cost much higher than rural residents can afford. For example, a year’s cost of Roche’s anticancer medicine Avastin can be as much as $100,000, while Herceptin costs about $50,000. These price tags are much higher than the $10,000 which is the average annual income for Shanghai, one of the richest cities in the country. The current common strategy is to work with Chinese charity groups to make the drugs available, albeit to a very small and selected group. However, Roche is taking a lead role in developing creative solutions to solve the affordability problem. The Swiss drug maker is partnering with the reinsurer Swiss Re to launch medical insurance products in China designed to support the sales growth of its anticancer drugs. Participation in the programme ensures patients future access to these expensive drugs when needed. The project has seen early success with five local insurers on board and six million people already signed up for the policies. Roche’s CEO Severin Schwan has said that “We are creating a market”.

So while China will continue to face mounting demographically driven healthcare pressures, the government is responding with novel insurance programmes and deeper funding support. The market is also developing both novel healthcare and payment solutions.

The 18th People’s Congress has just been held in Beijing and the government is in the process of changing leadership. Despite the change, the 12th Five-Year Plan and the recently released ‘Health China 2020’ programme clearly indicated that expansion and reform of the healthcare system remains a top priority. This provides an environment rich with opportunities. Gaining access requires thorough understanding of the stakeholders in the Chinese healthcare system, reliable partners and innovative approaches.

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Zhihao Yu is an Analyst at Lux Research where he leads the China BioPharma practice, which focuses on covering the spectrum of innovative biopharma activities in China. Based in Shanghai, Zhihao covers rapidly growing areas such as molecular diagnostics, therapeutics, biomaterials, medical devices, and emerging areas such as bioinformatics and bioprocessing. Prior to joining Lux Research, Zhihao worked as a postdoctoral research fellow at the Cleveland Clinic. He received his PhD in Biochemistry from the University of California at Davis, and is a graduate of Nanjing University with a BSc in Chemistry and an MSc in Analytical Chemistry.
Zhihao Yu
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