Recent health care reforms open the door to insurers, hospitals, and IT vendors.
Claudia Süssmuth-Dyckerhoff and Jin Wang
In response to growing social pressures, China’s central government announced last year a series of health care reforms. Its goals are ambitious: to establish a basic, universal health care system that can provide safe, effective, convenient, and low-cost services to all of the country’s more than 1.3 billion citizens. The reforms therefore affect most facets of health care delivery, including insurance, primary care, hospital management, medications, and public health.
These reforms—and the $125 billion the government has committed to support them—will probably improve the quality of care and enhance health outcomes for the Chinese people. They will also stimulate China’s health care market and create opportunities for private payers, providers, and IT vendors.
The size of that market—which we estimate at $240 billion, about 5 percent of China’s GDP—could exceed $600 billion within ten years. If China’s health care spending simply keeps pace with projected GDP growth, it will increase to $480 billion by 2018. We, however, believe that it is likely to rise faster than GDP, as a result of better insurance coverage, improved access to high-quality care, and rising demand (tied to aging, urbanization, and lifestyle shifts). If health care spending hits 6.5 percent of GDP by 2018, the market could increase by an additional $150 billion.
Because the reforms’ primary objective is to ensure broad access to basic health care services, the government will continue to dominate the market, especially from a delivery standpoint. Nevertheless, the changes make it more attractive for private companies to enter, by clarifying the roles public payers and providers will play, identifying niches for private players, and making the operating environment more transparent and fairer for them.
Opportunities for payers
Although private health insurance plays a small role in China, this market is not insignificant, given the country’s population: in 2008, premiums totaled about $8.4 billion. If that spending continues to rise at the rate we anticipate and the role of private health insurance expands—as the government hopes it will—the market could reach $90 billion by 2020.
For private payers, supplemental coverage and program management are the best opportunities. Since the depth of the coverage provided by public insurance programs will continue to vary significantly across different types of insurance and by geography, additional products to provide supplementary coverage could be quite attractive to many Chinese consumers. A product tailored to the broad population, for example, could offer safety net coverage, such as reimbursement beyond the public programs’ annual caps. Alternatively, a company could target affluent consumers with a more comprehensive offer, including access to high-end hospitals and services.
Private payers also have an opportunity to partner with local governments to help them manage the public insurance programs. In some regions and cities, governments have begun to work with private companies to leverage their expertise in a range of areas, including benefit design, enrollment, and provider management. Private companies can help such governments develop customer insights, optimize the design of products, and track subscriber data more comprehensively. In addition, they can show governments how to accelerate the adoption of standard treatment protocols, install performance-monitoring mechanisms, and minimize variations in treatment costs.
A few foreign payers have started entering the Chinese market to take advantage of the opportunities. In 2009, the South Africa–based health insurer Discovery Holdings acquired a small stake in Ping An Health Insurance, one of China’s largest private health insurers. WellPoint too is taking the plunge in China’s payer market.
Opportunities for providers
Although private hospitals have been permitted for more than 15 years, their role is still quite limited: they account for only 6.5 percent of China’s hospital beds. At present, the country has three main types of private hospitals: high-end, service-oriented ones, which target expatriates and wealthy Chinese patients; specialty facilities, which typically focus on elective services, such as simple dental procedures; and large general hospitals. The first two types enjoy clear market positioning but have often been constrained in scale. Hospitals in the third category, which compete directly with large public institutions, have struggled to develop a differentiated and competitive value proposition. As a result, most Chinese patients still prefer to go to public hospitals, despite dissatisfaction with the level of service there.
Until recently, all three types of private hospitals were held back by unfavorable government policies—most notably, the stipulation that each doctor could register and work in only one facility. Given this restriction, most doctors opted to work in public hospitals, which offered them a clear and stable career track. As a result, private hospitals found it difficult to hire medical staff and thus could not compete on a reputation for high clinical quality.
Furthermore, private hospitals have faced reimbursement restrictions. In many cities, they were not eligible to join the hospital networks covered by public health insurance. In cities where they were covered, their reimbursement rates were below those given to public hospitals.
But the latest reforms are starting to remove these constraints. The most important change was included in both the central government’s overall reform guidelines and the implementation policies put in place in a number of cities: doctors may now practice at multiple facilities, including private hospitals, making the best doctors more mobile and easier to recruit. As a result, private providers could begin building hospitals (or leveraging existing facilities) that combine high clinical quality and high service levels to address the needs of the fast-growing affluent-patient segment. There are also an increasing number of signs—a recent announcement in Shandong Province, for example—that private hospitals are now being considered for inclusion in public health insurance networks on the same terms as public hospitals.
Once all these reforms are in place, the role of private hospitals should expand. We anticipate that within the next few years, they could account for at least 8 to 10 percent of all hospital beds, up from the current 6.5 percent. Private providers will play an important role in China by creating healthy competition with public hospitals and addressing unmet needs.
A few international providers, such as Singapore-based ParkwayHealth, have established a presence in China and have plans to expand gradually. Several others are looking to tap into the opportunities in China within the next few years. There are also rumors that the government will open the market to 100 percent foreign ownership in private health care facilities, though no official word has been given. Foreign ventures are already allowed to hold 70 percent stakes in such facilities.
Health care IT opportunities
The government’s reforms clearly articulate the need to improve the health system’s poor IT capabilities. China’s Ministry of Health is therefore making a concerted effort to define what information should be in the electronic medical records (EMRs) to be used by payers and providers, as well as what should be in the personal health records of individual patients. Stakeholders (such as the provincial bureaus of health and industry) have not yet aligned on common IT standards and the path for developing them.
Nonetheless, some regions are moving forward to adopt new IT systems. Beijing, for example, is piloting a regional health information network that integrates data from different types of providers. Provinces such as Jiangsu and Fujian are also launching pilots to speed EMR use.
Thus, China is a nascent market for private health care IT vendors, but it could become an important one. Early entrants have the chance to help develop the platforms of the future and to standardize the products that will help gather, link, and analyze data. IBM, which has already entered the market, is working with a leading Chinese academic medical center to develop an evidence-based patient care system.
China must find a way to ensure sustainable funding if its reforms are to succeed in the long term and if health care is to become affordable for its citizens. It must also improve the institutional capabilities of all organizations within the health care system—at the national, regional, and city levels—so that they can implement the needed changes. Although private companies, especially commercial payers and providers, will continue to have only a small share of the Chinese market, they can play an important role by helping other parts of the health care system acquire the needed capabilities and putting pressure on public providers to improve their care.
About the Authors
Claudia Süssmuth-Dyckerhoff is a director in McKinsey’s Shanghai office, where Jin Wang is an associate principal.