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May 17th 2017 SH HCD: Shanghai Healthcare Drink Event Summary: Profiting from Healthcare Policy Changes

Moderator: Justin Wang – MD, L.E.K. Consulting (All questions below were asked by the host)

Panelists:

  1. Lynn Jiao: Vice President Global Strategy and Analysis & Executive Director, China, AdvaMed.
  2. Vita Tao: Sr. Government Affairs Manager, Policy and Regional GA, Eli Lilly
  3. Seth Zhang: COO of Yiyao / Shanghai Pharma, an innovative sales platform also invested by JD.com and IDG
  4. David Basmajian: AmCham SH healthcare committee co-chair; Former Head of Policy, APAC, Baxter.

Question 1: Last week we saw several CFDA announcements to encourage innovation, such as improving the clinical registration process, accepting clinical trials data from overseas and etc., which was commented by many as rather bold. This is favorable for pharma MNCs, less for med-techs, how do the panelists view these policy changes? What is the most important impact when these policy changes come into realization?

  1. Vita (Eli Lilly): We are already seeing the impact on business being realized with faster launch times. The efficiency has greatly improved at CFDA. It seems that China government really wants to do something to push for innovation, which is good for pharma’s innovative products. China wants to drive the market more like the US and Japan market, with higher transparency.
  2. Lynn (AdvaMed): the impact that was realized for the pharma industry did not happen to the device industry. The med device industry still needs to complete clinical trials overseas first and then come into China and repeat those clinical trials. Hope to see the same policies coming out for medical device products.
  • Host: What initiatives does AdvaMed take to advocate for association members?
  • Lynn: We are connecting MNCs and presenting industry papers to the CFDA, and we also meet with senior officials to discuss the possibility to accept overseas clinical trial results, just as they did for Pharma.

Question 2:  The other thing the CFDA talked about was to upgrade the clinical trials standards, so trials done in China will meet international standards, supposedly this is a good thing for international pharma compaines, but does this do anything to help upgrading China’s importance among all the international markets? (Question for Vita) Because traditionally people assume things will happen 10 years late in China, would the policy changes help global headquarters invest more resources into China from a pipeline launching perspective?

  • Vita: Lilly already has. Starting from this year, China reports directly to the global headquarters, so it is upgraded to the same level as US, Japan and Canadian markets. The global team sees a bright future for China and the market potential, but they also know while the future is bright there are still a lot of uncertainties. I think the China government knows where they want to go, but there are a lot of challenges when it comes to implementation of policies. The company’s attitude is pretty clear though, they will provide the necessary resources and support.
  • David (AmCham): Baxter’s focus is renal-solutions and renal-therapy in China, yet the latest solutions are not in China due to the approval process being too long. They have government affairs team to make the process go faster. If Baxter can get the latest solutions coming into China, it gives the company a differentiating point, against both overseas and domestic competitors, especially the domestic ones that offer lower prices.
  • Seth: It really depends on how MNCs operate in China. AstraZeneca for example, their China business has taken over 10-15% of global sales. If you look outside of Pharma, looking at Apple and BMW, a significant % of their sales coming from China (40%+ for BMW for example). Even for pharma, it’s not really about the future because the market is already there, depends on how you operate. The challenge for MNCs is that people need to rethink the old sales/promotion models. In the last two years some MNCs experienced flat or decreased growth because their old model is no longer compliant with China’s policies. The opportunity is already there right now with the middle class willing to pay more for healthcare and government adjusting reimbursement list, but MNCs need to change the mindset of how to do business in China.

Question 3: China’s medical spending as a portion of the global market is still small: pharma is ~10%, and medtech is ~5%. But if you look at pork – China counts for ~50% of global consumption/spending, and 33% of global automobile consumption. Is there a way for pharma to grow? AZ’s example on regulation – their 3rd generation lung cancer drug Tagrisso recently has been in the spotlight, through a very short review and approval process, and it only took weeks from approval to launch, what do you think we can learn from their example? Can other companies replicate their success?

  • David: Not only were they prepared, but I heard that AZ has been educating the CFDA on how to expedite the process. This is something all companies can learn from.
  • Vita: I think the pipeline is really important. Before CFDA had the reform, many MNCs didn’t have a full pipeline ready for the China market. Now the CFDA is driving MNCs to the innovative market and leaving generics for domestic companies. If your pipeline is not ready to compete there, another strategy is to cooperate with domestic innovative companies, as all the policies favor domestic innovation. The government wants to upgrade pharma market’s innovation capability for domestic companies not MNCs, so if you can work with a domestic company with a 1.1 innovative drug, you have a better chance to replicate AZ’s success. You need to be prepared from multiple channels.

