Centralized purchasing expands as healthcare reform deepens.

As a centrally controlled country, he Chinese government plays a large role in furnishing healthcare facilities. With the growing market economy, however, the government's investment gradually has decreased in the past 20 years. Currently, China's healthcare spending is only 4 percent of GDP, compared to 20 percent of GDP in the United States. As the basic healthcare system deteriorated and costs rose, public outcry to control prices prompted the government to reinstate its control over products and services as part of the universal healthcare reform currently being implemented.

Central purchasing programs in the form of public tenders--or bidding processes-have been reinstated and will expand to include more medical supplies and products in the future.

In 2004, when China started to introduce advanced medical technology and equipment into the healthcare market, the Ministry of Health (MOH) organized a group of experts--leading physicians, medical technologists and government officials--to evaluate and approve importation of large devices, such as computerized tomography (CT) and magnetic resonance imaging (MRI) systems. The group's objective was to make sure that the products introduced to Chinese hospitals represented current technology and to prevent China from becoming a dumping ground for secondhand or obsolete equipment. Government funding also was approved based on support from this group. Because of this group's decision-making power, its members were intensely courted by companies and hospitals. Rumors of corruption and favoritism were widely suspected.

Between 2005 and 2006, private investment and financing companies began to enter the medical market. Eyeing a large patient base and high outpatient volumes, financiers were willing to afford the equipment purchase initially and share profit with the hospitals. It was common for a CT unit (costing around $1 million to $1.5 million) to be fully paid back in a little more than a year. Excessive prescriptions of unnecessary procedures were rampant.

As costs rose, public discontent began to surface and became louder at the 2006 National People's Congress, where healthcare costs and consumer prices were the two hottest topics among delegates. Following the conference, a special group was assigned to look at the healthcare system, which decided the past 10 years of market-driven healthcare management were "fundamentally unsound." Consequently, the National Development and Reform Commission (NDRC), the top level macro economic authority under the State Council, began to plan for healthcare reform and a universal health insurance program, which are aimed at rebuilding the fundamental healthcare system, expanding health coverage and reducing patient costs.

Recent Activities

With the approval of NDRC, MOH restated the approval process for large equipment, such as positron emission tomography and expanded into high-end, high-priced medical consumables, such as stents. MOH organized joint purchasing agreements for hospitals in eight provinces for high-end consumables. Beijing City also organized similar programs in 2006 and 2007 for the same categories of products. Each program brought the pricing for these products down by 26.5 percent and 22.1 percent, respectively. Building on this success, MOH organized a national purchasing plan in 2008, affecting high-value disposable products in four categories: cardiac pacemakers, cardiac electrophysiology products, cardiac implants and peripheral cardiovascular implantable products. MOH selected a list of suppliers, their products and invited them to bid on their best prices. Manufacturers who won the bid to provide these products are required to sell under the approved pricing to nonprofit hospitals. According to reports, 78 domestic and international companies with 1,106 products participated in this program. MOH selected 71 companies and approved 948 products. According to MOH, this move reduced average pricing by another 10.08 percent.

Although such government-managed purchasing programs achieved the objective of bringing down healthcare costs to patients, the cost to manufacturers was high. In addition to reduced profit margins, manufacturers needed to pay high fees to participate in the purchasing plan. Companies that make high-quality products were forced to compete with lower-end, "similar" products. Lack of technical knowledge and understanding of product application by the evaluators also played a role in such an inadequate decision-making process. The need to "protect" certain Chinese industries or companies because of their economic contribution to the regional economy also hinders the fair and honest bid process. In addition, the process also squeezes the profit margins that distributors rely on, causing many to either abandon their original business model or move into manufacturing, which can be a risky proposition for both the business as well as consumers.

Healthcare Reform and Central Purchasing

This column has reported the ongoing healthcare reform and the universal health insurance program in China, for which the central government committed $125 billion. With the programs being implemented this year and with $5.9 billion as part of the economic stimulus program, the medical market should see good growth in 2009.

The healthcare reform implementation program stipulates that by 2011, through central governmental and regional government investments, at least one county-level hospital in each county should reach the standardized Class II hospital level. Each administrative region (there are 31 regions in the country) and its provincial level cities must have established a network to provide healthcare service to its residents. MOH drafted a guidance document for county level hospitals and clinics, identifying medical equipment needed for these health centers. County-level hospitals must have a CT scanner, X-ray machine, color ultrasound, endoscope, respirator, electrocardiogram, blood gas analyzer, childbirth monitor, infant jaundice treatment machine, surgical eye microscope, ear/nose/throat treatment machine, dental station, blood cell counter, urine analyzer and an emergency vehicle. MOH will organize public tenders--a public bidding process--for some of the high-end equipment in the above list, or to provide technical guidance to provincial governments, which will administer their own bid programs.

MOH has completed the first high-end medical consumable (such as cardiac and neuro-implantable products) and large equipment (such as PET-CT and accelerator) tenders for 2009. The next step is to organize tenders for other consumables, such as bone implants. For equipment and consumables requested by the basic healthcare system, there will be tenders by the central government or regional governments.

For high-end equipment, such as CT, cardiac imaging systems, endoscopes and some large laboratory instrument, MOH will continue to use its central bidding program.

To aid regional governments in selecting the right products for their hospitals, the China Association of Medical Equipment, which is associated with the Ministry of Health, has provided product and technology evaluations since 2006. In the past three years, this association evaluated 1,743 products in 22 categories. The association recommended 69 percent of the products evaluated.

Going Forward

With the release of the health reform plan and the national program for basic healthcare insurance, more programs will be expected to further reduce the cost to patients. Given increased government investment into the healthcare system, there will be more government involvement in deciding what equipment a hospital can use or where to buy it. Indeed, such a heavily government-managed purchasing program will achieve the objective of reducing the healthcare cost to average patients for the time being.

The negative impact of such programs also is inevitable. The program increases the concentration of technologies and production advantage for a few large suppliers, while discouraging new companies and new advanced technology, reducing competition in the industry. There are 17,000 government-owned healthcare institutions in China, and it is questionable if all their needs can be served by the products contained on one list. Centralized purchasing also can be seen as a step back to the old "government-controlled" economy, where centralized decision and authorities tend to breed poor judgment and corruption.

But the process has just started. And many adjustments will be needed. The question of how these policies will affect the purchase behaviors remains.

Chang-Hong Whitney is president of Whitney Consulting Ltd. in Massachusetts. With an MBA from Babson College (Wellesley, Mass.) and undergraduate degrees in electronic engineering and international business, she has been consulting for western companies on doing business in China since 1994, focusing on the medical device market. Her services include China regulatory affairs, market research, sourcing and logistics programs and China business strategies. She can be reached at [e-mail].