With Leadership Changes On The Horizon, Chinese Vice Premier Sheds Light On Future Of China Healthcare Reform

Analysts predict that healthcare reforms will continue and that major policy changes are unlikely during the leadership transition, which starts next year.

In a recent article published in Qiushi (seeking truth), an influential magazine of the Communist Party of China, Chinese Executive Vice Premier Li Keqiang called for a deepening of healthcare reform, and encouraged private investment to increase the competitiveness of medical services in the country.

The article has stirred up a vibrant discussion among policy watchers and industry executives given Li’s stature, and the likelihood that he will move up to premier in early 2013 following China’s scheduled leadership changes next year. Li has been a key figure in mapping out China’s initial three-year, $124 billion healthcare reforms as head of the State Council’s Committee on Deepening Healthcare Reform.

The initial plan stretched from 2009-2011, and industry has been looking for further clarity on what will come next as the country moves beyond the three-year period. One hopeful sign is that the government, in fact, has spent more than the planned $124 billion on reform, with some estimates saying it has been closer to $160 billion (Also see "Cost Of China Healthcare Reforms Exceeds RMB 1 Trillion; Government Raises Reimbursement Ceilings" - Scrip, 14 Mar, 2011.).

In the article, Li said that universal healthcare coverage is the backbone of healthcare reform and that it is government’s responsibility to provide basic healthcare services to the generic public.

In addition to China’s three existing basic insurance systems, which cover urban workers, urban residents and rural inhabitants, the government also is exploring commercial and private insurance options that would foster additional healthcare services, the vice premier said (Also see "China Signals Need For Private Investment To Support Its Healthcare Reforms; Private Insurance Options Likely To Widen" - Scrip, 16 Dec, 2010.).

To reduce financial burdens on patients, the government plans to continue implementing its essential drug list, while reducing the contribution of drug sales to hospital revenue, especially for urban hospitals, Li said.

Grassroots hospitals and community clinics will get a further boost, Li said, mostly to encourage patient visits and prevent overcrowding in tier-1 and tier-2 hospitals.

Chinese public hospitals possess 89% of total hospital beds in the country and treat 92% of patients (including outpatients), and will continue to play a vital role in basic healthcare offerings. However, the government is engaging the private sector to provide non-basic, selective and personalized services, noted Li.

To strengthen healthcare reform, Li said three core tasks remain:

• establishing universal health care;
• expanding the EDL to rural village clinics and nongovernment-run community facilities; and
• reforming public hospitals to improve quality and public service mentality.

Leadership Transition

As China gears up for a generational leadership change next year, healthcare executives have been pondering policy matters and trying to strike a balance between long-term business strategy and short-term execution, Deutsche Bank analyst Jack Hu noted in a Nov. 23 note to investors. Under China’s system, leadership changes generally occur every five years and are announced during the Communist Party Congress.

The 18th Congress of the Chinese Communist Party is scheduled for the fall of 2012 and a key task will be selecting a new Politburo and Standing Committee. The members of these two supreme leadership bodies will concurrently occupy the top positions of all government agencies, including the most important body, the State Council, which is China’s cabinet.

Vice Premier Li, who assumed his current post in 2008, is widely expected to become the next premier when current Premier Wen Jiabao retires as part of the leadership changes, according to Brookings Institute scholar Cheng Li, who has written a series on the 2012-2013 Chinese leadership changes. China President Hu Jintao and Chairman of the National People’s Congress Wu Bangguo are also expected to retire.

Of the nine members currently on the Standing Committee, only the two youngest, Li and Vice President Xi Jinping – who will likely replace Hu Jintao as president - are expected to remain during the next five-year period.

As the deputy party secretary of the State Council, the 56-year old Li's current portfolio includes economic development, price controls, finance, climate change and macroeconomic management. His assumption to the premiership would be seen as a sign of continuity for healthcare reform given his current role in the reforms.

