Top Health Industry Issues of 2016China view points

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June 2016

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2016 will be a year of firsts for healthcare consumers, organizations and new entrants as innovative tools and services enter the New Health Economy. Based on PwC’s global report “Top health industry issues of 2016”, healthcare and pharma industries experts from PwC China and Hong Kong combine the industrial situation in China and highlight the 10 forces that are expected to have the most impact on the industry in the coming year.

Reducing health costs has been a mantra for years. But as payment shifts to value-based models, health systems in 2016 will pursue lower-cost care settings more aggressively and creatively than before.

For China, allocating medical resources reasonably and promoting the accessibility of the appropriate medical and health service are the main objectives of the country’s medical and healthcare reform, emphasised again in the 13th Five-Year Plan.

From our research, seniors below the age of 70 prefer to receive care close-to, or in-home, with those over 70 requiring more advanced modes of care, for example: drop-in community care, institutional live-in or more skilled nursing.

Issue 1Care moves to the community

For non-seniors, access to a skilled and efficient referring diagnosis-to-treatment system allows improved access at rural and community levels without un-necessarily overburdening top level and specialty hospitals. It’s about the right level of diagnosis and care at the right place at the right time.

On the one hand, we should see more and more regional hospital groups, with affiliated satellite community health centres to engender referring, as well as confidence in the care provided by the overall network to the patient. Community extension strategies like this, leveraging other channels may be necessary.

Mark Gilbraith

PwC China and Hong Kong Health Industries Leader

70+70-

In related examples, recently Shanghai government released a plan to financially support top medical universities in the city to triple enrolment of medical students to meet the city’s needs – especially for qualified General Practitioners and Rehabilitation Physicians to supplement community medical professionals. In addition, Shanghai announced plans to open another 50 drop-in care centres for the elderly following the success of 22 opened last year.

In 2016, the health industry will begin to use those data so-called “non-relational” databases in no ways, thanks to high-tech. These databases arrive at a time when the industry is thirsting for ways to make good use of a swelling ocean of consumer and health data.

Research by PwC China has found a growing number of top hospitals recognize the importance of information technology and are investing more to build capacity. A good example is in enhancing medical quality control systems, based on integrated electronic medical records (EMR). This trend is framed by the 13th Five-Year Plan, which prioritises training more general practitioners and family

Issue 2New databases improve patient care, consumer health

doctors, improving medical services in areas of critical need, and promoting electronic health records.

The introduction of an integrated EMR system based on a more dynamic database opens up new ways to link medical data with clinical environments, ultimately supporting more informed decision-making. Data can be applied to specific clinical situations, making precision medicine possible. Advanced databases and EMR form represent a new foundation for clinical information systems and the future of IT in hospitals. In addition, technologies such as these will help enhance other important areas, such as medical quality control procedures.

Clinical information system based on

EMR

SOA (service-oriented architecture) platform

Rule base for quality control

Clinical data repository (CDR)

Clinical decision support system

(CDSS)

SOA

As domestic hospitals adapt, most will need to go through five major steps to establish a complete quality control platform. The steps cover a clinical information system based on EMR, a SOA (service-oriented architecture) platform, a rule base for quality control, a clinical data repository (CDR) and a clinical decision support system (CDSS). Each of these steps will require substantial investment in human, as well as physical and financial resources from hospitals. Consequently, value exploration is likely to become more of a focus as high-tech database and EMR systems come to the fore.

Sabrianna Xing

PwC China Consulting Partner, Healthcare

Issue 3 2016 is the year of merger mania

In 2016, high-profile mergers and acquisitions are likely to continue, with attention focused on insurers as they work to assure regulators that consolidation will benefit consumers.

In China, investment trends in the healthcare industry are influenced by medical reform, especially when involving core assets or businesses such as hospitals. Over the past few years, an increasing number of policies have been launched to encourage social capital to invest in healthcare and participate in medical reforms. As a consequence, investors are now enthusiastic about investing in hospitals, supply chains and other core healthcare related services such as rehabilitation and diagnosis rather than health check centres, cosmetic institutions and dentist surgeries. The investment from social capital and private investors on core healthcare business will help to improve healthcare services quality, expand healthcare coverage and attract more investments.

