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China’s Healthcare Reforms: the Promise and the Peril

January 29, 2013www.AsiaHealthcareBlog.com

www.RubiconStrategyGroup.com

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The Peril …Would it surprise you to know that in many ways, China’s healthcare was actually better under Mao than once the country began to open to the West?

+Better During Mao?

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Christina Ho, Fellow and Project Director of the China Health Law Initiative at Georgetownand Yanzhong Huang of the Council on Foreign Relations have written extensively of lateon how China’s modernization has actually dramatically harmed the access to healthcareand successful outcomes to medical interventions of nearly every sort. Mao’s “Barefoot

Doctor Brigades” were not sophisticated, but they created better outcomes for the averageChinese than what they have today. What this says about how healthcare specifically has – andhas not – evolved in China is relevant to China’s senior care market.

+What Happened?

China’s economic reforms required dismantling large parts of the state’s involvement in the economy.

State Owned Enterprises (SOEs) were shut down, privatized, or modernized.

These good and necessary steps had a bad and unintentional effect: the “broken rice bowl” was not replaced by similar investments from the private sector.

China’s central government was so focused on modernization and its many down-stream implications that it overlooked healthcare.

+What Happened? (cont.)

Government spending on healthcare decreased from 1.1% of GDP in 1980 to 0.8% in 2002.

WHO estimates that 50% of China’s rural poor find themselves in “entrenched poverty” due to healthcare costs.

In 2000, the WHO ranked China 188 of 1919 countries globally regarding “fairness of healthcare finance.”

56% of rural Chinese do not bother to follow up on doctor recommendations because of expense.

2012 Pew Global Attitudes Project found that between 2008 and 2012 anxieties over China’s healthcare system had more than doubled.

+Healthcare Divides China

In ways not unlike more developed countries, if much more severely.

China has a definite urban/rural, rich/poor/middle class problem relative to healthcare access and outcomes.

By 1999, insurance coverage in rural areas had dropped to 7%.

Mao’s “barefoot doctors” became fee-based, non-government covered, entrepreneurs.

+A Perfect Storm

Water Pollution 70% of China’s rivers are

too polluted to provide safe drinking water.

Air Quality PM2.5 poses immediate

cardiovascular problems.

Smoking Between 300-350m

smokers.

Western Diets Hypertension,

cerebrovascular disease rates, diabetes, etc. are all on the rise.

Demographics No country will get as old

or as rich as fast as China will.

+Speaking of Demographics

+What Is Going On?

By 2050, 1/3 of China’s population will be 60+.

Ratio of elderly in need of support today is 16:100, by 2050 that will be 64:100.

Largely the result of the “one-child” policy and the 4:2:1 problem it created.

Beijing already has over 1.7m 65+; Shanghai has 2.3m.

Fewer than 50 dementia care facilities exist in the entire country. Incidence rates are projected to rise by over 300% by 2040.

By 2040, China will have more dementia patients than in the whole of the developed world.

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And The Promise …Yes, the problems in China’s healthcare system are troubling.But, solving these problems will not only meet a compelling human need, it will also provide a unique opportunity.

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The Opportunity

2009 investment by China’s central government of RMB 1.13 trillion into healthcare.

12th 5 Year Plan (5YP) has RMB 4.4 trillion planned specifically for healthcare.

Government plans to add: 150,000 primary care physicians in

next 5 years. 2,000 new county hospitals. 29,000 new township hospitals. 5,000 existing hospitals upgraded. 95% of all Chinese covered by

expanded national insurance. Expanded national drug formulary,

access to new diagnostics and medical devices for treatment of chronic diseases.

+A Sense of Scale

2003 2004 2005 2006 2007 2008 2009 2010 20110.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

0

5

10

15

20

25

30

35

40

China Government Healthcare Spending

Billion RMB YOY Growth (%)

+Where China’s Government Is Investing

45%

1%2%

9%

24%

7% 12%

Where China's 2009 Healthcare Reform Went

New Rural Co-Op and Urban Res-idents InsuranceInsurance Subsidies for Enterprises in DifficultyIndigent Patients Medical AidPublic Health Awareness In-vestmentPrimary Care & Public Hospitals Upgrade & ConstructionDrug SubsidiesOther

+The Opportunity What is going on within China’s healthcare industry is likely a

once in a generation opportunity.

