Impact of China's New Healthcare Reform on Medical and Health Enterprises and Strategic Responses

In recent years, a series of healthcare reform policies have been frequently introduced, including medical insurance cost containment, drug price reforms, tiered diagnosis and treatment systems, comprehensive public hospital reforms, incentives for private healthcare provision, and the "two-invoice" system. Collectively, these reform initiatives aim to eliminate the practice of subsidizing hospitals through drug markups, address the difficulties and high costs associated with accessing medical care, and implement coordinated reforms across healthcare services, medical insurance, and pharmaceuticals. These measures are poised to exert a profound impact on the landscape of the healthcare market.

Recently, at the “Elite Circle” Medical Forum jointly hosted by Fortune Capital and China Merchants Bank, Song Longtao, Managing Director of Healthcare Investments at Fortune Capital, delivered a keynote presentation titled “Impact of the New Healthcare Reform on Healthcare Enterprises and Discussion of Countermeasures.”

A summary of the relevant content is compiled and shared as follows:

I. Overview of Healthcare Reform Policies

Based on the target entities, healthcare reform policies can be categorized into four major types: distribution, pharmaceuticals, health insurance, and medical services. The difficulty of reform increases progressively across these categories, and the time required for policy effects to materialize correspondingly lengthens.

1. Healthcare Sector:Tiered diagnosis and treatment has been elevated in priority, and public hospital reform has been “upgraded.” The “Key Tasks for Healthcare Reform in 2017” proposes to focus on advancing the development of five systems: tiered diagnosis and treatment, modern hospital management, universal health insurance, pharmaceutical supply guarantee, and comprehensive regulation.

The five top priorities outlined in the “Key Tasks for Healthcare Reform 2016” were to comprehensively deepen public hospital reform, accelerate the establishment of a tiered diagnosis and treatment system, consolidate and improve the universal health insurance system, enhance the drug supply and guarantee mechanism, and establish and improve a comprehensive regulatory system. Compared with 2016, the priority of tiered diagnosis and treatment has been elevated.

(1) Tiered Diagnosis and Treatment: In the "Key Tasks of Healthcare Reform in 2017," tiered diagnosis and treatment was elevated in priority. Medical consortia and family doctors, as important vehicles for implementing this system, received significant attention. The plan required that pilot programs for tiered diagnosis and treatment and family doctor contract services be expanded to more than 85% of prefecture-level cities.

(2) Comprehensive Reform of Public Hospitals: The "Key Tasks for Healthcare System Reform in 2017" proposed the formulation of guidance documents for the modern hospital management system, which helps to systematically review the experiences and policies from previous comprehensive reforms of public hospitals.

By the end of September 2017, comprehensive reform of public hospitals was fully rolled out, with all public hospitals eliminating drug markups (excluding traditional Chinese medicine decoction pieces). In 2017, the average growth rate of medical expenses in public hospitals across China was kept below 10%. Policies on medical service price reform were implemented, urban public hospital pharmaceutical price reforms were comprehensively advanced, and a regional coordination mechanism for medical service pricing was established.

2. Pharmaceutical Sector:Supply-Side Reform Continues to Advance

(1) Accelerate the consistency evaluation of quality and efficacy for generic drugs;

(2) Carry out pilot work on the marketing authorization holder system for drugs;

(3) Increase the number of drug varieties included in national price negotiations and ensure effective coordination between price negotiation outcomes and medical insurance policies;

(4) Further expand the scope of designated production for drugs in short supply.

3. Distribution Sector:“The Two-Invoice System” and “Centralized Volume-Based Procurement” Remain Key Priorities

(1) Implement the "Implementation Opinions on Promoting the 'Two-Invoice System' in Drug Procurement by Public Medical Institutions (Trial)";

(2) Adhere to the principle of centralized volume-based procurement, promote the implementation of classified drug procurement in public hospitals, cultivate entities for centralized procurement, and encourage cross-regional joint procurement as well as joint procurement of drugs and high-value medical consumables by specialized hospitals;

(3) Promote the establishment of a traceability mechanism for ex-factory drug price information;

(4) Encourage the development of chain pharmacies;

(5) Formulate guiding opinions on launching pilot programs for the centralized procurement of high-value medical consumables.

