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China’s healthcare reforms – promising or case for worry?

China's healthcare industrialization - promising or do reforms give case for worry
Are internet hospitals the new trend?

Demand for quality healthcare products and services, such as private specialty hospitals, is climbing in China, which isn’t just the world’s second-largest economy but the world’s most populous nation. Embracing Western-style health and hygiene practices alongside traditional medicine, China has originated as one of the world’s most productive healthcare hubs, comprising defensive service providers, pharmaceuticals, and fast-growing tech and biotech firms.

Various healthcare-related companies, particularly in China have accelerated the development of products and services to satisfy increasing demand from consumers, foreign as well as domestic. The sector is of utmost importance in China, due to its growing middle-income group as well as the increasing elderly population. Furthermore, the Covid-19 pandemic has accelerated the profound and urgent need for the rapid expansion of the sector.

Thus, China’s healthcare sector continues to develop at double-digit rates, ranking as the fastest-growing healthcare market of all large emerging economies. Furthermore China is addressing its overburdened healthcare system through strategic goals for health, drug makers, and biotechnology companies, expanding further opportunities for investors in the process.

Healthcare sector still undergoing multiple reforms

The Chinese government is strengthening the health care system and focussing more on reinforcing existing structural trends in the industry. New reforms have come up over the past decade in areas of social health insurance, essential medicines, primary healthcare, basic public health service package, and hospital buildings. Analysts suggest that the massive investment potential of the healthcare market in China is set to be unlocked by ongoing reforms.

In March 2021, the government in China’s 14th Five Year Plan (2021-2025) included healthcare reforms as one of the top initiatives for driving economic growth in the next five years. As per the Chinese Communist Party (CCP) and the government’s blueprint, China is aiming to support the development of private medical institutions and promote Internet Plus Healthcare initiatives.

The government’s total health care expenditure is estimated to account for about 8% of the country’s gross domestic product by 2026. As per data suggested by Value Partners, healthcare expenditure in China rose to a compounded annual growth rate (CAGR) of 12.3% to $1 tn in 2019 from 2015, and is expected to double by 2030.

In terms of drugs, Beijing has set targets for companies to make progress on innovation and has streamlined the drug approval process. In addition, China also plans to improve legislation around public health by amending the infectious disease law and the “frontier health and quarantine law”. Recently, National Health Commission and the National Health Care Security Administration jointly issued a new regulation about long-term prescriptions.

Taking lessons from the Covid-19 pandemic, China is also planning to be better prepared for the next disease crisis. China in mid-May created a new national agency that will report directly to China’s State Council. The newly formed National Administration of Disease Prevention and Control (NADPC) will absorb the existing Chinese Center for Disease Control and Prevention (China CDC). To bypass the layers of bureaucracy that slow the timely flow of information, NADPC will be tasked with safeguarding and promoting public health, establishing an epidemic monitoring and early warning system, and guiding disease control research, Xinhua News Agency reported.

The number of medical and health institutions escalated from 170,000 in 1978 to over 1 million in 2020, according to a white paper titled – Moderate Prosperity in All Respects: Another Milestone Achieved in China’s Human Rights. Over 95% of the population is covered by the basic medical insurance system. The state medical insurance scheme has also added more branded, non-generic drugs to a list of those that qualify for patient reimbursement.

“The national policies in recent years have supported the development of the pharmaceutical industry. On the other hand, the ultimate goal of medical insurance cost control policy is to make more people be able to afford good quality products and services, so the long-term development of healthcare is still worthy of expectation due to the rigid demand for healthcare. Besides, the demand brought by the aging population and consumption upgrading would further open up the space for future growth,” Xinyao Wang, Hong Kong/China Healthcare Analyst wrote on Smartkarma.

China’s efforts to modernize healthcare

As China is fully digitalized in areas like e-commerce, mobile payments, and food delivery, it is also a ripe destination for healthcare digitization. According to the Ark Invest report, online medical consultations in China are likely to increase meaningfully from 6% of revenue in 2019 ($1.5 bn) to 50% by 2025 ($50 bn).

In December 2019, China released a revised Drug Administration Law in order to reform the e-commerce market for selling prescription medicines. To boost online sales of prescription drugs, the law also outlined more explicit procedures for online consultation, sales of prescription drugs, and price harmonization for online and offline drugs and medical services.

In 2020, the Covid-19 outbreak and its led restrictions on movement triggered the adoption of online services. People preferred to avoid visiting hospitals or pharmacies during the pandemic. This further accelerated the shift of top pharma companies towards online consultations, with AI-assisted clinical support systems and self-service clinics.

However, as the sector is still relatively limited, only a few of China’s biggest healthcare companies like JD Health, Alibaba Health, and PingAn Health have been able to capture the dramatic growth of online pharmacy services. JD Health offers a free hotline service as well as a free online consultation platform. The company leads the market by providing its own in-house doctors, a network of external doctors, and around-the-clock family doctor services.

Meanwhile, Alibaba’s online platforms and ecosystem allows it to enjoy a larger user base. The company offers consultations and prescription renewals on its cloud-based pharmacy through Taobao, Tmall, and Alipay. PingAn Good Doctor has been aggressively expanding its pharmaceutical retail offering and also plans to install One Minute Clinics, self-service kiosks without physicians.

The development of policy adjustments, reinforced by a growing and changing demand has left vast opportunities for companies operating in the field of innovative healthcare. As per James Jiang, Partner at legal firm YuandaWinston, the Chinese health care sector continues to be fertile ground for both inbound and outbound M&A activity. According to a July report by Winstons, China-based healthcare AI startups, where 21% of financing rounds in 2020 were Series D and above, up from 7% in 2019 (series D Round stage is generally for financing a special situation, such as a merger or acquisition).

However, the rapidly changing regulatory environment for the industry in China is keeping analysts nervous about where the authorities’ next move lands.

According to a S&P Global report, the increased scrutiny by Chinese authorities on tech giants is unlikely to affect their healthcare subsidiaries. It added that the reform-led disruption could transform the medical sector into a key battleground for e-commerce and tech companies.