Device exporters fear price controls in China as social tensions drive change

WASHINGTON — With China's demand for imported medical devices set to rise 12% to 15% by 2010, Western manufacturers expect strong growth there. But China's unusual distribution system, marred by corruption, could spark a government crackdown blunting that outlook.

That was the message from speakers here at the Globalization of Medical Device Policies international conference, held by AdvaMed, a medical industry trade group.

When it comes to China and planned health care reform, the best word is "murky," said Henry Levine, senior vice president for Stonebridge International, a global business consultancy.

China has undergone wrenching changes in its health care system, Mr. Levine explained. Most Chinese had some level of government-paid health care in the 1980s, but today 80% to 90% of the rural population and less than half of the urban population has no health insurance. That is creating high social tensions and pressure for government action, he said.

Today, Chinese doctors and hospitals earn most of their incomes from the sale of medicines and medical devices, which patients must pay for before treatment, Mr. Levine said. This has led to over-prescribing and corruption among middlemen who inflate device prices, knowing the added costs will get passed on to patients.

Physicians and hospitals are supposed to limit their own markups to 5%. However, through kickback schemes, they charge closer to 8% to 10%, in part out of necessity due to poor government funding, said Paul Barry, Boston Scientific's director for international health policy.

At present, only 5% to 8% of hospital operating funds are provided by the government, Mr. Barry said. Hospitals and physicians use distributor "rebates" to earn operating revenue.

"As a result, device demand is growing, soaring, because it represents a source of funding, and this has raised some concerns that device consumption has gotten out of hand because of those incentives," he said.

The situation is creating a lot of turmoil in China, the fastest growing medical device market in the world and the second-largest market in Asia after Japan, said Roberta Lipson, chief executive officer at Chindex International, another consulting company.

"It's not industry's fault, but the government is looking to break up this corruption," she said.

To offset the rapid growth, the government may expand so-called tendering or price-negotiating programs found in some provinces - in effect, a negotiated price setting. The problem with this, Mr. Barry said, is that the authorities are basing their idea of a fair price on numbers that do not include all costs and expenses. That could limit the availability of medical technology, reduce innovation and raise prices in the long run, he said.