Li came into political stardom with a background in the Communist Youth League of China, where he was the First Secretary from 1993 to 1998. He then became the CCP Secretary for two less-developed provinces, agriculture heavy Henan and rust belt province Liaoning.

In an article published in QiuShi in June 2010, Li emphasized the importance of economic structural change to achieving sustainable development, pointing in particular for a need to boost domestic consumption. To do so, China must move toward a more middle class-oriented society by providing citizens with affordable healthcare and housing, he noted.

Elsewhere in the government, the current Minister of Health Chen Zhu will likely remain in his present post, said Brookings scholar Li. Minister Chen received his doctoral degree in medicine from Universite Paris 7 and is one of the world’s leading hematology experts.

Representing China’s growing influx of overseas returnees, Chen is one of the four so-called “Haigui” among a total of 27 full ministers in the current Chinese cabinet. The rise of Western-educated elites in the Chinese leadership is an important indicator of increased openness and political progress, noted Li.

Holding Pattern

Regardless of who will oversee Chinese economic and healthcare policymaking, most major policies will remain in a holding pattern during the leadership transition period, analysts say.

The State FDA, for instance, is likely to continue its focus on promoting domestic innovation and increasing new drug approvals, CEO of Hangzhou, China-based Manhattan Management Consulting Wang Jin told PharmAsia News.

However, Wang said industry should not expect any major breakthroughs in the drug approval process, as SFDA is constrained by a small staff and won’t be able to make drastic changes overnight. In the meantime, the agency will look to bolster drug review efficiency through exchanges with foreign counterparts, Wang predicted.

Although no large changes are likely in the short term, more legislation could be expected for the medical devices industry, according to Chen Yang, head of China life sciences for the global law firm Sidley Austin LLP. In an interview, the Beijing-based lawyer also said she expects more drug price cuts in the coming months, an opinion echoed by other China analysts .

In terms of macroeconomic policy, Citi analysts predict that further interest rate hikes are unlikely in 2012, based on lowering inflation risks and the need for stability during the leadership transition. “We believe the policy tightening is over, and expected no more rate hikes in the next 12 months,” Citi analyst Mingao Shen wrote in an Oct. 10 note to investors. However, “an outright policy reversal is also unlikely any time soon since lagged indicators still point to inflation risks and the government is likely to avoid a drastic policy shift during a leadership transition” (Also see "Are China's Rising Labor Costs Good For Big Pharma?" - Scrip, 11 May, 2011.).

Sharing that view, Deutsche Bank analyst Jack Hu expects to see a state of uncertainty remain in healthcare policies next year until the next generation of leadership takes office in 2013. However, changes could still occur in the life science space within the current policy mix.

In an Oct. 17 note, the analyst listed several uncertainties for the near term, including whether centralized tendering will expand to include more drugs and whether high-end medical consumables will be included in tendering. Hu also predicts a new national EDL will be released in 2012, with more drugs included.

Rx For Uncertainty = R&D Focus + Partnering

Facing policy uncertainly and near-term headwinds, many drug makers in China are focusing on risk-mitigation strategies, particularly by adjusting product offerings and restructuring sales distribution channels, according to DB’s Hu.

However, Hu says the best plan is to focus on R&D given the push by China’s government to spur innovation, including plans to invest RMB 10 billion on developing innovative drugs as part of the 12th Five-Year Plan. That push is likely to continue no matter who leads China over the next five years.

“In our opinion, the most effective long-term strategy is to increase the R&D and in-licensing efforts, “ Hu said.

If Hu is right, that should benefit leading Chinese companies like Simcere Pharmaceutical Group and 3SBio Inc., which have looked to ink deals for China rights to Western drugs while simultaneously developing their own portfolios of innovative compounds (Also see "Facing Pricing Pressure And Generic Erosion, Simcere Shifts To Innovative Products For Future Growth: China Earnings Roundup (Part I)" - Scrip, 22 Nov, 2011.).