Question 4: The government obviously will remain patriotic when it comes to supporting innovation as their interest are multi-level, as MNCs how do you communicate with them and covey your messages?

  • Lynn: my opinions are different. From our experience, if you want to work with a Chinese partner/manufacturer, you need to understand what the government’s definition is for “domestic company” and “China made”. I personally asked these questions to NDRC, National people’s congress, central government and Jiangsu government, and all these organizations had different answers. One official said that domestic company from their view was a pure, Chinese-owned manufacturing company in China. So do some homework before you determine a domestic partner.
  • David: If you look at the policies coming out, they mostly are focused on a few principles which are: to reduce the cost of healthcare in China, to build an innovate system in China and to ensure that Chinese patients have access to the most innovative med tech and drugs. The recent announcements from CFDA falls into the 3rd As a company if you can align your goal with these principles, you have much better chance to succeed, which sounds obvious, like if you are an innovative biotech for cancer you are probably in good shape, but if you are not doing that or have already done that, what other priorities can you focus on? The CFDA is also focused on upgrading the quality and safety of devices, so one thing we are talking to them about is how to improve standards to make devices and drugs safer for Chinese patients. American companies can help with improving the standards by building capacity at the CFDA. Baxter, for example, connected with a lot of CFDA officials and technicians to educate them, and you can see some of the impact today. If you as western company help with upgrading the overall industry standards, this will make it harder for domestic, low-price, low cost players to compete with you.
  • Seth: I think China and US are the only two single markets where, if you just succeed in one, you are already a industry giant. Tencent for example gets 99% of their revenue from China market, and they are already top 5 global tech company. United Health, one of the healthcare giants, only operates in the US. MNCs, therefore, need to rethink their strategy, rather than just brining their US products into China. China is a big enough market for you to create and test something new. Take Baxter for example, they’ve just created a product specifically for the China market. If you just focus on importing products, you will face competition from local players, but one thing is that China market is actually great for innovation – look at mobike and ofo, it only took them few months to emerge everywhere. So don’t just focus on selling a product and compete on price. You should sell a service, and China is a great place to test out innovative services. Chinese consumers are much more open-minded than Japan and US consumers, as they are happy to try new things. Obviously, the government heavily regulates the healthcare market, but companies should still look to see if they can do incremental innovations.

Question 5: One core issue that many here are concerned about is social insurance, which has had a lot of changes in recent years. The Ministry of Human Resources and Social Security (MOHRSS) has recently issued an official inquiry on whether there should be a dynamic adjustment mechanism for healthcare reimbursement list. This came as a pleasant surprise to many in the industry. Instead of waiting for the reimbursement list to be updated every five years, now it may be adjusted instantly as needed. What are your thoughts on the changes in social insurance policies? Can they bring material improvements to pharma’s business?

  • Vita: From a pharma perspective, and based on my experience of dealing with the government for many years, the Chinese government actually knows quite well what needs to be done at each step, the question is when and how. They needed a “trial” period before actually making a move. For example, many new drugs have been introduced in recent years, and they realized that the old system of updating reimbursement list every 3-4 years is no longer practical, so now seems like a good time for change. In fact, the written policies didn’t say the reimbursement list can only be adjusted every 7 years, it specified that adjustment should occur every two years. Yet previously there was always some reason that prevented the list from being updated. The officials of MOHRSS are well aware of the situation, but they also know that once the adjustment process begins, it can happen quite quickly – like this round of update only took 3-4 months to implement. So what they were looking for was a balance of various parties’ interests, so no party could complain later on, and if someone does challenge their decision, they wanted to make sure the decision process was defendable with enough evidence to support every step. This dynamic adjustment system that they are proposing is not a spontaneous decision, but a carefully considered policy that came out at the right time – after CFDA issued policies that accelerate innovative drug approval process. In addition, MOHRSS maintains an open attitude towards the dynamic adjustment mechanism proposal, instead of them deciding how it is going to work, they asked six questions for different social parties, industry organizations and academic institutions to answer. You may submit your answer by end of May, and in June, the MOHRSS will select the top 5 proposals that they consider most practical, and give them to 5 academic institutions to conduct research on feasibility. The questions they asked were quite thoughtful, including: negotiation logistics, drug categories to be included in the adjustment system, pricing system, coordination of different departments for implementation, and how old drugs’ exit strategy from current reimbursement list. They have the policy structure drawn out already, but in the meantime they are also open to hear different parties’ opinions on actual policies. With that being said, one thing to watch out for is government’s “carrot & stick approach”, aka if this policy is a good news to the companies, there might be a more harsh policy coming out later. For example, if many new drugs can now be reimbursed through social insurance now through the dynamics adjustment of the reimbursement list, the upcoming questions for companies are payment method and drug pricing, both of which requires far more negotiation and discussion. So MNCs shouldn’t get too excited with the dynamic adjustment mechanism, as it merely opened the gate, but to get in you still need to get pass the gate keeper which is not the MOHRSS anymore.
  1. Host: since you said that government has taken all into consideration, what do you think the implementation timeline for this dynamic adjustment mechanism of the reimbursement list is? The government added 3 new drugs last year, and it was said they’d add 44 this year, when will this policy finally realize?
  2. Vita: The three drugs added last year was not by MOHRSS, it was mostly a pricing negotiation rather than entrance permission into reimbursement list. This year’s 44 additions are more like an opportunity given to the drugs during adjustment period when the system hasn’t been established yet. I think the process will be fast. They are back on the 11th their internal meeting already have the structure and process finalized, and negotiation will likely happen in June.

