China Galaxy Securities: Provincial pooling of medical insurance may become a new starting point for long-term investment in the pharmaceutical industry. Medical services, innovative drugs and other sectors deserve attention.

China Galaxy Securities released a research report stating that the acceleration of provincial coordination of the medical insurance fund will improve the efficiency of medical insurance fund utilization, and is expected to become a new starting point for pharmaceutical investment. From the perspective of the overall amount of pharmaceuticals, the acceleration of medical insurance expenditure will benefit the recovery of hospital business, be positive for the overall pharmaceutical industry, and recommend focusing on medical services, in-hospital medical devices (large infusion, anesthesia drugs, blood products, imaging, high-value consumables, etc.), in vitro diagnostics, and innovative drugs (BIC and FIC pipeline leaders). The main points of China Galaxy Securities are as follows: The acceleration of provincial coordination of the medical insurance fund will improve the efficiency of medical insurance fund utilization, and is expected to become a new starting point for pharmaceutical investment Recent policies on provincial coordination of medical insurance funds: In November 2025, the State Council discussed and subsequently issued the "Guiding Opinions on Promoting the Provincial Coordination of Basic Medical Insurance," requiring provinces to formulate implementation plans. In mid-December, the National Medical Security Work Conference listed it as a key work for 2026. On January 6, 2026, the General Office of the Zhejiang Provincial Government issued the implementation opinions on Zhejiang Province's provincial coordination of medical insurance. On March 5, the National People's Congress meeting reiterated in the State Council's government work report the steady promotion of the provincial coordination of basic medical insurance. As the core link of China's medical industry payment system, the medical insurance fund is the core payment force guiding market demand trends. The growth rate of China's total health expenditures and the revenues of medical manufacturing enterprises above a certain scale are highly correlated with the growth rate of medical insurance fund revenue and expenditure. If medical insurance expenditure accelerates, it will play a positive role in the recovery and growth of the medical and health industry. Provincial coordination is expected to resolve structural contradictions in medical insurance, revitalize existing funds, and promote expenditure growth China's medical insurance fund currently faces structural problems, with significant annual surpluses on one hand. By the end of 2024, the cumulative surplus of the medical insurance fund was 5.31 trillion yuan, and from January to December 2025, the current surplus of the pooling funds was 531.3 billion yuan. On the other hand, there is a significant decline in medical insurance expenditures in many regions and insufficient coverage. The system of provincial coordination of medical insurance breaks the administrative barriers between cities and regions, uses surplus medical insurance funds generated by economically developed and young population cities to provide targeted support to cities with weak economic foundations, severe aging populations or facing risks of fund depletion. By promoting provincial coordination and cross-province mutual aid with personal accounts, it is expected to revitalize surplus funds held by medical insurance, effectively resolve structural contradictions in medical insurance revenue and expenditure, and reverse the trend of slowing expenditure growth. Moving from the "compensation fund" model to the "unified revenue and expenditure" model, expenditure growth is expected to return to double digits Currently, more than 20 provinces in China are accelerating the process, with 6 provinces and cities already implementing the "unified revenue and expenditure" model, 8 provinces adopting the "provincial compensation fund" model, and 7 provinces actively planning for further progress. According to the article by Yuan Tao on the scientific connotation and path optimization of the provincial coordination of basic medical insurance, the scholar conducted a simulation experiment using non-life insurance actuarial techniques for Province G to carry out provincial coordination of basic medical insurance policies. The results predict that the CAGR of medical insurance pooling fund revenue in this province from 2021 to 2035 is 10.4%, while the CAGR of medical insurance pooling fund expenditure is 13.4%. The promotion of provincial coordination of medical insurance is beneficial for the recovery of the domestic medical industry. Medical services, in-hospital medical devices, diagnostics, and innovative drug sectors deserve attention Medical services and in-hospital medical devices are most directly related, and the acceleration of medical insurance expenditure is beneficial for the recovery in medical services overall. The elasticity of the demand for medical services brought by in-hospital services is large, with good receivables, directly boosting valuations, and in-hospital medical devices and diagnostics are expected to be positively restored with the increase in medical diagnosis and treatment. Although innovative drugs have a small share in medical insurance, they have a large potential for growth, with the centralized procurement of generic drugs and negotiations on innovative drugs serving as a means to reallocate medical insurance funds. The acceleration of medical insurance expenditure will significantly increase the support of medical insurance funds for innovative medical devices. Risk Warning: Risks of policy implementation recovery falling short of expectations; risks of downstream demand stimulation falling short of expectations after policy promotion; risks of medical insurance fund operation revenue not covering expenditures.