China can invent new drugs; paying for them is harder

• By Juliana Liu / Bloomberg Opinion

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China now rivals the US as a global center for pharmaceutical innovation, but its health insurance system struggles to keep pace with the cost of breakthroughs, leaving many patients unable to access top new drugs.

That is why a healthcare law passed last month is important. It restores explicit support for private medical insurance that was dropped from an earlier draft. It would allow private insurers to play a vital role in closing the gap between what the country’s basic medical insurance system can afford to cover and the expensive treatments its drugmakers are producing.

The benefits could eventually be far-reaching. For China’s innovative drugmakers — such as Jiangsu Hengrui Pharmaceuticals Co (恆瑞醫藥), BeOne Medicines Ltd (now headquartered in Switzerland) and Innovent Biologics Inc — a more developed private insurance market could help lift demand and profitability by making new treatments for everything from cancer to diabetes to insomnia more accessible.

The obstacles remain formidable. Insurers struggle to price coverage for novel treatments because they have little claims history and limited visibility into the clinical and real-world data needed to predict demand and costs, an industry white paper published in May said. Even when drugs are insured, people might find it hard to get them.

The need for an alternative source of financing comes from the limitations of China’s near-universal system, which covers about 95 percent of the population. The state insurance scheme is funded mainly by payroll contributions for urban employees and a combination of individual payments and government subsidies for everyone else. Even for covered treatments, patients can be left to shoulder about 30 percent of the bill, making affordability a major challenge.

There is an inherent tension. Expensive treatments added to the reimbursement list of covered drugs — which was introduced in 2000 — compete with cheaper, more mainstream ones. China has traditionally dealt with this trade-off by using access to its enormous publicly insured market to extract steep price cuts from drugmakers — basically telling companies to cut prices if they want to be on the list. That works well to contain costs, but it inevitably influences the care that patients receive.

Budget considerations mean newer, more effective medicines that have become standard therapies in wealthier countries remain out of reach for many Chinese. For example, Merck & Co’s blockbuster cancer treatment Keytruda (pembrolizumab) is used to treat everything from lung cancer to melanoma, but it has less than 15 percent of market share in China because it is not on the list for public reimbursement, Bernstein SG senior China biopharma analyst Rebecca Liang (梁玥) said.

That gap is what a stronger commercial insurance industry could help fill. At the moment, its role is limited. Private health insurers paid for 7.8 percent of China’s innovative drugs and medical devices last year, the industry paper said. Patients themselves picked up almost 46 percent of the tab, with the balance covered by the public sector. The just-approved healthcare law, which is to take effect next year, aims to shift that burden by putting existing policies on a firmer legal footing while setting out how the system should develop further.

The direction is clear. Last year, China published an inaugural list of two dozen high-end drugs, including costly cancer therapies and treatments for Alzheimer’s, that aren’t paid for by state coverage. Instead, the list gives official endorsement for coverage under low-cost private insurance policies supported by regional governments.

However, creating a pathway for private insurers is only a first step; they also need the tools to make it work. Beijing should make it easier for insurers to access the data they need to price insurance risks, improve information-sharing among hospitals, drugmakers and payers, and develop ways to spread the cost of exceptionally expensive treatments among multiple parties.

Some Chinese drugmakers struggle to turn promising discoveries into profitable products at home. That makes licensing them to overseas pharmaceutical companies, which can commercialize the medicines in more lucrative markets, an important source of revenue for the industry.

China’s biotech success has created a problem that is worth having. The country is producing medicines that its healthcare system was not designed to finance. Private insurers offer a way to resolve that contradiction. Now Beijing needs to make sure the insurance market can actually solve it.

Juliana Liu is a columnist for Bloomberg Opinion’s Asia team, covering corporate strategy and management in the region. She was previously CNN’s senior business editor for Asia, and a correspondent at BBC News and Reuters. This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.