Haitong: The establishment of the Class B catalog for commercial insurance is expected to serve as a landmark time point in catalyzing the market for innovative medicines.

Haitong released a research report stating that, from the perspective of long-term investment in the secondary market, the future investment opportunities in the pharmaceutical sector come from: active global innovation, continuous industrial upgrading in China, significant improvements in demand and supply, investments in internationally competitive and domestically transformative new products. The establishment of Category B list in commercial insurance is a milestone time point and is expected to catalyze the innovative drug market. The establishment of Category B list will break the current pain points of non-national talks and difficult access to hospital for centrally-purchased drugs, and will give eligible innovative drugs the right to enter hospital with a slight price reduction or no price reduction. If a single drug entering the B list has sufficient innovation and effectiveness, its sales peak may significantly outstrip that of basic medical insurance single drugs. Haitong's main points are as follows: In the field of healthcare, there are a large number of public and quasi-public products, so fairness and efficiency have always been the core issues that healthcare reform needs to address. Reviewing the healthcare reform experiences of major countries worldwide, it is found that dominance of fiscal payment leads to inefficiency, and lack of regulation results in poor fairness. Therefore, global healthcare reforms follow the same rule, that is, prioritizing fairness is a policy outcome, while enhancing efficiency and encouraging innovation are market mechanism outcomes, mainly reflected in the development of commercial health insurance. Healthcare system reform should be viewed in terms of fairness and efficiency. The demand in the pharmaceutical industry is affected by policy cycles and innovation cycles, and the capital market is an indicator of healthcare reform policies and industry innovation. The correction of healthcare index in the past 3 years mainly reflects the slowdown in basic medical insurance income growth, corresponding policy tightening on payment end, to control the rapid growth of demand. Meanwhile, the temporary downturn in investment and financing market leads to more rational corporate investments. Therefore, understanding the stage of China's healthcare reform and policy direction is crucial for assessing the buoyancy of the capital market. Reviewing the period from the new healthcare reform in 2009 until now, highly prosperous periods in the pharmaceutical industry are often accompanied by resonance between demand, policy, and supply. From a long-term perspective, such periods have occurred twice. 1) From 2009 to 2015, healthcare reform focused on expanding accessibility to healthcare as its core goal, rapidly expanding the wallets of employee medical insurance and resident medical insurance, driving a significant increase in revenue in the pharmaceutical manufacturing industry. Policy development and demand were positively aligned during this period. 2) From 2019 to 2020, under the three-tier linkage policy, the healthcare reform system shifted from developing fairness to improving efficiency, promoting the transformation of industry from imitation to innovation. With China aligning with international standards by joining the ICH, the innovative drug and medical device industry chains seized the opportunities of the times and domestic manufacturing advantages, occupying a certain international market share. During the same period, the COVID-19 pandemic spurred domestic demand. Demand and supply resonated during this period, leading to an increase in the buoyancy of the pharmaceutical industry. Looking forward to the next 5 years, it is expected that the healthcare industry may experience policy stability, industrial upgrading, and internationalization, with resonance between demand, policy, and supply, bringing a new peak in the buoyancy of the pharmaceutical sector. The top-level design indicates that 2025-2030 is a stage of constructing a multi-tier healthcare system, developing multiple wallets on the basis of the two wallets, with the most potential being commercial health insurance. The following core judgments are made on each funding pool: Judgment 1: China's basic medical insurance is in a stable operating stage and will develop in the long term with fixed income and expenditure Haitong predicts that the revenue growth of basic medical insurance will be slightly faster than GDP growth in the long term, based on the following determinations. By 2023, basic medical insurance revenue will reach 3.4 trillion yuan, with expenditure of 2.8 trillion yuan, and accumulated balance of 4.8 trillion yuan. 1) Employee medical insurance revenue will be 2.3 trillion yuan, with expenditure of 1.8 trillion yuan and accumulated balance of 4.0 trillion yuan, covering 370 million people. Without adjusting the contribution rate, the revenue growth of employee medical insurance mainly comes from the growth of contribution base, which is close to the level of GDP growth. 