Winning in China’s Changing Medtech Market

Mon, 18 Aug 2014 20:44:47 GMT

Growth and Change in the Health Care System
**China’s medtech market is expected to emerge as the second largest in the world by 2020.** That growth is being fueled by two powerful forces. The first is rising demand for health care products and services. As the Chinese population ages, and as a sedentary lifestyle becomes more prevalent, chronic and serious diseases are increasingly common. Along with an expanding middle class that can afford to pay more for care, this is stoking demand. 2020年,中国的健康医疗市场将会从现在的全球第4上升到第2。主要的两股动力:人口老龄化,慢性病增加;中产群体对医疗健康服务需求的增加。 In addition, the Chinese government is increasing its spending on health care, including significant investments in public hospitals in order to increase the capacity of the overall system. And thanks to health care reform, all citizens now have access to basic health care through public insurance. As a result, **the percentage of total spending on health care covered by the government will expand from 30 percent in 2012 to 40 percent in 2020.** 政府负担的居民医疗支出将会上升10%。 We project that the Chinese medtech market, buoyed by the strength of the overall health-care sector, will post a compound annual growth rate of 14 percent between 2013 and 2020, expanding from $22 billion in annual revenues to $55 billion. (See Exhibit 1.) Almost all product categories will experience double-digit growth, with some—such as orthopedics and minimally invasive surgical devices—growing even faster. 预计中国的medtech市场在2013到2020年之间会有14%的复合增长率,从220亿美元增长到55亿美元。矫形和微创外科手术设备会增长更快。 [![Winning-China-Medtech-ex1_md_tcm80-165318](](

