China Healthcare: 3 Strategies to Tackle Expanding Payment Reform

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China has launched DRG/DIP payment methods to better control medical costs, creating new challenges and opportunities. Experts Lillian Li, Siyan Chen, and Fan Chen outline what manufacturers can do to ensure future and better growth.

With rapid economic growth, accelerated urbanization and an aging population, healthcare expenditure continues to rise steadily in China. At the same time, the traditional Fee-for-Service payment method is not sufficient in controlling medical costs. Considering the strong need for cost containment in public medical insurance funds, the Chinese government has been piloting various payment methods to motivate medical institutions to control medical costs since 2009.

In 2019 and 2020, China’s National Healthcare Security Administration (NHSA) officially launched its Diagnosis-Related Group (DRG) payment reform in 30 pilot cities and its Diagnosis-Intervention Packet (DIP) payment reform in 71 pilot cities. Both payment methods conceptually categorize medical services into groups and set a fixed payment amount for a certain group, which is usually calculated by taking the average of historical data:

  • DRG – categorizes patients into groups according to the type and severity of the disease, the complexity of the treatment methods, and homogeneity of the clinical process and resource consumption using the CHS-DRG (China Healthcare Security Diagnosis-Related Group) system
  • DIP – classifies diseases into groups according to the combination of "disease diagnosis and treatment method" using Big Data

By the end of 2020, the NHSA established the CHS-DRG system and the DIP Disease Database (病种库) as the nationwide standard. The CHS-DRG system is comprised of 26 Major Diagnosis Categories, 376 Adjacent DRGs, and 618 DRG subgroups that cover all acute and short-term (within 60 days) hospitalized treatments (e.g., esophageal, appendectomy, mastectomy). Furthermore, the DIP Disease Database currently defines 11,553 core disease groups and 2,499 comprehensive disease groups.

According to the action plan announced by the NHSA, 70 percent of inpatient service costs funded by public medical insurance should be paid using the DRG/DIP method as of December 2024. By the end of 2025, the reform is expected to be rolled out to all qualified medical institutions nationwide for inpatient services.

Implications for manufacturers

In light of the wider implementation of the DRG/DIP payment reform, manufacturers may consider pursuing multiple strategies for pipeline development, value communication, and policy shaping to tackle the associated challenges:

  • Prioritize disease areas where innovative drugs have greater opportunities, such as areas with high unmet needs and limited treatment options
  • Emphasize cost-effectiveness and clinical profiles of target products across the treatment cycle, such as improved efficacy and shorter hospital stay vs. other treatment options
  • Work closely with national and local governments to shape payment mechanisms, including defining exemptions or specific weights for innovative products when setting payment standards

Special thanks to Siyan Chen for her support.

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