Various options in investment models such as joint venture, ownership reform, PPP and IOT are now available and developed. In 2015, the government announced to cancel the

approval on qualification of medical insurance designated hospital and drugstores and launched a two-child policy, which will attract more investors into the healthcare industry. In addition, successful examples of social capital backed IPO such as Phoenix and Kangning demonstrated the potential rewards to social capital and private investors, which should, in turn, raise the appeal. At the same time, the development of digital and new technology are revolutionary to traditional healthcare industry and creating more, dynamic space for investors to engage.

Investment in China’s healthcare industry is still at an initial phase with some legal, industrial and management issues to straighten out. During this period the biggest challenge will be post-deal integration, optimizing business models and management incentive plan.

Leon QianPwC China North China Health-care Industry Leader

Health check centres

Dentist surgeries

Cosmetic institutions

Hospitals

Rehabilitation Diagnosis

Supplychains

Joint venture, ownership reform,

PPP and IOT

Healthcare Industry

Xun TangPwC China Deals Partner

While in pharmaceutical industries, global giants carried out several big deals worth billions of dollars in 2015, with domestic pharmaceutical companies contributing substantially. One factor is the expansion of an aging population, a dynamic that is incentivising citizens to pay more attention to healthcare. At the same time, however, the Chinese government is pushing forward medical reforms, eliminating excess capacity and supporting local pharmaceutical companies. As a result of these dynamics, the number of merger and acquisitions in China’s pharmaceutical industry rose rapidly in 2015, creating new records in both quantity and value.

In 2015, some big pharmaceutical and medical equipment companies, especially listed companies, launched a significant number of merger and acquisition deals in a bid to expand market size and complete their industrial layout. These companies invested in quality assets, offline drugstores and e-commerce, with a particular focus on deals in precision medicine, internet medicine and gene sequencing.

Concurrently, domestic companies have been looking for overseas acquisition opportunities in medical equipment, services and biotechnology. Considering that most domestic companies are not familiar with overseas markets or related technical trends, the ongoing pursuit will continue to pose major challenges, notably in making prudent judgements in terms of a target’s value, and subsequently ensuring effective management following acquisition.

We expect that the global wave of mergers and acquisitions will continue in 2016, and that both quantity and scale of deals in China’s pharmaceutical industry will be higher than 2015.

Issue 3 2016 is the year of merger maniaPharmaceuticals Industry

In 2016, the global pharmaceutical industry is concerned about further downward pressure on prices and its ability to fund new innovation. Like the proverbial story of Goldilocks, the search is on for a pricing formula that is “just right.”

The drug pricing mechanism and links to hospital income streams in China have been a long standing topic of discussion for the pharmaceutical industry. Increases in drug expenditure have posed a major challenge to a stable health environment, not least with regard to health insurance solvency. Consequently, drug prices form an important area of focus for health reform in China.

One notable update to drug pricing in China, has been the promotion of a market-oriented pricing mechanism that is underpinned by government regulation. In June 2015, the government removed central pricing for a majority of the drugs with maximum retail prices no longer managed by the state. For such drugs, pricing is

Issue 4Goldilocks comes to drug prices

now predominantly determined by the market. At the same time, substantial changes also relate to drug tendering and bidding, as well as medical insurance reimbursement, which are expected to become increasingly important features of the drug pricing process.

Today, local governments are developing increasingly stringent bidding rules, such as a “double envelope” system, intended to advance quality and commercial viability. Further, the establishment of an inter-provincial drug price referencing system, direct sale of low-price drugs on a government platform, a multi-party price negotiation mechanism for patented drugs and exclusive drugs, as well as second-round price negotiation, will all feature in the ongoing developments.

With regard to medical insurance reimbursement, one main impact for drugs includes the adaptation of new standards for medical insurance reimbursement, which increase pressure on healthcare institutions or the insured when selecting high-priced drugs, with the aim of bringing drug prices

Jia Xu

PwC China Consulting Partner, Pharmaceuticals and Life Sciences

down. Another main impact concerns government-run medical insurance, which is now expected to proactively influence tendering and price negotiation, a more dynamic role than merely fulfilling an administrative function.

In light of the ongoing reforms, pharmaceutical companies may face sustained downward pressure on drug prices, and even loss of sales in some provinces. In addition, a greater number of decision makers and increasing regional variations in the pricing mechanism could lead to more management costs. Pharmaceutical companies will benefit from setting out and implementing effective strategies, with more optimised operations to maintain current levels of profitability. The companies that succeed may also now be looking at adapting their business models to ensure they survive and thrive in China’s new health environment.