4. Healthcare Insurance Sector:Urban-rural integration, reform of medical insurance payment standards, cross-regional settlement of medical insurance, and commercial insurance continue to advance

(1) Completed the integration of the basic medical insurance systems for urban and rural residents, implementing the “Six Unifications”;

(2) The fiscal subsidy for urban and rural resident basic medical insurance has been increased from RMB 420 to RMB 450 per person per year, with a concurrent increase in individual contribution standards and an expansion of the scope of drug coverage;

(3) Comprehensively promote the establishment of a diversified and composite medical insurance payment system, with diagnosis-related group (DRG) payment as the primary method, supplemented by capitation, per-service-unit payment, and other composite payment models;

(4) Launch pilot programs for payment standards of medicines covered by medical insurance, and explore the formulation of payment standards for medical services under medical insurance;

(5) Develop approximately 200 clinical pathways, bringing the total to around 1,200; develop approximately 100 traditional Chinese medicine (TCM) clinical pathways;

(6) Promote the implementation of the Notice on Further Strengthening the Effective Coordination between Medical Assistance and Critical Illness Insurance for Urban and Rural Residents;

(7) Expand the pilot policy for individual income tax deductions on commercial health insurance premiums to nationwide implementation, and support social forces such as commercial insurance institutions in participating in the administration of medical insurance services.

II. Impact of Healthcare Reform Policies on Various Sub-sectors and Response Measures

1. Impact on Pharmaceutical Companies: Slower Growth and Structural Adjustment Are the Main Themes

"Adjuvant medications," such as antibiotics, traditional Chinese medicine injections, multi-component biochemical drugs, and nutritional agents—once highly favored in clinical practice—have become the focus of key drug monitoring programs implemented by public hospitals across various regions.

The latest round of adjustments to the National Reimbursement Drug List (NRDL) prioritizes new drugs with high clinical value, medicines significantly added through provincial Class B adjustments, as well as drugs for major diseases, pediatric use, emergency and critical care, and special occupational diseases. As provinces commence substantial expansions of their respective NRDLs, small and medium-sized pharmaceutical enterprises with high-quality, exclusive product portfolios are poised to gain a competitive edge and overtake rivals.

2. Impact on Pharmaceutical Commercial (Distribution) Enterprises

(1) The pilot scope of the “Two-Invoice System” was expanded, accelerating the consolidation of distribution enterprises;

(2) The outflow of prescription drugs has become an irreversible trend, serving as both an effective remedy and a natural outcome in dismantling the "drug-revenue-dependent healthcare" model.

3. Impact on Medical Device Companies

Challenges: Traditional sales practices will face stricter regulatory oversight, while illicit under-the-table transactions will be eradicated. Platform-based procurement and e-commerce models will disrupt conventional sales channels, fostering a transparent and fair trading environment for medical device sales that is subject to genuine public scrutiny. Higher standards will be imposed on product quality, safety, pricing, and after-sales service, prompting medical device companies to devote greater resources to product development and excellence. With tightening regulations, clear compliance requirements will apply to every stage of the medical device lifecycle, from manufacturing and distribution to clinical use.

Opportunities: Seize the grassroots market. The per capita funding standard for the New Rural Cooperative Medical Scheme has risen to 450 yuan. Enhanced purchasing power and increased reimbursement rates will stimulate the expansion of the grassroots market. Pay attention to private healthcare channels. Public hospitals cannot fully meet the public’s specialized treatment demands; private hospitals, specialized medical institutions, and even private clinics will become important supplements in the future. A significant number of public hospitals will continue to undergo restructuring into private or joint-stock hospitals, making it essential to prioritize the development of this channel. Market opportunities arising from the outsourcing of non-core services by public hospitals—such as medical imaging centers, clinical laboratory centers, and equipment maintenance and repair—will continue to emerge through divestiture.

4. Impact on the Landscape of the Healthcare Services Market

Opportunities: Policy support has cultivated a fertile environment for the development of private healthcare and attracted significant capital interest. In recent years, capital investment in private hospitals has primarily followed five models: acquisitions, greenfield hospital development, specialized chain operations, participation in hospital construction, establishment of private high-end medical centers, and involvement in the restructuring and entrusted management of public hospitals. Private hospitals have expanded aggressively, with substantial increases in both their numbers and market share. Over the past three years, the number of private hospitals has grown remarkably; since 2015, the number of private hospitals has surpassed that of public hospitals for the first time. Furthermore, reforms in public and military hospitals have provided excellent opportunities for private healthcare to recruit professional talent.

Challenge: Following the elimination of drug markups, public hospitals are expected to attract more patients by leveraging their relatively lower price advantage. Private hospitals, already at a competitive disadvantage in the market, risk being “abandoned” by some patients due to “homogeneous services at higher prices.” Regarding the loss of drug-related profits, estimates suggest that private specialized hospitals will be less affected due to their relatively lower proportion of drug revenue, whereas private general hospitals will lose approximately 30% of their drug-related profits.

Strategies for Private Healthcare Providers: Establish robust talent acquisition and incentive systems, such as equity incentives; enhance medical quality to build brand credibility for private hospitals; attract capital and expand scale; avoid direct competition with public hospitals by pursuing differentiated competition; achieve standardization, replicability, and informatization; adapt to trends and explore new models, such as the “pharmacy + clinic” model.