2) Resident medical insurance revenue will be 1.1 trillion yuan, with expenditure of 1.0 trillion yuan and accumulated balance of 764 billion yuan, covering 960 million people. The revenue growth of resident medical insurance mainly comes from the annual increase of 30 yuan/person in the financial subsidy base, reaching 670 yuan by 2024, with financial subsidies accounting for 60% of the revenue of resident medical insurance. Therefore, if the financial subsidy increases by 30 yuan/person annually, the self-payment of residents also increases proportionally, and the number of insured people remains the same, the revenue growth of resident medical insurance will be around 4-5%. Considering the adjustment space for strengthening insurance coverage, delaying retirement, employee contribution rates, and financial subsidies, it is expected that the revenue growth of basic medical insurance will be faster than GDP growth in the long term. Judgment 2: China's commercial health insurance scale is still small with great development potential By 2023, commercial health insurance premium income will be 379.2 billion yuan, with expenditure of 280.5 billion yuan. Haitong predicts that by 2030, the compensation scale of commercial insurance for medical expenses will increase by approximately 327.7 billion yuan, boosting the overall growth rate of basic medical insurance + commercial insurance payments by 1-2%, maintaining the growth rate of basic medical insurance + commercial insurance expenditure at 6-7% or more. For the innovative drug market, if 30% of the incremental compensation funds are used for innovative drug payments, the scale of commercial insurance payments for innovative drugs will expand from 7.4 billion yuan to approximately 105.7 billion yuan, significantly driving the expansion of the innovative drug market, which is only about 140 billion yuan. Judgment 3: The more developed commercial health insurance is, the more adequate the pricing of innovative drugs Currently, commercial health insurance in China accounts for only 3% of total healthcare expenses, with the expectation that it will eventually exceed Germany (8%) and catch up with the United States (31%). International comparisons show that the commercial health insurance of major developed countries aims to bear multiple payments and the function of innovation. The more developed commercial health insurance is, the more adequate the pricing of innovative drugs. 1) The United States has better utilization of market mechanisms. Commercial insurance payments in the United States account for 31% of medical expenses, with innovative drug prices being 4 times the global average. Under a system of free pricing and comprehensive coverage by commercial insurance, commercial health insurance payments account for 42% of prescription drug expenditures. 2) Germany has not developed its particularly large commercial insurance scale mainly because in Germany, participation in basic medical insurance and commercial insurance is a choice between the two. Commercial insurance does not emphasize universal coverage and is only aimed at high-income groups, so while Germany's commercial insurance has a certain scale, it is not particularly developed. China's commercial insurance is likely to be universal and multi-tiered in the future, which is a difference between the development of multi-tiered payment systems in China and Germany. In terms of fairness and efficiency, payment scale and innovation, Germany has more reference value for China, mainly because it has established a catalog of personal health services not covered by statutory health insurance (IGel).Promoted the differentiation between commercial insurance and statutory health insurance; secondly, against the background of DRG payment reform, Germany has established an innovative product payment model with three-tier system connection of temporary payment, supplementary payment, and bundled payment, accelerating the speed of integrating innovative products into clinical practice.Commercial health insurance in our country currently needs improvement in both industry maturity and policy support. To grow the scale of health insurance, we need to combine policy mechanisms and market mechanisms. 1) Industry maturity is mainly reflected in the low claims ratio. In the United States, the law stipulates that the claims ratio must be at least 80%. For example, United Healthcare achieved a claims ratio of 83% in 2023, while most health insurance companies in our country have claims ratios in the range of 20-60%, leaving room for improvement. 2) Developed countries overseas encourage the purchase of health insurance mainly through tax deductions and subsidies. In our country, tax incentives and subsidies for the purchase of health insurance by companies and individuals are relatively lagging behind. To address the fundamental issue of whether the scale of health insurance in China can be increased, the answers given by the United States and Germany are that legislation requires commercial insurance to cover both those with pre-existing conditions and healthy individuals, and to promote commercial insurance to cover more innovative drugs and medical devices through market mechanisms. Risk warning: Policy risks in the pharmaceutical industry, risks of commercial health insurance development falling short of expectations, valuation volatility risks, etc.