Smartphones, connected medical accessories and apps have been underutilized by the healthcare industry. In 2016, care will begin to shift into the palms of consumers’ hands, helping to drive down costs, increase access and fulfil the public’s desire for “anywhere, anytime” monitoring, diagnosis and treatment.

In China, though the change is not very rapid, we still see a significant pivot towards digital health.

China has over 500 million smart phone users which is over 1/3 of global users and close to 400 million 4G users. We also have over 2000 healthcare apps already, broadly fitting into 6 categories:

1. Concierge services for appointments and payment-31.3%

2. Assessment and diagnosis apps for remote medical assessment-30.3%

3. Information and education for healthcare practitioners and patients-16.2%

4. E-commerce for drug sales (consumables, OTC, devices and other drugs)-12.1%

5. Medical information sharing-EMR-7.1%

Issue 5Care in the palm of your hand

6. Chronic disease management, for diabetes, etc-3%.

Value is the key to not only the traditional major stakeholder groups, such as patient, practitioner, provider, payer, distributor and pharmaceutical companies, but also the new disruptors, including new players bringing new value and capital to the sector. However, the failure rate of apps is running at over 40%.

Patients and practitioners in China will have access to a growing number of apps with new ways of engaging and interacting across platforms, expect a lot more innovation, investment and cooperative models.

As examples, we will see more remote medical assessment following the “bedless” hospitals, patient disease engagement and monitoring interacting with wearables and data, diagnosis support tools for general practitioners, assessment tools that patients can use to measure and even predict potential disease progression, patient treatment adherence and compliance monitoring, clinical trial patient engagement, and many others.

Traditional players and the disrupters have already set up cross-enterprise innovation platforms and incubators to change their mode of thinking about the potential new ways of engagement, interplay and collaboration between doctor, device, drug, data, digital, distribution and diagnostics.

Consideration of resource and budget re-allocation should be made, and priority should be given to New Health from traditional use. Data security, quality and privacy as well as app certification will take on importance. In the land of apps, it’s all about the user experience and patient experience.

PwC is launching the Experience Centre for developing digital strategy, and ensuring apps deliver on their promises. It will be an exciting year of digital health.

Mark Gilbraith

PwC China and Hong Kong Health Industries Leader

31.3% 30.3% 16.2% 12.1% 7.1% 3%Concierge services for

appointments and payment

Information and education for

healthcare practitioners and

patients

E-commerce for drug sales

(consumables, OTC, devices

and other drugs)

Medical information

sharing-EMR

Chronic disease

management, for diabetes,

etc

Assessment and diagnosis apps for

remote medical assessment

As security breaches become more common and costly, medical technology cybersecurity will emerge as a major issue in 2016 globally.

For example, one of the important challenges is cyber sabotage (or ‘hactivists’), which is arguably a bigger threat than cybercrime or cyber-espionage, as it’s harder to combat through security countermeasures.

There is a growing agreement that device manufacturers need be proactive - given the strength of the manufacturing industry in China and the speed of advances in technology, security does not often catch up quickly enough. Manufacturers and vendors are in a race to build product concepts into reality. In many cases, security and privacy issues become marginalised. But we need to see a shift from only taking security seriously after encountering issues, to ensuring that security becomes a core pillar of product development.

Issue 6Cybersecurity concerns come to medical technology

According to PwC’s 2016 Global CEO Survey, many CEOs are concerned about security breaches, but they still don’t recognise that cybersecurity can be a strategic business advantage.

Cybersecurity in the healthcare industry is an emerging issue in the mainland China market that is receiving attention from policymakers, who discussed the topics at this year’s “two sessions” (National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC)).

Participants suggested that authorities should strengthen regulations related to patient information security, including privacy conditions tied to big data and ownership of electronic medical records. They also noted that the government should increase budgets and invest more to improve cybersecurity in this area.

Megan Haas

PwC Hong Kong Partner, Forensic Services

At the end of the day, it’s about security by design-a strong cybersecurity posture originates from a product’s inception and is ingrained throughout the process rather than being a separate component at the end. And it should be executive management driving the agenda.