Some estimates suggest the amount China is investing into the country’s healthcare system is the most amount in the shortest period of time any country has ever spent on its healthcare system in the history of the world.

The sheer amount of money and the number of means by which it is impacting the country’s healthcare system can easily cloud which parts are ready for foreign investment and expertise.

Some sectors are still not ready, even though the government would like to see improved infrastructure and know-how deployed there.

Before a company can determine if the market segment where they want to operate is ready, they have to consider whether they are ready to go to China and whether the capital they would like to deploy in China can be best spent there or elsewhere.

+What Are the Most Compelling Opportunities?

Capacity Building

Primary Care

Enabling Technologies (telemedicine, payment processing, HIT)

Training

Specialized Medicine (oncology, cardiovascular, pediatrics, rehabilitation)

Public-to-Private Hospital Transaction

Senior Care

+Senior Care

The US 60+ age range has been fairly consistent during the period CCRCs developed (’60-’00 ranged from 7-16% of total population).

In China, between ‘10-’40 the same age demographic will almost triple (11-31%).

The US of the 60s-70s accumulated significant material advantages (household financial wealth, insurance, pension plans, etc.) as the CCRC community evolved in the 80s. This has been leveraged to drive CCRC developments through current-day.

In contrast, China is very early into accumulating its household wealth (and has yet to go through a structural crisis which will test the solvency of what has been built up thus far).

In contrast, China does not have a sustainable healthcare, insurance or pension plans in place for the middle class.

Yes, China is getting rich. But it is getting rich out of sync with the amount of time it took the American model to evolve the necessary cultural and contextual conditions for the CCRC model to be successful.

Is China going to grow tooold too fast for the CCRCmodel to evolve as it did

in the US and EU?

17+Western Senior Care Models

Day-

Care

CC

RC

Rehabili

tati

on H

osp

ital

In-H

om

e C

are

Train

ing P

rogra

ms

Hig

h A

cuit

y /

Hosp

ice

+Some Factors to Keep in Mind

How the Chinese consumer …. Rationalizes healthcare

expenditures.

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

15.5 15.9 15.7 17.0 17.0 17.9 18.1 22.3 24.7 27.2 28.6

25.6 24.1 26.6 27.2 29.3 29.9 32.633.6

34.9 34.9 35.9

59.0 60.0 57.7 55.9 53.6 52.2 49.3 44.1 40.4 38.2 35.5

How China Pays for Healthcare

Government Social Insurance Out of Pocket

+Some Factors to Keep in Mind

How they view “private” healthcare (≠ VIP).

How they view diagnostics, devices and drugs.

How they view services.

Gener

al M

edici

ne (C

heck

-Up)

Cosm

etic

Surg

ery

(Eye

lid S

urge

ry)

OB/GYN

Pedi

atric

s

Oncol

ogy

Cardi

olog

y0%

5%

10%

15%

20%

25%

McKinsey: What Drives Affluent Chinese into Private Healthcare

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Pursuing the PromiseHow do you determine if this is the right opportunity for your business to pursue? What makes going to China the right place for one business over another?

+For Company’s New To China

China should be a strategic, not purely opportunistic, pursuit.

The decision to go to China should reflect a holistic appraisal of internal capabilities, financial resources, and risk appetite versus other domestic or foreign investment opportunities.

The process of choosing should allow key management team members and other stakeholders to ask questions, raise concerns, and feel their input has been sought and incorporated into the final decision.

If a decision to go forward in China is made, your management team should have several different market access strategies presented with a comprehensive analysis of each, along with an idea on how to properly market your services to the Chinese consumer.

+Contact Information

Benjamin Shobert

Founder, Managing Director

Rubicon Strategy Group, LLC

Two Union Square

601 Union Street, Suite 4200

Seattle, WA 98101

Phone: 206-652-3572

Fax: 206-652-3205

Mobile: 317-777-2926

Email: bshobert@rubiconstrategygroup.com

URL: www.CrossTheRubiconBlog.com or www.AsiaHealthcareBlog.com