Navigating China's Healthcare Reform 'Deep Water Zone': Insights from Cai Baoguang and Chen Qiyu
Nowadays, the most significant keyword in China’s healthcare reform is “deep-water zone.” At the recent National Conference on Health and Wellness, President Xi Jinping emphasized that the reform of the medical and health system has entered a deep-water zone, reaching a critical stage where tough challenges must be confronted. So, what does “deep-water zone” mean? It refers to a situation where one can no longer feel the stones underfoot or cross the river by groping for them. In such deep waters, those who cannot swim or fail to resolve issues quickly will exhaust their strength and drown.
Healthcare Reform in Uncharted Waters: Three Paths, All Fraught with Uncertainty and Risk. How Do Pfizer’s Greater China President Bao-Guang Cai and Fosun Pharma Chairman Qiyu Chen View These Challenges? Can Overseas Experience Offer Solutions? At the 2016 Xipu Conference, They Provided Detailed Insights. VCBeat (WeChat ID: vcbeat) Reporters Have Compiled and Edited the Highlights.
In the "deep-water zone" of healthcare reform, Cai Baoguang stated that direction can be found through iterative experimentation. Navigating this complex phase of healthcare reform is akin to finding one’s bearings in the open sea; it is a challenge not only for China but also for many countries worldwide, including the United States. Despite years of effort, healthcare reform in the U.S. remains incomplete. Data shows that in 2014, U.S. healthcare expenditure reached $3.1 trillion (RMB 19.2 trillion), with healthcare spending consistently accounting for over 17% of GDP, and per capita healthcare consumption averaging approximately $9,700 annually. In contrast, China’s healthcare expenditure accounted for only 5.5% of GDP in 2014. Although this figure has been rising in recent years, per capita healthcare consumption in China remains only about 1/22nd of that in the U.S. It is evident that while healthcare expenditure has been growing annually—with an average growth rate of approximately 21% from 2006 to 2014, reflecting the finance department’s ongoing efforts to adjust and optimize expenditure structures and increase healthcare funding—overall medical costs in China remain significantly lower than those in the U.S. Therefore, as healthcare reform enters its most challenging phase, continued and increased government investment is essential to provide adequate support.
Chen Qiyu argues that China’s issues must be analyzed in light of its history and national conditions. Much like the reform and opening-up era, when China’s economy had reached a crossroads, increasing household income was also a challenge in the deep-water zone of reform. Faced with this dilemma, it was essential to avoid detours. Therefore, reforms were piloted in Shenzhen. During the pilot phase, other provinces and cities were uncertain about the path forward. However, it eventually became clear that without Shenzhen’s pioneering exploration, there would have been no successful reforms, no marketization, and no subsequent comprehensive national development driven by Pudong’s reform and opening-up.
Therefore, for healthcare reform in the "deep-water zone," it is essential to first ensure overall stability, keeping critical safeguards intact and orderly, while actively accelerating exploration of the reform direction. In determining this direction, we can leverage external insights; it is hoped that the National Leading Group for Healthcare Reform will comprehensively review global models during policy formulation and exploratory efforts to identify which approach best aligns with China's national conditions. However, to define the ultimate direction of healthcare reform and navigate the "deep-water zone," a pilot-based approach should be adopted. Regarding pilots, we currently possess favorable conditions, including abundant and robust government resources as well as highly dynamic market resources. The key to China's healthcare reform lies first in effectively leveraging the government's substantial resources and payment capacity; second, we benefit from a vast capital market, keen investment awareness, and a large workforce affiliated with the healthcare industry—including physicians, pharmaceutical R&D and manufacturing enterprises, retail outlets, and internet platforms—all of whom have accumulated extensive market-oriented experience under the current healthcare environment. On the market side, whether in hospital reform, pharmacy channel reform, or pharmaceutical manufacturing and distribution reform, it is necessary to explore a path suited to our own context. Yet, how to conduct and encourage such exploration across these segments involves two core elements.
One issue concerns our payment system. Currently, both China and the United States are undergoing healthcare reforms. Although the two countries are at different stages of reform, it is evident that both prioritize strengthening the intermediary link, namely the improvement of health insurance payment mechanisms. The second issue relates to value distribution. The most critical challenge to address is the fair allocation of value among physicians, as well as medical entrepreneurs and innovators. Successfully resolving this issue would significantly bolster confidence in healthcare reform.
In the healthcare sector, the prevailing wisdom of the past was that “whoever wins over physicians wins the market.” However, since the investment surge began in 2014, companies—whether investment-oriented enterprises like Fosun Pharma or R&D-focused giants like Pfizer—have not directed their efforts and resources toward physicians. Instead, they have adhered to the philosophy that “whoever wins over patients wins the market.” How do Cai Baoguang and Chen Qiyu interpret this shift?
Cai Baoguang expressed strong agreement with the notion that “winning patients means winning the market,” and shared insights based on overseas trends from three perspectives.
1. Internet Trends.As discussions around internet-based healthcare intensify, medical e-commerce has become a focal point. In reality, internet platforms serve not merely as sales channels but also as primary sources for patients to gather information. According to international surveys, 78% of respondents obtain health-related information via the internet—a significant figure, especially considering that only 86% acquire such information from physicians. This indicates that the proportion of individuals using these two channels is quite similar. Therefore, it is evident that the internet has become an important source of health information for patients and represents a major future trend.
