Cancer in China's healthcare system

The Economist (see below for more text) talks about China's failed healthcare reform

• "Hospitals, deprived of many of their subsidies, have become highly dependent on medicine sales, income from which now typically accounts for more than 40% of revenue (see chart).
• After mark-ups by hospitals and distributors (also mainly state-owned), the retail price of medicine can be 20 times higher than it is at the factory gate. [note: for most drugs it is about 3 times higher]
• In the half-reformed mess that is China's health-care sector, selective price controls are of little use. Without any significant increase in government support (the share of China's total health expenses borne by private individuals has increased from a little over 20% in 1978 to a touch over 58% in 2002), state-run hospitals will continue to regard patients as a primary source of revenue. "

China's healthcare reform is based on a half-hearted attempt to adopt the Singaporean system. It failed because it only copied half of the system. For example, without rationalizing diagnostic fees, the hospital cannot cover its cost and the physicians are badly paid, hence there is no way to correct the problem of overprescibing drugs. Without a proper insurance and reimbursement system, it is impossible to align reimbursement to insurance premium and hence no accoutnability on spending. When you have a good solution and you only get half of it, it is worse than importing a bad solution.

There is a cancer in China's healthcare system, corruption. Such corruption is hard to cure because it interwines with the whole system. Healthcare providers (hospitals and hysicains) are not paid for what they do. Diagnostic fees are capped at 10-20RMB, so they have to cover their cost through kickback at overprescibing drugs. This further exacerbates the problem because of the waste over unnecessary drugs, medical materials, equipments and operations. Cancer cells feed on the nutrients supposedly for healthy cells, but if you try to kill the cancer cells, you end up killing more healthy cells.

The Economist correctly stated the problem as the corruption in overcharging and overprescibing drugs. But the Economist wrongly scapegoated the government's lack of subsidy. The core of the problem is the hospital fee and insurance/reimbursement system, not the amount of government subsidy. Without a transparent pricing and reimbursement system, corruption will eat away any subsidy the government is giving.

Price control was also blamed by the Economist article. But that is not a major problem either. Chinese people have learned to circumvent price control, exacly the way we buy discounted tickets from airlines. i.e., there is an officially approved price-tag, and there is a real '(discounted) transaction price'. Unfortunately, due to lack of competition in the healthcare provider, the discount only reach the hospital/wholesaler level, and the patients end up paying for the "listed price" most of the times. As a matter of fact, the lowering of list price does help to alleviate the burden on patients. (France and many EU countries has price control for drugs as well) Then why was the drug revenue still stands at the 40% of total hospital revenue? Reasons:

1. Quantity: physicians can prescibe many differnt types of (unneccessary and even useless) drug
2. Price: physician can switch to newer products ("new" or "innovative" drugs are effectively not under price control) even if there is no visible difference in efficacy, because physician+hospital take a cut of 20-60% of the amount the patients pay

The problem of China's healthcare system is not due to lack of subsidy. It is the result of a totally screwed up system which does not align cost to price, thus creating the opportunity for corruption. It does not reward healthcare providers properly, thus encouraging and even forcing widespread corruption.

The cancer in China's healthcare system can be cured. It requires a transparent system with accountability. Moreover, to prevent corruption (and hence waste) the providers need to be rewarded for what they do. China did not fail because it imported Singaporean or American healthecare solution. It failed because it imported fragments of it and left out a number of loopholes.

The solutions to corruption in hospitals and in the city government are the same: reward them properly and align what they are rewarded to what they actually do.

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Medicine in China Gouged
Nov 17th 2005 BEIJING

Market forces have left patients hurting
“GETTING your appendix out, is a year's farming up the spout,” goes the jingle in China, where the collapse of a once widely admired state-subsidised health-care system has left many citizens unable to afford even the most basic treatment. But the government's efforts to tackle the problem by ordering big cuts in medicine prices are winning it few admirers. Demands are growing for far more profound reforms.
While most prices have been freed from state control in the past 15 years, those of prescription medicines remain government-regulated. This has been of little comfort to patients, many of whom were once able to reclaim their expenses but now have to pay themselves. Hospitals, deprived of many of their subsidies, have become highly dependent on medicine sales, income from which now typically accounts for more than 40% of revenue (see chart). After mark-ups by hospitals and distributors (also mainly state-owned), the retail price of medicine can be 20 times higher than it is at the factory gate. A government survey published last year said nearly 30% of city residents recommended for hospitalisation refuse to be admitted, with some 70% citing the cost—though the cost of medicines would only account for part of that.
In the past eight years, China has ordered 17 price reductions affecting a wide variety of prescription drugs. In September the biggest cuts yet were announced. From October 10th, retail prices for 22 types of medicine, comprising more than 200 brands, were to be reduced by an average of 40%.
The numbers were headline grabbing, but have failed to impress patients and have been greeted with scepticism even by the state-controlled media. Not surprisingly, the pharmaceutical industry has been especially vocal. It says the latest move could further damage a sector whose profit margins have already been plummeting thanks to repeated price cuts, rising raw material costs, new quality standards and growing competition. Thinner margins, the drug firms complain, mean less money for developing new products.
In the half-reformed mess that is China's health-care sector, selective price controls are of little use. Without any significant increase in government support (the share of China's total health expenses borne by private individuals has increased from a little over 20% in 1978 to a touch over 58% in 2002), state-run hospitals will continue to regard patients as a primary source of revenue. To circumvent price cuts, doctors simply prescribe more, prescribe medicines not affected by the cuts, or recommend more (and often unnecessary) tests for which patients have to pay.
The government has tried to introduce greater price competition by relaxing restrictions on the medicine retail sector. But there have been problems: some of the new pharmacies have had their windows smashed by “unknown” attackers. Some hospitals have reportedly put pressure on distributors not to deal with them. Some have found their stocks rapidly bought up by distributors' agents—great for sales, but not for consumers. And in a market awash with fake medicines, the well-established chains are often considered a safer choice, despite their higher prices.
The price cuts this year would have been bigger—an average of 60% had been proposed—were it not for the pharmaceutical industry's pleas. But for consumers, it is unlikely that this would have made much of a difference either. Poorly-paid doctors have every incentive to find ways of keeping the revenue flowing.

In recent months, debate about the need for more thorough-going reform has intensified. The debate has been given extra momentum by an unusually hard-hitting report by a government think-tank early this year. It declared medical reforms to be “basically a failure”. One proposed solution is to concentrate government resources in key hospitals (giving them sufficient funds to avoid the need to gouge patients) and turn the rest over to private control. But there are also some who argue that introducing market forces into the medical system has been the root cause of the current problems. While officials struggle to reach a consensus, the pharmaceutical industry fears there is more meddling with prices to come.