Chinese Health Care Reform: Market Opportunities And Challenges

China's renewed emphasis on reforming its health care system is creating both opportunities and challenges for foreign manufacturers doing business there, according to speakers at AdvaMed's 2008 MedTech Conference in Washington, D.C.

There are 175,000 medical and health institutions throughout China, and 15 percent of the devices used there today were produced prior to 1970 and 60 percent were produced prior to 1980, "so there's obviously a need for some new technologies in that marketplace," said Stephen J. Trevisan, CEO of Accelovance, a clinical research organization with a business unit focusing specifically on studies and commercialization in China. He spoke during a Sept. 24 panel session.

Trevisan said that growth of the medical device market in China has doubled in the past five years. He noted a particularly high demand for ultrasound, X-ray and computed tomography equipment.

Although there is a strong preference and investment in domestically produced products, there are also growing opportunities for foreign makers of some high-tech medical technologies. Still, the country's system of setting prices and purchasing devices remains a challenging path to negotiate, U.S. industry representatives say.

Nationalism Plays Into Market Access

China's government is investing millions of dollars in its rural health care infrastructure this year as part of a long-term plan to improve the quality of health care, which, according to the 1World Health Organization, has not kept pace with the country's rapid economic growth.

The implications of this increased investment is "good news for suppliers of low-priced, basic equipment that will be very much needed in the rural clinics," said Judy Zakreski, VP of U.S. Operations for Chindex International, which distributes foreign medical products in China and runs private hospitals in the country.

The government's investments, however, are focused on local brands. And market entry for foreign manufacturers into rural hospitals is becoming increasingly more difficult due to heightened Chinese nationalism following the Olympics, Zakreski said.

This is "leading to protectionism and the implementation of new policies that make it more challenging and difficult for imported product manufacturers to enter and succeed in the Chinese market."

"Hospitals want to buy local if they can, especially the products that are locally made and legally sanctioned in government procurement," she explained.

On the flip side, Zakreski noted, the rise of nationalism in China could benefit manufacturers of more sophisticated medical technologies "because as part of the nationalistic sentiment, China wants to be on the cutting edge, and so there's a willingness to invest in these latest and greatest technologies, despite their cost, for status."

China, in its zeal to be on the cutting edge, "will [sometimes even] waive their rules to make sure that they get some of the latest technology," she added.

China's market for more complex medical technologies, such as implantables, is dominated today by manufacturers from the U.S., Japan and Germany, affirmed Accelovance's Trevisan.

"The bottom line is there's going to be money spent, it needs to spent on the hospital infrastructure, it needs to be spent on devices and equipment brought into China, so it clearly is a huge market for device producers around the world," he said.

Local Chinese manufacturers or smaller Chinese companies will market or distribute foreign medical devices made by small suppliers and may even help foreign companies manufacture their products for the Chinese market, Trevisan said. "They're there and they want to do deals."

"And for the larger suppliers obviously it's a growing and expanding market, so there should be opportunity there," he noted.

But once deals are made and products are produced for China's market, the process of getting hospitals to buy them can be a substantial barrier to overcome.

"Manufacturers of medical devices are going to have to apply for listing on that supplier list if they're going to have their device sold within the system, and it's not easy," Trevisan said.

[Editor's note: Trevisan and Accelovance Chief Scientific Officer Robert deGroof spoke with PharmAsia News in a (Also see "Accelovance’s Stephen Trevisan And Robert deGroof On China’s Clinical Research Landscape: An Interview With PharmAsia News (Part 1 of 2)" - Scrip, 15 May, 2008.)- (Also see "Accelovance’s Stephen Trevisan And Robert deGroof On China’s Clinical Research Landscape: An Interview With PharmAsia News (Part 2 of 2)  " - Scrip, 19 May, 2008.) interview on China's evolving clinical trial landscape.]

Centralized Purchasing Takes Hold...

The Chinese government initiated a more centralized purchasing process for some costly medical devices this year for the first time.

Devices including pacemakers, implantable defibrillators, stents and interventional catheters were selected by the Ministry of Health and included in a national purchasing catalog for hospitals.

Only administrative health hospitals are mandated to comply with purchasing products selected by MOH, while university hospitals, teaching hospitals and army hospitals are not bound by this purchasing policy, Zakreski explained.

"However, if the Ministry of Health with its great volume of hospitals is able to obtain good pricing of medical devices, then other hospitals are going to want the same deal," she said. "They'll look to this as reference and try to get the same pricing."

The process will likely favor lower-priced products made by local manufacturers as much as possible, Zakreski said. But even if a company is successful in getting its product selected, it does not commit the government to buying a certain quantity when it signs a contract.

"So it's really a Catch-22. If you're approved as the supplier of preference for MOH, you could end up losing your shirt," she said.

"There's no guarantee that you're going to sell the 100 units that the Ministry of Health said that they'd want. Maybe you'll only end up selling three, because in the end, that's what the hospitals actually wanted, so this needs to be approached really quite hesitantly before we get too excited about it."

China is also floating a new policy for devices that would limit the amount a manufacturer can mark up a product's price and restrict the price from exceeding average retail in surrounding Asian countries (Also see "China Price-Control Reg Raises Concerns Among Manufacturers" - Scrip, 22 Oct, 2007.).

This would put more pressure on distribution channels in China, which "will need to be closely evaluated," Zakreski said.

"If there is a limitation placed on the markup in China to preserve the required margin, dealers are not going to be able to make what they need to make in China. Manufacturers need to ensure that their margin is preserved, so new distribution channels, especially for high-value consumable products, should be explored," she added.

U.S. device firms say they are engaging the government to make the pricing policy more flexible and ensure that product comparisons performed as part of the centralized purchasing process reflect products' actual performance and effectiveness.

...And Is Likely To Expand

"Obviously the newest technology from the United States is not 'apples-to-apples' comparable to the technology that's being produced in China, and a lot of times the centralized tendering and price control policies will completely ignore that," Zakreski said.

Chinese officials have signaled intentions to expand centralized purchasing to more device categories in the next year or two.

"We have heard that they are planning to expand the centralized purchasing to imaging diagnostic equipment as well as implantable orthopedic devices," said Nancy Travis, VP of Global Strategy and Analysis for AdvaMed.

Eventually, MOH plans to "cover all medical equipment under this type of scheme if it turns out to be successful in their goals of lowering the prices of medical equipment," Travis said.

"There's a widespread perception in [MOH] and other industries in China that one of the causes of high health care cost is the high cost of technology."

- Ingrid Mezo ([email protected])

[Editor's note: This article also appeared in 'The Gray Sheet' - Oct. 6, 2008.]