Second, New Product Trends.U.S. consumers are highly eager for new products. According to statistics from the U.S. retail product industry, 67% of surveyed patients expressed a demand for new products, stating their willingness to purchase and try them as soon as they become available. They place greater trust in new products to deliver superior medical outcomes, making the development of new products an emerging trend.
3. Sales Channel TrendsThree Keywords: Technology, Internet, and Value Restoration. Many American consumers seek low prices when purchasing products, while also maintaining high expectations for product value and service. When choosing a pharmacy, consumers prioritize either its pricing or specific services, a trend that should become the international norm.
“Ultimately, any industry is won by those who win over users; in the healthcare sector, these users are often patients.” Chen Qiyu expressed a similar view. Meanwhile, he highlighted several variables.
First, there is a shift in the “user” demographic. In the past, users in the healthcare sector were almost exclusively patients. However, with the development of the broader health and medical industry, many medical products are no longer used only after the onset of disease but are also utilized by individuals in a sub-health state. This evolution in products has consequently altered the target audience.
Secondly, the adage “he who wins the doctors wins the market” can be interpreted as physicians holding authoritative status in the doctor-patient relationship, with patients accustomed to deferring decision-making to them. However, as healthcare consumers’ knowledge levels rise and internet influence expands, their understanding of medical knowledge and skills has improved significantly. This poses a challenge for hospitals and physicians, while consumers also learn to address issues through alternative channels. Therefore, although physicians will remain important in the future healthcare market, their previously absolute dominance across the broader health industry will shift. This change is tiered according to the nature of the problem: for complex issues such as cancer treatment, physicians will continue to lead; whereas for matters related to health maintenance and over-the-counter (OTC) products, pharmaceutical companies and pharmacies may assume greater importance.
Another variable lies with insurers or payers, who act on behalf of end users. Particularly in the selection of generic drugs, payers wield greater power to represent consumers, potentially leading to a multi-layered transformation of the overall landscape in the future.
Synthesizing the above perspectives, it can be understood that physicians’ decisions follow the principle of “winning over physicians wins the market,” while patients’ decisions align with “winning over patients wins the market.” Which areas fall under patient decision-making? Over-the-counter (OTC) drugs are the primary example. Even among prescription drugs, a significant portion is determined by patients rather than physicians. Although the initial consulting physician provides a diagnosis and formulates a treatment plan, patients subsequently “vote with their feet.” This critical phase mainly involves health supplements and medications for chronic diseases, where decision-making power rests not with physicians but with patients. Therefore, it can be firmly asserted that “winning over patients wins the market.”
What is the biggest difference between pharmaceuticals and pharmacies in China and the United States? In China, 80% of pharmaceutical sales occur in hospitals, while only 20% take place in retail pharmacies; in the U.S., the situation is precisely the reverse, with 20% sold in hospitals and 80% in pharmacies. The primary approach to addressing this imbalance—and one of the major topics in China’s healthcare reform—is the “separation of prescribing and dispensing.” Many people mistakenly believe that this policy aims to end the practice of “subsidizing medical services through drug profits.” In reality, its goal is to transform the longstanding “80/20 structure,” a traditional model that has clearly led to national resource waste and regulatory challenges. Although the concept of separating prescribing from dispensing has been proposed for many years, when will it actually be implemented for public hospital drug sales? Chen Qiyu and Cai Baoguang have offered their perspectives on this issue.
“This is actually a concern shared by all, and it is also a matter of strategic direction. Achieving a shift from an 80/20 to a 20/80 ratio in China is extremely difficult, and the timeline for such a transition is unpredictable.” Chen Qiyu first expressed his viewpoint. From the perspective of development trends, perhaps reducing the proportion of pharmaceuticals in hospitals to a 50/50 structure would represent a reasonable and balanced state. The next step is to consider which medications should remain within hospitals. Based on the current medication structure, considerations could include high-value products such as oncology drugs, essential medications for inpatient treatment, or drugs that require administration under physician guidance. Conversely, medications involved in chronic disease management, as well as those prescribed in outpatient settings, can be transferred to external pharmacies. During this transition, special attention must be paid to the distribution of benefits between hospitals and pharmacies, as well as their respective capacity to handle the change. For pharmacies, ensuring government and consumer confidence, and safely and smoothly taking over the medication market flowing out from hospitals, requires strengthening self-regulation among pharmacies and enhancing the professional competencies of licensed pharmacists.
Regarding the timeline for the implementation of the separation of prescribing and dispensing, Cai Baoguang also offered an unpredictable conclusion. He believes that achieving this outcome involves government policy factors and the management of various aspects of the separation process. Meanwhile, reforms in healthcare payment systems and proprietary pharmacies, as well as the development of pharmaceutical manufacturers and commercial pharmacy chains, will play key driving roles. Finally, Cai Baoguang stated that if progress continues in this direction, he hopes that by the time of the 15th Westpu Conference (the 9th was held in 2016), the ratio could reach 51% to 49%.