The need for a shift in priorities in government policy.

As with so many things in China, quantifying the country’s healthcare market is open to broad interpretation. The official government estimate of the pharmaceuticals market in China is RMB 220 billion (US$27.5bn) by 2005. However, IMS Health, who specialise in market intelligence on the healthcare and pharmaceuticals market, valued the Chinese market in 2005 at US$ 13 billion, less than half the government estimate. Whatever the real market size, it has, and continues to grow fast, with forecast estimates for market growth at between 13% and 18% up to 2010.

However, more is not necessarily better in this case. There are contradictions in government policy, working against both the drug manufacturers and the consumers. Firstly, healthcare spending, as a proportion of overall government spending, has continually declined, from 34.1% in 1996, to 25.5% by 2005. Meanwhile, the government has forced price cuts and tighter controls on the drugs industry.

Healthcare spending cuts have the effect of concentrating more of the available resources into fewer central hospitals. These hospitals have become notorious for over-prescribing drugs to patients, helping to increase their income, which has fuelled rapid salary rises among hospital administrators, who now have tidy control over a lucrative market that they are loathe to lose.

Drug price cuts have forced drugs companies into an increasingly competitive market environment, leading to tighter margins and more consolidation. However, the number of drug manufacturers has, counterintuitively, been rising. The reason is that the lucrative pharmaceuticals market has attracted many new fake drug manufacturers. Industry estimates put the share of the market taken by sales of fake drugs to be between 10% and 15% of the total market.

Yet the government is very keen on both healthcare service reform and developing a world class pharmaceuticals industry. Beijing would love to see the industry move more into R&D of its own proprietary drugs, rather than simply be a bulk manufacturer of foreign patents, thus increasing the intrinsic value of the industry. But the drop in government investment in the industry, which has tightened industry margins, has simply reduced the ability of the drug manufacturers to afford to build such new R&D facilities.

Meanwhile, although Hu Jintao has committed his government to healthcare reform, as the current situation being immensely unpopular with the Chinese people. But how to reform remains a contentious issue. The health minister, Gao Qiang seems to favour a UK-style national health service. But other political vested interests prefer the insurance route. The problem with the insurance route is that only 6% of urban Chinese, and 8% of rural, have taken up healthcare insurance.

Health insurance is relatively expensive, premiums being high possibly because hospitals over-prescribe, knowing they can get the money. Most Chinese save as much as 20% of their salaries precisely so they can cover life expenses such as education, housing and healthcare costs, and pay cash for treatment at hospitals. Breaking the habit of cash for treatment needs to be tackled at the grass roots level, and this requires the government to break the monopoly control that the hospitals currently enjoy. Meanwhile, there needs to be investment from the government to strengthen the pharmaceuticals industry. Only then can the healthcare market serve the interests of the industry and the end consumers, rather than the middle men.

For more insight into this topic, see the Q3 2007 China Economic Quarterly article “Health care: time for a check up”.