China Healthcare Market and

Key Recent Policy Updates

2016

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1. China Healthcare Market

2. The Healthcare Reform and Key Recent Policy Updates

Agenda

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China is now the 2nd largest healthcare market in the world

Total healthcare expenditure and growth CAGR (US$ bn)

● It is also the fastest growing one among the top 5

Source：WHO. Healthcare expenditures are based on 2013 data, and CAGRs are between 2008-2012.

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5.9% 22.8% 10.7% 0.1% -0.9%

2,867

531 507 423 329

United States China Japan Germany France

But per capita spending and relative spending is still low…

Note: Healthcare expenditures are based on 2013 data, calculated with current year exchange rate to US dollarSource: WHO

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Per capita healthcare expenditure (US$）

3,965

9,150

370

Healthcare expenditure as % of GDP

10.3%

17.1%

5.6%

China Healthcare Market – regulatory framework

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National Development & Reform Commission (NDRC)incl. The Price Bureau

Key Stakeholders Function and Responsibility

Ministry of Finance (MoF)

National Health and Family Planning Commission (NHFPC)incl. The State Food and Drug Administration (SFDA or CFDA)

Ministry of Human Resources & Social Security (MoHRSS)

Ministry of Civil Affairs

Ministry of Commerce (Mofcom)

Setting the price of drugs and medical services

Investment in healthcare sector as well as subsidies for health insurance

Formulating industry policies, supervising the operation of state-owned hospitals, drug registration and safety/quality administration, disease prevention, etc.

Management of medical care programs and the reimbursement system

Medical aid for the poor

Regulates the distribution of medicines and medical equipment

The State

Council

• Voluntary basic medical insurance for rural residents

• Covers ~60% of population

• 40-80% inpatient reimbursement ratio

• Voluntary program for urban residents not eligible for UEBMI (seniors, unemployed, children, students, disabled)

• Covers ~15% of population

• 40-80% inpatient reimbursement ratio

China Healthcare Market – sources of funding

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Source: NHFPC

• Urban Employee Basic Medical Insurance, a mandatory program for employees of urban state-owned and private enterprises

• Covers ~20% of population

• 75-85% inpatient reimbursement ratio

Sources of healthcare expenditure funding Key Public Plans

Government• Administrative expenses• Subsidies to public plans

(URBMI and NRCMS)

Social• Employer/employee

contributions to public plans• Commercial plans (~3%)• NGOs, donations

Out-of-pocket(OOP) expenses

100

30%

33%

37%

UEBMI

URBMI

NRCMS

China Healthcare Market – flow of expenditure

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Source: WHO

Composition of healthcare expenditure

9%

Pharmacies 11%

Clinics

Others

Public HealthOrganizations

2%

7%

AdministrativeOrganizations

8% Hospitals

63%

County/Township/Community

Level Hospitals

City LevelHospitals

37%

63%

Treatment charges

Drug sales

60%

40%

Hospital Revenue by type

Hospital revenue of city tier

1. China Healthcare Market

2. The Healthcare Reform and Key Recent Policy Updates

Agenda

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China is using 3% of global healthcare spending to address healthcare needs of 22% world’s total population

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3.0%

97.0%

China

RoW

China % share of world’s healthcare spend

22.0%

78.0%

China

RoW

China % share of world’s total population

Source: WHO

Significant achievements made to date – improved quality of health

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Life expectancy at birth (years)

2000 2010 2014

767572

Maternal mortality ratio1

2000 2010 2014

27

35

58

Under 5 yr olds mortality ratio2

2000 2010 2014

11

16

37

1: per 100,000 live births2: per 1,000 live birthsSource: World Bank Group, World Development Indicators 2016

Significant achievements made to date – expanded insurance coverage

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Basic medical insurance coverage – 2000 vs. 2014

95%

2000

20%

2014

Out-of-pocket expense as % of healthcare spend

33%

2000

59%

2014

Source: WHO, NHFPC

Significant achievements made to date – better access to healthcare

Source: OECD, NHFPC

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Hospital beds per 1,000 population

2.92.5

4.8

Physicians per 1,000 population

OECD Median

3.2

2.6

2.1

OECD Median

But still, China is faced with serious long term healthcare challenges

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90mn

25% Chinese population is aging very rapidly. In 1982, only 5% of the total population is aged over 65. In 2010, the number has increased to 9%. By 2050, it is expected to reach 25% (same as the level in Japan)

