China's public hospitals will be feeling the pinch as the government implements an overhaul of the medical insurance system, industry experts said.
As part of the insurance reform, Beijing has been testing the diagnosis-related groups, or DRG, payment system for classifying medical services at public hospitals since 2017. The system, common in the West, seeks to curb costs and use resources efficiently.
In a Feb. 7 document, the Ministry of Human Resources and Social Security recommended a list of 130 types of diseases or procedures in which the DRG payment model could be applied. The list included a large number of cancers, heart diseases, as well as surgical procedures such as cataract surgery or kidney transplants. The ministry directed that the public hospitals should apply the DRG payment model to at least 100 conditions or procedures.
"We believe the DRG model will become the main focus of the next steps of the reform, especially for the medical services sector," said Bing Zhao, China healthcare analyst at UBS Securities.
Cap on reimbursement
Under the DRG system, patients are classified into groups based on factors such as their age, primary diagnosis, and presence of other health complications. Since treating patients in the same group typically require similar hospital resources, the DRG system will help the government better estimate the actual cost incurred by a hospital to treat a particular disease.
Using the DRG system essentially puts a cap on the reimbursement amount for certain diseases or diagnoses, said John Lin, a partner at consulting firm Roland Berger.
In the past, many public hospitals resorted to overprescribing medicines — prescribing drugs that were ultimately not used by or were not necessary for patients — to boost their profits. This had put pressure on the national insurance budget, as patients who paid out-of-pocket medical fees claimed reimbursement from the national funds.
But now the government is trying to tighten the budget, CCB International Securities healthcare analyst Albert Jin said.
And it is doing this by promoting the DRG system at the public hospitals.
"The reform actually tries to standardize the prescription [of medicines at hospitals]," Zhao said.
The government wants to first apply the DRG system to procedures and diseases that have a high reimbursement cost and those that are easier to standardize, Zhao added.
However, the policy is not expected to impact the market at the current stage.
"The policy hasn't elaborated on the payment standards for these DRGs. The government is still exploring, so would not impose much pressure to the industry near term," head of healthcare research at BOCOM International, Lilian Wan, wrote in a Feb. 28 note.
Drawbacks of the DRG model
But there are some drawbacks in the DRG system, experts say.
Since there is a fixed amount of reimbursement for each patient case, the DRG system will motivate hospitals to treat more cases, not necessarily solving the problem of over-treatment, Zhao explained.
"The problem is that the hospitals will focus more on cost [saving] and not on the outcome of the treatment," he said.
According to Lin, there is also a risk that some hospitals may choose to provide treatments that are cheaper and of lower quality to patients.
"What needs to be prevented is the worst case scenario where, because of the pursuit of profitability," hospitals do not work with the best intention in mind for the patient, said Lin.
Zhao added that the government must provide enough subsidies for hospitals, otherwise it will be hard for them to function.
In June 2017, the National Health and Family Planning Commission said the DRG system will likely expand to 50 cities by 2019 and 100 cities by 2020. The State Council hopes to extend its medical insurance payment reform nation-wide by 2020.
China's basic medical insurance scheme now covers approximately 1.35 billion people, Premier Li Keqiang said March 3 during the National People's Congress's opening session.