Amidst this robust expansion, the medtech landscape is being transformed, largely as a result of ongoing reforms in China’s health-care system. Changing regulatory policies are encouraging innovation and leveling the playing field. **The China Food and Drug Administration (CFDA) wants to encourage innovation across the health care industry**. While **it will likely be several years before policies in this area have any real impact**, the aim within medtech is to create a prioritized review process for innovative products. As part of this effort, an Innovative Medical Device Assessment office will be established within the CFDA to assess new products. To be considered innovative, a product’s key mechanism must be new to the Chinese market or one of its features must constitute a major enhancement over previous versions, among other criteria. The assessment will allow companies to correct any technical problems during the review, avoiding a rejection that would require them to restart the approval process. In addition, CFDA will push to improve communication between manufacturers and regulatory bodies in order to streamline the approval of all products. 医药管理局鼓励创新。 At the same time, changes are in the works to simplify re-registration applications, which are required when a product’s original registration expires or when alterations have been made in the manufacturing process or in the product itself. The CFDA will allow companies to file the simplified application in some cases, including those involving a standard registration expiration or a change in manufacturing location. In other areas, the CFDA is raising the bar, imposing stricter clinical-trial requirements for new [class II and class III products](), regardless of whether they are imported or manufactured locally. All class II and class III devices must now undergo local trials, and only products whose safety can be proven without a trial or that meet certain other criteria will receive a waiver. As a result, MNCs, which have often been able to register their products for sale in China without trials, will lose the advantage they have had over local products in terms of expedited approval of class III devices, in particular. **Pricing pressure is intensifying.** Government policies are aimed at reducing costs at hospitals and at other points in the health care system. 医药价格压力增大 – *The Prices Charged by Hospitals.* Under the policy known as packaged pricing, the government allows hospitals to charge patients a fixed amount for a medical procedure, rather than a variable amount based on such factors as the number and type of supplies used. The 2012 National Medical Service List, published recently by the government’s National Development and Reform Commission (NDRC), has expanded the list of procedures covered under packaged pricing. As a result, the number of medtech products included among the procedures that are subject to the policy has grown from about 4,000 to more than 9,000. These are mainly lower-priced consumable products used only on a single patient or during a single procedure. If a newer, more expensive product is substituted for a lower-priced item, or if a large number of products are used, the patient cannot be charged for the additional cost. The result: hospitals will use fewer—and lower-cost—products than they did in the past. – *The Prices Hospitals Pay.* Tendering—the process by which a product provider is selected from among a number of bidders every three to five years—is gradually expanding across China. That means more tenders will be executed in China’s provinces for consumable products, especially for high-value, relatively standard devices like coronary stents and pacemakers. In fact, the price of drug-eluting coronary stents has been found to decline by 10 to 15 percent, on average, after each tender, though the extent to which the process reduces prices varies by province. This trend could have a greater impact on MNCs, whose products tend to come with higher price tags, than on local companies. – *The Markup Passed on by Distributors.* A draft policy issued by the NDRC in 2012 aims to limit the “channel markup,” the difference between what distributors charge hospitals for a product and what they pay the manufacturer. Certainly it will take some time for this policy to be implemented, given the complexity of determining the appropriate markup for different products, the difficulty of tracking markups as products move from manufacturer to distributor to end user, and the lack of support from key stakeholders, notably distributors, physicians, and some manufacturers. But channel markups will undoubtedly fall, which means that manufacturers must make sure that their distribution partners can survive the declining margins. **Reimbursement coverage is broadening—but hospital budgets are getting tighter.** The benefits offered under basic public health-insurance coverage will continue to expand. Moreover, the government is pushing local governments to offer major- disease insurance, which pays health care expenses related to serious, life-threatening diseases, and it is also adopting policies that will drive the development of a healthy market for private insurance. As a result, more medtech products will be covered by public insurance, and the reimbursement ratio will continue to improve. But other factors will continue to create obstacles for medtech players. Reimbursement decisions will still be set at the city or county level in most cases, leading to fragmented policies that create challenges for manufacturers and patients. And those decisions are likely to favor relatively lower-priced midmarket products. (See “Different Dynamics Within Different Product Segments.”) Furthermore, the government is piloting policies intended to keep a lid on overall health-care costs. One of these is global budgets that will reimburse hospitals a fixed amount from local public-insurance funds (city, county, or province, depending on the region) every year. Global budgets are set with an eye toward controlling costs, so hospitals will have an even greater incentive to use lower-priced midmarket products. Different Dynamics Within Different Product Segments **Understanding the dynamics of China’s premium, middle, and low-end medtech market is critical to success.** But the medtech market is complex, and there are no simple rules. In fact, the characteristics that distinguish premium products frequently differ from one category to the next. 理解中国健康医疗领域的高、中、低端市场的不同,这一点非常重要。
**Premium Products.** In some categories, such as imaging, these high-quality, high-priced products are characterized by the use of a new technology. But in other categories, such as orthopedics, premium products are those that have a new design or use new materials. Meanwhile, premium operating-room equipment may be distinguished by neither a new technology nor new materials, but rather by the seamless integration of components such as tables and lights into a single system. In still other categories, premium products are those that come with clinical support—such as surgeon training—provided by the manufacturer. 高端医疗影像等等是靠新的技术,有些领域比如矫形,高端产品不是靠什么新的技术或者材料。高端的手术室也不靠这些,只是靠更无缝连接的各种灯光桌椅等等,或者设备厂家提供某些培训类的服务。 **Midmarket Products.** These products have a lower price tag than premium products but still offer good quality. In some categories, midmarket products have fewer features than higher-priced offerings or may be made of less durable materials, resulting in a shorter life span. In other categories, they may be of very high quality but based on an older technology. Typically, the sales and marketing strategy for midmarket products involves less training and education or less after-sales customer service than that of premium products. **Low-End Products.** These products are lower priced and sometimes of lower quality than their premium and midmarket counterparts. In many cases, companies break into the market with low-end offerings and, over time, raise the quality of these products and move into the midmarket.
**The provider landscape is changing, with smaller hospitals taking on a larger role.** Major changes are coming to China’s hospital system—from large urban hospitals to smaller county hospitals to the still nascent network of private hospitals. And these changes have major implications for medtech players. **产业格局在变化,小医院将发挥越来越重要的作用。从大城市三甲医院到小县城医院,再到新兴的民营医院,这将是一个主要转变。这对从业者有很重要的寓意。** **Perhaps the most significant shift will be the expanded role of county hospitals.** The government has undertaken a broad effort to discourage people from seeking treatment for serious illnesses at large urban hospitals; the ultimate aim is for 90 percent of critical-illness cases to be treated at county hospitals. As part of this drive, the government will spend roughly $17 billion from 2012 through 2020 to upgrade county hospitals, making them better equipped to diagnose and treat major diseases. The result: county hospitals will become the fastest-growing group, albeit starting from a smaller base than large urban hospitals, which will continue to account for more than half of all health-care spending though 2020. This trend is still in its early days, but medtech companies will eventually need more efficient sales and distribution coverage in order to reach these dispersed county hospitals. 可能最重要的转变将是县级医院。政府在努力减少重症患者去三甲医院,**最终目标是让90%的重症患者在县级医院接受治疗**。为此,在2012年到2020年之间投入170亿美元用于县级医院建设。**县级医院将会变成增长最快的群体**,尽管盘子比较小,尽管直到2020年三甲医院还将负责50%以上的医疗支出。**这个趋势才刚刚开始,但是医疗公司将会需要更有效的销售和渠道来到达这些零散的医院。** Meanwhile, the management of urban public hospitals will change. Right now, a single central-government body establishes regulations for hospitals and oversees their management. But pilots in some cities are testing a new approach involving separate regulatory and management bodies. If that structure is widely adopted, medtech companies will need to develop relationships with these two different oversight bodies. This shift will take place over the course of a number of years, with purchasing decisions increasingly made by centralized management bodies with more bargaining power than individual hospitals. And that is likely to put additional downward pressure on pricing. Moreover, the government is piloting the creation of hospital alliances—for example, between some large and small institutions—with the aim of coordinating patient care more effectively and efficiently. Ultimately, that could alter usage patterns across the hospital system for some devices. 三甲医院的治理方式将会发生变化。目前是单一政府主题的监管,但有部分城市已经开始独立设置监管机构。 Finally, the government has set a goal for private hospitals to provide 20 percent of health care services by 2015. However, there are significant obstacles to making that happen, not least of which is the lack of a clear plan from the government. In addition, obtaining the required licenses to open new hospitals and recruiting sufficient numbers of trained physicians and other medical personnel will be a tall order. Still, even a modest amount of construction will be good news for equipment providers, which will need to outfit the new facilities. 最后,**政府定下目标在2015年将民营医院服务的比例提高到20%。这个有很大困难,而且政府没有讲明确方案。**开办医院的许可、医生护士招聘都是困难。 **Sales and marketing practices remain under a microscope.** Headlines about government investigations into sales and marketing practices in China make clear that a tougher compliance environment is here to stay. Consequently, as the government focuses on the problem of physician corruption, all manufacturers need to ensure that their sales and marketing approaches are compliant. At the same time, traditional marketing and sales activities, which do not adequately prevent noncompliant practices, will change. Companies will need to develop alternative approaches to reaching customers, such as more digital marketing, less one-on-one selling, and increased bundling of products—shifts that will not only eliminate noncompliant practices but also help reduce marketing costs amid declining margins. **医疗市场的销售将会受到更严密的监管,以控制贪污腐败问题。**传统的销售手段将不得不改变,**医疗公司将不得不依靠更多新的渠道,比如互联网渠道,来代替传统的面对面式的营销。既可以防止腐败,也可以降低营销支出,提升利润空间。**