Burden of non-communicable disease (NCDs, cancer, cadio disease, diabetes, etc.) is increasing, due to changing lifestyle and environmental issues – currently there are 90mm people with diabetes. This will drive up outpatient visits, hospitalizations and overall medical spending

Demographic shift

Epidemiological change

100mn

Diversifying needsRapid social stratification (100mm incremental middle class population expected in the next decade) means diversifying healthcare demands –private hospitals, high-tech medical devices, patented drugs and commercial health insurance need to be developed to cater to the country’s well-to-do population

Objective of current healthcare reform is to establish a basic universal healthcare system that provides safe, effective, convenient and low-cost services by 2020

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2009, start of the “New Healthcare Reform”

2016, current year

Medication

Service Delivery

Reimbursement

2009EDL

2010cGMP

2013EDL 2012Generic Consistency Evaluation

2015Free drug pricing,Accelerated drug approval,Biosimilar guidelines,generic guidelinescGMP deadlineMultiple rounds of drug price cuts by NDRC

2009Public hospital bidding

2013County public hospital reform

2015City public hospital bidding

Separation of Rx and dispending (e.g. zero mark-up)

Tiered diagnosis and treatment

2009More financial support, 90% coverage, OOP burden 55%

201495% coverage33% OOP

2015Critical illness insurance

Coverage increases, Out-of-pocket (OOP) burden lowered

Issue 1 – maldistribution of healthcare resources…

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8%

26%

66%

41% 102%

88%46%

13% 60%

Hospital Bed Utilization Rate

Inpatient volume as % of total

Hospital Number as % of total

Grade 2 Hospital

Grade 3 Hospital

Grade 1 Hospital

Source: China Healthcare Yearbook

…Which exacerbated the problem of access

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Beijing Xiehe Hospital Beijing Xiehe Hospital Beijing Ob & Gyn Hospital

Beijing Ob & Gyn Hospital Beijing Oncology HospitalPeking University 3rd Hospital

Key Policy Focus 1 – rationalization of the delivery system

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Promotion of tiered diagnosis and treatment on a national scale1

Loosening control on doctor’s multi-site practice2

Development of primary care service network in urban and rural area3

Issue 2 – increasing reimbursement pressure

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Annual premium income/expenditure of public med care plans (RMB BN)

Med care plans’ surplus/deficit position by city

400

800

1,000

1,200

0

200

600111

188

20142013

145

140

155

8877

201520102009 20122011

Income Expenditure Surplus

• On the national level, public plans are still at surplus position, but is facing increasing balancing pressure giving demographic shift

117

22

86

225 municipalities in total

Deficit, on cumulative basis

Deficit, on annual basis

Surplus position

• But on municipality level, almost half of the cities are already in deficit position (mostly in less developed mid-west regions)

Key Policy focus 2 – expanded funding sources and better cost control

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Encouraging private investment into healthcare service sector1

Encouraging the development of commercial medical insurance2

Hard reimbursement cap for hospitals, DRGs3

Multiple rounds of price cuts for drug purchase, zero mark-up at hospital level4

Issue 3 – low efficiency in the distribution system

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Drug/device distribution in China Drug/device distribution in the U.S.

Manufacturer

W1

W1

Hospitals

W2

W2

W3

W3

…

…

Tier-1Wholesalers

Tier-2Wholesalers

Agencies A1 A2 A3 …

• ~15k drug/device distributors in China

• Channel mark-up accounts of 30-50% of total retail price

Manufacturer

GPO1

Hospitals Hospitals

GPO2

• ~72% of hospital purchases made through GPOs

• GPOs earn ~3% admin fee and save an estimated 10-20% on hospital purchases

Source: Healthcare Supply Chain Association

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The “two invoices” policy1

Key Policy focus 3 – improving channel efficiency

Healthcare sector VAT reform2

Issue 4 – lacking behind in fostering innovation

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PharmaCo R&D spendingas % of sales

6.9%

18.6%

NDA Submissions in 2015

15

40(1)

(2)

(1): incl. NME and BLA(2): incl. chemical class 1.1, 1.2, 1.3 and biologics class 1

Average time used for NDA review (months)

42

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Key Policy Focus 4 – fostering innovation

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Clinical trial data inspection1

Generic quality and efficacy consistency evaluation2

Reform of categorization for chemical drug registration3

New CFDA mechanism for priority review and approval4

Carry out of Marketing Authorization Holder (MAH) scheme in 10 provinces/municipalities5