With ever-increasing demand for healthcare services, medical expenditure in China has surged in recent years. However, the means of funding this expenditure have not been updated over this period. As a result, although the net balance of the Basic Medical Insurance (BMI) fund is still growing, the growth rate of income is now less than that of expenditure. It is estimated that by 2017, there will be a deficit in the Urban Employees Medical Insurance fund, and that the accumulated deficit will be severe by 2024.

There is growing expectation that the increasing pressure on the BMI fund will spur development of commercial health insurance in China. From 2012-2015, China’s commercial health insurance was growing at a compound annual growth rate (CAGR) of 40%, while other segments, such as property insurance, life insurance and accident insurance, were growing more slowly, with CAGRs of 14.5%, 14%, and 18% respectively. Commercial health insurance is expected to be a key growth driver of China’s insurance industry.

We believe that commercial health insurance will lead to new opportunities and innovations that

Issue 7The new money managers

help people better manage their health expenditure in China. For example:

First, we will see more scope for new innovative products arising. With the development of improved knowledge of diseases, medical data and risk control, insurance companies will be in better shape to launch more innovative and targeted medical insurance products.

Second, health insurance will become more digitised. We will see internet play a more significant role in the health insurance market, and digital technology will become widely used across various processes of health insurance, including claim settlement, payment, risk control and service delivery.

Third, insurance companies will have an onus to explore innovative cooperation models with more partners facilitating more opportunities. In such a framework, health insurance companies will be able to work with pharmaceutical enterprises in developing new insurance products, cooperate with medical equipment manufacturers and internet enterprises to promote health management, or help government to manage the BMI fund.

Finally, health insurers will establish health management platforms that

Simon Sun

PwC Strategy& Consulting Partner

40%

14.5%

14%

18%

Commercial health

insurance

Propertyinsurance

Lifeinsurance

Accidentinsurance

integrate different health and medical services, spanning the whole life cycle of consumers. This would likely include diagnosis, treatment, health education, disease management and elderly care.

The development of commercial health insurance will bring great changes to China’s healthcare market. Given the sheer scope, the full complement of stakeholders in the industry will play a role in the changes, resulting in substantial activity to seize market opportunities as they arise in the months and years ahead.

Health systems command billions of dollars in revenue and yet few can do what other billion-dollar companies consider table stakes-dentify the cost of the services they provide. In 2016, insurers, consumers and other major healthcare buyers are demanding better value for their spending, and healthcare providers are scrambling to calculate these costs.

China’s healthcare reform has prompted local health authorities to focus more on cost and less on income at hospitals, while introducing more stringent requirements for lean management and precise cost accounting.

Hospitals usually categorise types of services as the objectives of cost accounting, which include both outpatient and inpatient services. Finance departments set up different cost schedules according to different service types and hospitals will then allocate the costs to different clinical service departments.

Issue 8The medical cost mystery

China is seeing a great increase in the application of precision medicine based on big data as a means to improve medical service quality and control medical costs effectively. The approach relies on collection of accurate data and timely analysis. Under the guidelines set out in the 13th Five-Year Plan, an increasing number of hospitals are improving their approach to gathering, structuring and analysing information and looking at more advanced technologies to achieve lean management, and ultimately, reduce costs.

Additionally, hospitals are also exploring better ways to hone their focus on high value work, and enhance the processes that drive efficiencies, such as striving for closed-loop management approaches that prioritise patients. Concurrently, hospitals are running a range of training programmes that ensure employees’ skills match job requirements. These positive steps reflect how leading hospitals are adopting modern business management principles to shape a transformative process, which are contributing to the foundations of a more prudent healthcare system.

Sabrianna Xing

PwC China Consulting Partner, Healthcare

1.71 beds per 10,000 persons

1.49 psychiatrists per 100,000 persons

of medical resources, such as the psychiatric departments, however, the quantity of new supplies remains low.

Potential solutions may include incorporating remote mental health services as a new supplementary enabler of diagnosis and treatment. The approach of remote mental health counselling and assistance provision would be particularly useful for many areas that lack enough psychiatric resources. With regard to people unwilling or unable to openly seek support with diagnosis and treatment at psychiatric departments or mental hospitals, solutions that utlise channels for consultation and treatment with a high level of privacy protection can be considered. Of course, it will be essential to ensure that all personnel providing remote mental health counselling and treatment have the requisite qualifications along with appropriate levels of oversight of service quality and supervision at all times.

