Escalated DRG Payment Model Pilot in China Expected to Pose a Genuine Threat to Innovators

August 2019

As a critical element of accelerating the healthcare payment reform, the pilot of Diagnosis Related Groups (DRGs) in 30 major cities across China was officially announced in June by state administrations including National Healthcare Security Administration (the administration in charge of public health insurance), National Health Commission (aka Ministry of Health) and Ministry of Finance. The ambition is to switch from the current Fee-for-Service model to the DRG payment scheme in 2021 after a 3-year simulation from now on in those pilot cities.

Despite the overwhelming bias of the mainstream media to promote the benefits of DRGs as a more efficient way to spend healthcare resources, the industry, i.e., the medical suppliers, the manufacturers as well as the providers, i.e., the hospitals in China are seriously concerned, as this is just another cost containment measurement from the government payers among the very various attempts only that this is a much more radical and systematic change. We believe the policy makers’ intention to introduce the DRGs model to replace FFS is to push the cost ownership to the hospitals in order to slow down the ever-increasing healthcare expenditure.

Traditionally under the FFS model, the hospitals and the suppliers have shared interests in overuse of examinations, medications and disposables and pushing up the prices whenever possible. The Chinese government has purposely set the charges of medical services offered by the public hospitals superficially low in order to achieve the accessibility objective of a social healthcare system. Recognizing there is no sufficient funding from the government to the public hospitals to provide the needed medical care, a practical solution adopted by the previous healthcare reform was to allow hospitals to add a small markup on the purchase prices of medications and disposables they’ve used in the diagnosis and treatment process. That explains why the big hospitals in big cities have become the “sweet spot” for suppliers of medical technologies with premium price.

However, since 2009 when the current healthcare reform started, a series of cost control measurements and policies have been introduced as the government tried to expand the healthcare coverage in terms of population. Discontinuing the mark-up practice is an obvious first step taken by the government to stop encouraging public hospitals from using the more expensive medical products. Then introduction of quota on disposable and medication spending as well as annual healthcare expenditure growth, global budget, bundled payment, etc. all with a very clear goal, i.e., cost control.

Now finally the adoption of DRG payment model for the inpatient setting. The reason we are particularly concerned of this reform, from an industry’s perspective, is because it will turn hospitals to an opposite side of the industry as for the first time public hospitals will have direct financial losses if the costs of medical products needed to treat a particular patient exceed the payment cap set by the government. And there is no reason to believe or hope a government that has the obligation to provide health care to almost 1.4 billion people and try to stand by the equality principle has the willingness or ability to set that payment cap on a level desired by the suppliers, especially those in the premium category.

Exhibit: Select examples of bundled payment introduced by provincial government payers for lung disease procedures.

China Select Bundled Payment (aka case payment) Examples

This is an alarming new movement not only in terms of creating new challenges for the industry as customers’ (public hospitals) procurement behavior would change as a result of change of their financial model and probably more so from a patient’s perspective –  who are there to make sure quality of care are not compromised should the providers go to the extremes that they would only go for the cheapest available products to maximize their own financial gains.

Boston Healthcare Associates works for innovative medical technology players to help our clients unlock the value of innovation. Our in-market experts closely monitor the policy and market trends on the strategic markets like China to help clients stay on top of industry trends and develop strategies and action plans to tap into the opportunities or tackle the issues. Our involvement in China’s payment reform dated back as early as 2015 with a BHA branded international DRG forum co-hosted by the government stakeholders such as payers and health policy makers. BHA will pay close attention on the further development of DRG payment reform and its pilot in China.

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