Question 6: For all the professionals in the med-device industry, what impact do you think the changes in social insurance, including the payment method, have on the device industry?

  • Lynn:The changes in latest reimbursement policy is only targeted at drugs, not devices. One thing we noticed is that since China is now becoming an aging society, the government owned social insurance pool is slowly running out of balance. This is a challenge the government is facing. However, we don’t think the government is thinking on the right track, as their solution is trying to cut product prices on devices, to reduce the amount they have to pay for hospital visits. Yet they don’t actually have the data showing healthcare spending was mostly on medical products. One question we are asking is that with price cut on devices, why is medical insurance spending is still rising? The whole system has issues that need to be fixed. One province we recently spoke to came out with a policy that any imported medical products with price above ¥200RMB will not be reimbursed, yet domestic products has no reimbursement price ceilings. The government needs to understand that pricing is not the main issue. Medical device companies are recently watching something called “case payment”, NDRC recently came out with a list of 100 diseases (for reimbursement?) so that’s something we are watching. What we are really hoping for is not for the government to adjust their own insurance list though, but rather letting private insurance into the market, to deal with the pressure from the aging society.
  • Seth: I don’t think the social insurance will cover everything in China, otherwise China will be like Japan or UK, which only works for small and highly developed society. Even in the US government insurance can’t cover everything – like Obamacare. Because China is so big, social insurance only covers 45% of all spending, 5% is covered by commercial insurance, and 50% are out of pocket expense. China doesn’t have this much money to cover the rest 50%, so we need to focus on private insurance and innovative payment solutions. Social insurance are unable to give patients access to some new drugs, especially the new oncology drugs, those are really expensive and cannot be covered by government for a 5-10 year period.

Question 7: Seth made a good point, our real expectation isn’t that social insurance will cover all our health expenditures, but that we should have a multi-source payment solution that will cover the spending in some way. An important question is that, the government has talked about supporting and pushing commercial insurance forward for many years, yet the results so far seem less than satisfying, what do you think is the biggest hurdle? And as players in the industry, what can we do to help private/commercial insurance assume a more important role in society?