In 2016, the industry’s stakeholders around the world-from employers to insurers-start to recognise mental health is important to their employees’ and customers’ well-being and productivity.

Mental health is a field which has traditionally attracted less attention than physiological health in China, and features less prominently in social discourse. When people are physically sick, they will actively seek medical diagnosis and treatment. However, there is often more reluctance to pursue psychological consultation or treatment when mental health issues are concerned. Important reasons behind such phenomena include both an inadequate recognition of mental health as well as a social stigma related to mental health, which frequently is felt in the form of a sense of shame by patients. The latter aspect is influenced by a pervasive influence of traditional culture, which inhibits many people from seeking out relevant psychological consultation and treatment.

In the current context in China, it is predominantly those patients with serious mental illness that attract

Issue 9Behavioural healthcare: no longer on the backburner

the most attention and are given corresponding treatment. According to related statistics from the National Health and Family Planning Commission of People’s Republic of China, about 4.3 million patients with serious mental disorders have been registered and are monitored in China. However, there is limited public knowledge on the wider range of mental health issues, such as anxiety, depression and other common mental disorders, and the rate of medical treatment in respect of such disorders remains low. Depression is a notable example, with nearly 350 million patients with depression globally. In China, the exact number of patients suffering from depression is unavailable now due to a lack of information about the disease, though estimates have the number at 30 million or more. Additionally, approximations based on available data in China point to no more than 10% of patients who suffer from depression receiving professional treatment or therapeutic reprieve. In China, about 250 to 280 thousand people commit suicide annually, of whom nearly 70% are patients stricken with depression. It is due to figures such as this that led The WHO to describe depression as a global crisis in a paper published in 2013.

Presently, there are 228 thousand psychiatric beds in China, with 1.71 beds per 10,000 person on average; there are over 20 thousand psychiatrists, or 1.49 for every 100,000 people, most of whom work in medical facilities at provincial or municipal levels. Relative to global peers, China has a low level of psychiatric medical resources. In addition, the overall, resources to cope with psychiatric conditions are also low, and those that do exist are primarily distributed in the nations’ major cities. By contrast, there are no psychiatric departments or psychiatrists in two-thirds of the nations’ counties. The present-day policies are encouraging social capital to enter the domain as a means to improve the poor supply

Jun Jin

PwC China Consulting Partner

Issue 9Behavioural healthcare: no longer on the backburner

Scientific advances and expanding market potential of biotechnology has led to growing interest in biosimilars. In China, biosimilars also benefit from, an influx of Chinese experts returning from overseas, strong financial support in the form of Venture Capital and supportive national polices.

Statistics of IMS predicts that as more and more drug patents are going to expire, biosimilar will occupy 20% of the global pharmaceutical market in the following five years. According to Thomson Reuters, currently the number of R&D projects of China ranks highest worldwide, while in terms of the number of core patents, China is positioned third after the USA and EU. Currently, tumors, diabetes and the immune system form the main focus areas for Chinese biosimilar development.

However, the extensive biosimilar market of China faces many challenges. China released the Technical Guiding Principal for Biosimilar R&D and Evaluation in February 2015 for a trial run, however, detailed standards and rules have yet to be issued. Currently, the approval procedure for biosimilars still follows the procedure for new biological drugs, which is both complicated and time-consuming.

Issue 10Enter the biosimilars

Additionally, current rules for clinical tests lead to higher R&D costs. Further, R&D in biosimilars is more complicated and less certain than with generic chemical drugs, and it also raises higher requirements of production technology for drug manufacturers. As a result, development of more positive and innovative solutions will be required to overcome the inherent difficulties.

International companies which own biological originate drugs and key product patents that are set to expire in the next five years, will need to pay attention to the impact and threat posed by biosimilars. Such companies will need to develop plans in advance that include strengthening their brands and market share with differentiated marketing and innovative services.

Companies embracing biosimilars will benefit from improving their R&D as quickly as possible, and by forming make clear strategies that cover product development, and where applicable, overseas market expansion. Such companies may want to consider more cooperation with doctors, hospitals

Jia Xu

PwC China Consulting Partner, Pharmaceuticals and Life Sciences

20%Biosimilars

Global pharmaceuticals market in the next

five years

and medical insurers, while keeping an eye on how local competitors and international pharma companies develop in the biosimilar market, remaining nimble to react quickly to maximize advantage and value as appropriate.

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