By Mohith Unny and Zaid Al-Nassir, Decision Resources Group (DRG)
Reducing Costs, Empowering Local Manufacturing, and Streamlining Device Commercialization
Over the past few decades, the Chinese medical device industry has grown at a substantial pace, driven by rapid urbanization, rising disposable incomes, and a large and expanding aging population. The industry has been further bolstered by the strengthening of health care infrastructure at lower-tier facilities and in nonurban areas, increasing patient awareness surrounding treatment options and availability, and the rising number of well-trained and skilled surgeons across the country.
All of these factors have engendered immense demand for medical care, spurring the uptake of various medical devices and subsequently supporting the country’s medical device market.
However, such robust growth does not emerge without challenges, and China’s medical device industry — while unique in a variety of ways — is no exception in this regard. Below, we present the primary challenges facing the Chinese medtech space and detail how the country’s government currently manages these issues, as well as how it plans to do so going forward.
Challenges: Demographic Trends, Financial Difficulties
The bulk of the challenges facing the Chinese medical device industry can be attributed to a combination of demographic and financial conditions; generally, these are represented by the difficulties and obstacles involved in providing consistent health care services to the world’s largest population across one of the world’s largest land masses.
Moreover, these difficulties are also often intertwined with the Chinese government’s ongoing efforts to upgrade local manufacturing capabilities — long associated with inexpensive, lower-quality production — to enable domestic companies to better compete with foreign manufacturers. Foreign companies are generally perceived to provide higher quality, though more costly, products and can be credited with producing the bulk of materials currently used in high-value industries, including medical devices, pharmaceuticals, aerospace, IT, and robotics.
With that in mind, a granular view into China’s past and ongoing challenges, shown below, can provide a more comprehensive understanding of the country’s current status and where it is headed on this developmental path.
- Aging population: China’s population is aging at one of the fastest rates globally and its working-age population is simultaneously shrinking, placing an immense cost burden on the country’s public health care system. This is compounded by the fact that a majority of the country’s elderly individuals are from low-income communities outside of large and fully urbanized cities, where access to affordable and high-quality health care is limited.
- Hospital overcrowding: In China, there is no system to control or regulate patient inflow, and Class 3 hospitals — typically located in urban centers, staffed by skilled surgeons, and well-equipped for all types of surgeries —are preferred by most patients, regardless of their medical needs. Since Class 3 hospitals represent only a small portion of all health care facilities, the result is overcrowding, long wait times, and a lack of personalized care, placing further pressure on the public health care system.
Additionally, Chinese individuals who require advanced surgeries or devices, but reside outside of urban centers, are unlikely to have access to the type of care they need, given that Class 2 and Class 1 facilities — more typically found outside urban centers — are not well-equipped or sufficiently staffed to deal with complex cases.
- Preference for foreign products: Many of China’s advanced medical device markets are dominated by foreign MNCs, typically those already successful in similar spaces in more developed economies, such as the U.S. and Europe; this is particularly true in large cities, where Class 3 facilities are most commonly found. Most Chinese patients and physicians perceive foreign products — typically higher-priced than local alternatives — to be of higher quality; in most cases where a patient can afford utilizing a foreign device over a domestic alternative, they will choose the foreign one.
Moreover, for many advanced device segments, foreign companies enjoy a first-mover advantage; because these companies already have clinical data to support their products in their home countries, as well as the resources to bring those products to market in China, they managed to capture a substantial share of various Chinese markets. Furthermore, unlike most domestic companies, MNCs invest extensively in surgeon and physician education programs (especially in large cities, where most Class 3 facilities are located), which allows them to spread awareness surrounding new products and procedures, and to establish physician familiarity and comfort with these products in the future.
Although the presence of domestic competitors continues to grow in China, due largely to various government policies (discussed below), this trend endures in markets for advanced medical devices and complex procedures.
- Supply chain redundancy: In many Chinese provinces, numerous distributors may be utilized to deliver a product from its manufacturer to a facility; to maintain profits, these products are typically marked up at each distribution level, leading to highly inflated medical device prices. In addition to being inefficient, this also renders many medical devices (particularly foreign ones) largely unaffordable for many Chinese patients.
Solutions: Infrastructure Investment, Supporting Domestic Manufacturing, and Healthy-Competition Policies
The aforementioned challenges have resulted in enormous cost pressures on the public Chinese health care system, which has been, and continues to be, stretched significantly beyond its limits. However, over the past decade, the Chinese government has instituted a number of initiatives to alleviate these pressures.
- Investments in lower-tier hospital infrastructure: To reduce overcrowding in Class 3 hospitals, the government has been investing heavily in improved infrastructure at lower-class hospitals, as well as enhancing skill levels among surgeons and physicians at these facilities. Additionally, some provincial governments (e.g., Henan), have altered their reimbursement policies in a manner that incentivizes patients to consult physicians in lower-class hospitals. Although these policies have reduced overcrowding at Class 3 hospitals in the past few years, overcrowding remains a substantial issue across China; therefore, it is expected that the Chinese government will continue implementing these policies to provide patients accessible and adequate health care at Class 2 and Class 1 facilities across the country.
- Expanding the number of private facilities: To further alleviate pressure on Class 3 hospitals, the government plans to encourage and empower private health care facilities, so patients who can afford to pay for advanced surgeries or MNC devices will opt for treatment at such facilities. Over the past few years, the number of private facilities in China has increased dramatically, and this trend is expected to continue.
