Leadership and Democracy LabWestern Social Science

Health Care in China: Where its Future Lies

Main Contributor: Ben Bramwell

Team Leader: Marissa Vaillant

Keywords: health care, China, pharmaceutical, pharma, government, drugs

In recent years, the world has watched as China’s economy grew exponentially larger and more diverse, catapulting the country into international economic and political relevance. The transition that is now being undertaken is a shift from rapid growth into a period of expansion that is both controlled and sustainable; a country settling into its new identity. This transition has several major effects on the health care industry in China, and by extension the pharmaceutical industry. The population is urbanizing, creating a more concentrated demand for health care as well as higher per capita health care spending. Citizens are gaining wealth while simultaneously the population is aging and chronic diseases are taking their toll (they account for more than 80% of the deaths in China). With dramatic increases in government health care expenditures expected in the near future, these factors create an optimal environment for investment from the pharmaceutical industry.

Government policy change has been a major influencer of growth in the health care sector in recent years. While public hospitals and clinics are still the major provider of health care, as of 2014 almost 50% of all hospitals in the country were considered ‘private’. These private hospitals have a much smaller average capacity than public ones, but tend to cater to a more affluent demographics. Accordingly, the patients that frequent private hospitals can likely afford (and be more willing) to pay for brand-name pharmaceuticals. Moreover, the private hospital industry is open to foreign investment. Legislation passed within the last five years aimed to make 20% of all hospital beds private by 2015 while also allowing for 100% foreign ownership of these private hospitals. The push for private hospitals represents a marketing opportunity for pharmaceutical companies—should pharmaceutical companies create partnership or marketing arrangements with private hospitals, they have the potential to sell high-margin pharmaceuticals to their affluent patients.

In addition to the potential market that changing government policy is creating for the pharmaceutical industry, the sheer amount of money China is expected to spend on health care in the near future represents a boon for pharmaceutical companies. In 2015, the amount of money spent in China’s health care sector was almost US$650 billion (or 5.9% of GDP), with government expenditure making up just over half of that number. By 2020, the government aims to have health care expenditures that are closer to 7% of GDP.

As the health care sector has grown in China, so have the problems that exist for pharmaceutical companies trying to take advantage of said growth. There are regulatory issues, but the focus here will be on the growth-based issues that present themselves. First and foremost is the extreme fragmentation of the generic drug manufacturer marketplace. China has over 5,000 low cost domestic generic drug manufacturers that dominate over 75% of the drug market in China. This ownership of the drug market by generic manufacturers presents a challenge for companies wanting to enter the marketplace with patented products. While there will likely still be a high end market for those who can privately afford them, patented brand name pharmaceuticals may not be the best way to wade into the Chinese health care market. More market-appropriate products may help to increase a company’s presence in the country and perhaps then allow for marketing pushing the more expensive, patented drugs.

Another issue that is linked to the popularity of generic drugs is the way that government expenditure is structured. While there is a government push to increase overall health care spending, the government’s planners recognize the increasing strain being placed on public health care and are looking for ways to get more efficiency out of their money. Encouraging the private hospital sector is one avenue in which  they are doing this, but another way is cutting budgets for pharmaceutical spending. The public health care system is turning to generic drugs to help cut costs in health care, making it difficult to sell patented products in the public hospitals. Public hospitals are still purchasing patented medicines, however, all companies must go through bidding processes at both the provincial and hospital levels in order to sell their product. Price is a major sticking point for buyers in the public sector, so margins and value must seriously be considered before entering the public hospital marketplace. This stipulation, that is prevalent in the public hospitals, is providing an ultimatum to big pharma to either offer products at lower prices (sometimes leaving no profit margins) or be ineligible in the bidding process.

The growth in the health care sector in China is providing a period of opportunity for international pharmaceutical companies. Both government and private spending are increasing exponentially. Government policies are looking to grow even more as well as opening private health care to foreign investment, and an aging, increasingly ill population are creating more and more of a market every day. There are still risks as well as challenges posed by the preferences of the market both public and private for generic drugs. This is a time of huge opportunity for growth in the pharmaceutical industry in China, but is not without its risks which need to be carefully weighed and understood before proceeding.