  • Seth: We have collaboration with many insurance companies like PingAn. China’s health insurance situation is significantly different from the US. Normal health insurance is consumption-based, you charge to your insurance card based on the number of hospital visits and drugs purchased. The 5% of commercial healthcare insurance market we mentioned earlier is dominated by critical disease insurance, which is very similar to life insurance (accident insurance). For example, if you get cancer, then the insurance company pays you a lump sum of 300,000RMB and that’s it – much like insurance payment for a major car accident, but it’s not integrated into the treatment process. In the U.S., insurance is a long term consumption based plan, and users are incentivized to save on the long term premium payment, but in China, commercial healthcare insurance is still at its infantry and mostly adopt the one time, lump sum payment method. What can move it forward? My opinion is that it’s stuck in a bad loop. There are many insurance companies that want to provide a long-term consumption based program, but they have no access to patient data that would allow them to price the premium correctly. Most Chinese hospitals are also government-owned, so unlike the insurance-operated hospitals in the US, doctors have no incentives to help you or the insurance companies save money by using cheaper drugs. As a result, the insurance might suffer from huge losses, and none of them can afford to continuously invest for 5-10 years without seeing hope for return. If we look at the longer time period of, say 20-30 years, then I think there might be some innovative insurance plan coming out, but under current environment it is too difficult to implement private health insurance.
  • David: AmCham is seeing an uptick in interest from international insurance companies to operate here. Again, it is an interest of the government to invest in private insurance and hospital services, but the challenges is that the private insurance only controls such a small market share, they don’t see enough motivation. They also need a good opportunity to come in. American insurance companies have interest and they want to come in and contribute, and do business, but they need significant regulation changes and they don’t have that yet.
  • Vita: The insurance sector is just like the healthcare sector, all dominated by government rather than market driven. Another problem is data sharing. Data is so protected that the commercial companies and even associations cannot access them. Medical insurance companies thus cannot calculate the premium they need for reimbursement. Most insurances the private sector is selling in in lump sum form for diseases like cancer and other critical disease – it’s more like life insurance rather than health insurance. Government has realized that they need to encourage the private insurance, but most insurance companies in China are still state-owned. So most current reimbursement policies are supplementary to social insurance. Also they are encouraging city residents to use their private account, which employees use far less than old people, so they are now encouraging employees to use this account to purchase private insurance. This sector is certainly growing; the target is to for out of pocket expense to reach 30%? But we don’t know how many years that will take.
  • Lynn: I agree with what others have said. A very important reason that commercial insurance’s development has been constrained in China is that patients’ data is not accessible to insurance companies. We have discussed this issue with Xinhua news agency, relevant ministries and insurance companies, that commercial insurance companies cannot possibly price the insurance plans without access to patients’ data and records, which ultimately will limit this sector’s development. That being said, I personally hold a positive view on the future of China’s commercial insurance sector, because China’s large population and demographic trends are both favorable to their growth. Furthermore, the development of online hospitals is also a good thing. Now a patient can get diagnosed on his computer or mobile phone rather than going to the hospital, if insurance companies can collaborate with online hospitals, this could be a great opportunity for their future.
  • Seth: First of all, our company does not operate online hospitals (China just announced abolishment of all online hospitals). Last year we worked with a 3A hospital in Shanghai in attempt to build an online hospital, yet we discovered that from a clinical perspective, existing technologies can’t really allow remote diagnosis and prescription writing. For example, if someone has a fever, then the first step at hospital is blood test, yet you can’t accomplish that with online hospital. Now, one may say that patients can use independent labs for the blood test, for example at a community hospital, but if you are going to a community hospital, then online hospitals lose their purpose. It actually fits into something else the government is encouraging: hierarchical medical system. The second problem with online hospital is the increased risk of medical disputes caused by misdiagnosis. In 2014 I personally experienced the online portal of the 2nd people’s hospital in Guangdong. In 90% of cases, the attending doctor will ask you to come into the hospital for further testing because they cannot give a certain diagnosis. Even if they issue a prescription, it’s usually the kind that has minimal possible adverse impact. Now, it’s not that I think we shouldn’t have online hospitals at all, but that it should be combined with hierarchical medical system. In other words, the goal of online hospitals shouldn’t be to provide patients with diagnosis and treatment at home, but to allow many diseases to be treated at a smaller hospitals, with experienced specialty physicians providing guidance through video conferencing. Finally, some disease might be treatable through online hospital, such as ones in dermatology, as they can use photos to identify the symptoms. Also, advancement in technology, such as personal, mobile blood testing device, might also make online hospitals possible.
  • Lynn: I agree that not all patients should use online hospitals, but for returning patients with say chronical disease, they can use online hospitals to facilitate the process. I discussed this issued with the director of a 3A hospital. He said he was encouraging all his physicians to use online hospitals. So I asked him if he was concerned that this would reduce the number of visiting patients. He responded that not all, in fact online hospitals will increase the number of patients visiting the hospital, because 1: returning patients do not have to physically visit hospital, thus giving more time spots to first time patients; 2: some resources can be used more efficiently, such as time, doctors can quickly diagnose a patient even in the bathroom. In regards to medical disputes, I recently visited a company in Shandong where they developed operating robots, which allows surgeons to remotely control to operate on patients, and they are already testing them in clinical trials, so technology can allow many impossible things to happen in the future.
  • Seth: Actually the biggest conflict point lies in that, if all major 3A hospitals open an online portal, then the hierarchical medical system that government is actively promoting will become much less meaningful – patients will simply not visit community hospitals. The ideal model in government’s plan is actually for all patients to get their first diagnosis in 3A hospitals, and then use community hospitals for returning/repeating visits. This won’t happen if patients can just follow up with 3A hospital physicians online.
  • Vita: I think the online hospital system that the government advocates is not to allow patients getting diagnosed at home, but rather to balance medical resources in different areas and increase efficiency. Online channels can allow undeveloped regions get more medical expertise and resources without having the physicians flying out there in person.