US and China Healthcare Expenditure Forecasts: Similar Drivers at Both Sides of the Market Spectrum

10 Oct 2011 Jing Zhang

I recently developed a healthcare forecast report for the World Markets Healthcare Service, which looked at factors contributing to global healthcare expenditure in the near-term.

At a time when the global economy is teetering towards recession, forecasts of two of the largest economies - US and China - suggest health expenditure will continue to experience growth in the next two years.

China and the US have the interesting link, in that they are both reforming the absolute foundation of their systems, and increasing healthcare insurance coverage from very poor coverage to near-100%.

The result: some one billion people from the two countries will have some form of healthcare for the first time in their lives.

In our report we identified defining elements shared by both economies:

  • Moves towards universal healthcare
  • Massive investments in healthcare infrastructure
  • Healthcare reform

US Economic Recovery: It's Going to be a Long Wait
The US economy is in a really bad shape, period. The numbers say it all: real GDP was up by an annual average rate of less than 1% in the first half; and the average annualized growth of consumer spending was up 0.2% over the past 14 quarters.The consumers aren't spending due to job insecurity; and business is not hiring given the bad economy. The country is waiting for the usual drivers of recovery-housing and consumer spending-to catch up. And it's going to be a long wait.

US Healthcare Reform: Close to 40 Million Americans Will Have Healthcare for the First Time in Their Lives

US Total Health Spending Growth

Reform initiatives, as well as slow economy and high unemployment, will impact US health spending. Health insurers are under increasing pressure to cut costs for private industries and the US government. The use of tiered co-payments and step therapy programmes, which promote lower costs and generic drugs, has rapidly grown over the past three years. Other measures such as increasing disclosure requirements for Pharmacy Benefit Managers of spread amounts, rebates, discounts and generics dispensation will also further dampen sentiment in the pharmaceutical industry.

However, a key element in the health reform is to reduce the number of uninsured from almost 20% of the population to just 8% in the next five years. That means close to 40 million Americans will, for the first time in their lives, have healthcare! This will expand the insurance market and boost health expenditure down the road. I expect health spending to grow 4.7% this year and 5.2% next.

China's Looming Slowdown Is Manageable

For China, the downside risks to growth will become a bigger concern than upside risks to inflation, but a hard landing is not likely. Weak import demand from the developed markets will hurt, but not kill, growth in China. In fact, both China and India have shown better resilience than their respective regions.

To boost domestic demand, policy-makers are steadily initiating measures, such as a rural pension scheme, provision of low-cost housing and increasing minimum wages. More government spending will likely focus on social housing construction, infrastructure projects and consumer spending.

China's Healthcare Reform: 960 Million People Will Have Healthcare for the First Time in Their Lives

Deep drug price cuts had a cooling impact on health spending. The government implemented several drug price cuts, lowering prices by 20%-30% to contain healthcare cost. The price cuts especially on essential drugs are likely to deepen even further. However, China's 3-year healthcare reform-ending by the end of 2011-is a major offsetting factor.

As a result of the reform, more than 1.2 billion Chinese have access to health insurance, which will boost the insurance coverage ratio to 95% from 15% of the total population a decade ago. That means 960 million people for the first time in their lives will have some form of healthcare! That's going to generate the biggest boost to healthcare demand and health spending.

China Total Health Spending Growth

As my colleague Gaëlle Marinoni put it in her recent post How is Pharma Launch Sequencing Evolving with Global Realities?, "Emerging markets offer fresh opportunities: increasing economic prosperity, expanding access to healthcare, untapped patient populations." China's double-digit spending growth trend will continue. I expect health spending to grow 16.6% this year and 14.3% next.

Looking Forward

In the medium term, I expect the healthcare expenditure growth trend to continue in both the US and China, building on the momentum unleashed by the massive health insurance expansion.


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