Still, there remains skepticism regarding private hospitals among Chinese patients who view large public hospitals as higher-quality facilities and surgeons, who often prefer practicing in public hospitals because it allows them to engage in research or teaching, and provides ample opportunity to improve their skills. However, as the government continues to encourage the establishment and utilization of private facilities, and as these facilities take on increased procedure volumes, patient and physician perceptions surrounding private facilities will improve, supporting the government’s overall efforts.
- Commercial insurance: The government is offering tax breaks to citizens that purchase commercial insurance instead of relying on public insurance, which offers little coverage for advanced surgeries and foreign products. It is hoped that these initiatives will both limit the costs incurred by the public health care system and allow for more efficient operations at all hospitals, but especially Class 3 facilities.
- Reimbursement adjustments: To support domestic manufacturers and foster healthy competition in the medical device market, provincial governments across China utilize reimbursement policies that encourage the uptake of domestic products (typically by reimbursing a larger proportion of these devices). In major cities, such as Beijing and Shanghai — where facilities are well-resourced and many patients are in relatively better financial situations — there is no difference in reimbursement between foreign and domestic devices; as a result, most devices used in these cities are from MNCs.
In contrast, reimbursement policies in Jiangsu, Hebei, Henan, Sichuan, Shandong, Shanxi, and Hunan either explicitly favor domestic products, utilize package-pricing policies that force hospitals to use lower-cost (and typically domestic) devices, or favor conservative treatments over surgical interventions. This approach allows for the use of more domestic products, which are generally more widely accepted in highly commoditized and non-specialized segments. Moreover, in many provinces, hospital directors operate under government-supported guidelines that stipulate the proportion of domestic products that must be used, a rate that can be as high as 80 percent.
- Multilevel tendering: Further supporting domestic players in China is the multilayered device procurement process, which may vary in detail from province to province, but is generally similar throughout the country. The tendering process occurs on various levels — including provincially, municipally, and then directly with individual hospitals. This allows the government to ensure healthy competition by preventing any single brand or company from completely dominating a device segment within any given province. Moreover, this allows provincial governments to favor devices from companies based in their own province, which allows them to collect greater taxes on each sale.
- The Two-Invoice policy: To counter price mark-ups resulting from the utilization of numerous distributors throughout the supply chain, several provincial governments have implemented a “two-invoice policy” that enforces a single level of distribution between a manufacturer and a hospital. This same policy has been implemented in the Chinese pharma sector for some time, and it has been effective in reducing drug prices for Chinese patients. Shanghai implemented this policy on a pilot basis in 2018, and it is likely this policy will be rolled out in additional provinces going forward. The goal is to reduce medical device prices across numerous provinces, supporting the uptake of medical devices (and subsequently revenue generation), as well as contributing to reduced cost pressures on the country’s overburdened public health care system.
- Easing foreign product commercialization: Despite the Chinese government’s moves to bolster domestic manufacturing and local companies, the government has no interest in completely pushing foreign companies out of the market. Rather, the government wants to see healthy and balanced competition between foreign and local offerings. Over the past five years, the China Food and Drug Administration (CFDA, now known as the National Medical Products Association, or NMPA), has made a number of changes to device commercialization regulations, both to promote local innovation and to facilitate smoother entry for MNCs into the Chinese market:
- In 2014, the CFDA announced the fast-track approval process for innovative devices;
- In 2016, it released a list of Class II and Class III devices exempt from local clinical trial requirements;
- In 2017, the government announced guidelines to begin accepting foreign clinical data, facilitating the approval process for international manufacturers;
- In 2018, the CFDA released the Medical Device Draft Amendment, which streamlines device approval processes and adds more devices to the local clinical trial exemptions list.
It is expected that the Chinese government will continue to work to reduce its health care expenditure, improve services across the country, and strengthen the presence and competitiveness of domestic companies. This will result in a number of foreseeable outcomes.
For instance, it is highly likely that the government’s efforts to strengthen private facilities and insurance will result in parallel health care systems: a public system that handles high volumes of surgeries at relatively affordable costs and caters to the mass market, and a private system that handles lower volumes but operates at higher margins. This will support domestic companies in the short-term (given that more patients will be relying on Class 1 and 2 facilities), but will ultimately also support the uptake of foreign devices once private facilities are more firmly established and widely accepted.
Moreover, due to government regulations that support local innovation, the quality of domestic offerings will continue to rise, allowing local competitors to capture share from MNCs and foreign players. Simultaneously, foreign companies will be better able to bring their products to market in China due to the increased ease of registration and clinical trial requirements. Overall, this will lead to a highly dynamic and competitive medical device market in China, providing millions of patients with accessible and affordable health care, and significantly supporting revenue generation.
About The Authors
Mohith Unny is a principal medtech insights analyst at Decision Resources Group. He holds a Master’s in Advanced Chemical Engineering from Imperial College London. Mohith can be contacted at firstname.lastname@example.org and through LinkedIn.
Zaid Al-Nassir is a senior product support analyst at Decision Resources Group. He holds a B.A. in Political Science, History, and Writing & Rhetoric from the University of Toronto. Zaid can be contacted at email@example.com and through LinkedIn.