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Analysis & Opinion
28.10.08 Endangered Hopes
By Vladimir Frolov

It is clear that the Russian healthcare industry needs a complete overhaul. Healthcare costs are rising, while the quality of healthcare for the majority of Russians who are not very rich remains sub-standard. Mortality rates from serious chronic diseases grow while the Russian pharmaceuticals industry is incapable of supplying Russian patients and hospitals with the necessary drugs.

Each year, 1.3 million Russians die from cardiovascular disease, costing Russia billions of dollars in lost economic output. Every year, more than 300 thousand people die of cancer. Another 150 thousand become handicapped. Cancer survival rates in Russia are the worst in Europe. The five-year survival rate from all types of cancer in Russia is at a dismal 43 percent. In France or Austria it is 61 percent, in Sweden – 62 percent. Russia’s spending on oncology care is inadequate. In 2006, Russia spent about ?570 million ($706.8 million), or ?4 per capita, on cancer drugs. By comparison, per capita spending on cancer treatment in the United States in 2006 amounted to ?38, in Canada – ?28, in France – ?22, in Italy – ?19, even in Poland it was ?9.

Russian officials have been frequently talking about boosting the country’s birthrate to deal with the population decline. A special federal benefit program that allocates $10,000 of “mothers’ capital” to all women giving birth to a second child has been set up at a serious budgetary cost. Prenatal care has been improved.

This laudable undertaking brought some results. In the first half of 2007, 753 thousand children were born – more than in the same period of 2006 (715.4 thousand) and all preceding years since 1999.

However, this is far from sufficient to stop the population decline. To achieve that objective in the next decade, birthrates need to grow by 50 percent from their current levels. This will require a massive shift in social behavior that is simply not in the cards. And the costs of the government hiring out women to produce children at such rates are prohibitive.

It is clear that in order to reverse the population decline in Russia more serious efforts need to be made to decrease death rates, which are mind-blowing by a developed economy’s standards. Russia is the only developed country in the world that has seen a decline in life expectancy during the last 40 years, while death rates in certain working age groups have increased twofold.

Only in 2005, with the introduction of the National Projects which gave a significant boost to healthcare spending, did Russia begin addressing its mortality problem. In 2006 and in the first half of 2007, the population decline has slowed down. Having peaked in 2003, when the number of deaths exceeded the number of births by almost 800 thousand, the population decline dropped significantly to 532.6 thousand in 2006, and then dropped to 500 thousand in 2007.
The Russian healthcare system is woefully underinvested. Current public healthcare expenditure in Russia is 3.7 percent of the GDP, compared to an EU average of 7.1 percent. The Russian government hopes to increase healthcare spending to five to six percent of the GDP as part of the “Healthcare 2020” reform program. But the financial crisis might make this an untenable proposition.

The government has made a dramatic decision to overhaul the social security tax to substantially increase the share of taxes that would be collected by the Federal Health Insurance Fund. Starting from 2010, the Fund would be the sole funding channel for almost all healthcare costs, replacing the current two-channel system that depends on budgetary subsidies. The system will function as a government-run health insurance program with every patient being able to seek treatment at a medical facility of his choice, whether government-run or privately owned.

This, in theory, is likely to increase competition among healthcare providers for the insurance premiums that go with the patients. The plan will cover most, but not all, drug costs for those covered by the program - that is all insured workers.

Pensioners and the handicapped will get their drugs through the existing government drug reimbursement programs, funded directly from the federal and regional budgets. The Russian government has not yet figured out how to cover the unemployed.

Controlling healthcare costs will be instrumental to the reform’s success. As of right now, too much money is spent on hospital treatment, even for cases which could easily be treated on an outpatient basis. Too much money is spent on too many under-qualified doctors and nurses. Uncapped pricing for drugs on government drug reimbursement lists created gaping holes in drug coverage.

The Russian pharmaceuticals industry has too many old plants that are producing the cheapest and least effective medicines. Only nine percent of those plants conform to international GMP standards. As a result, more than 90 percent of drugs supplied under the $1.3 to 1.5 billion a year federal drug reimbursement program are manufactured by major international companies.

A special government program to modernize the nation’s pharmaceuticals industry has been developed before the crisis. It projects that by 2020, Russian companies will have captured at least 50 percent (or $30 billion) of the Russian drugs market, valued at $60 billion per year. All low-cost generic drugs, not covered by international patents, will be manufactured in Russia at modern plants that would be built under the GMP standards. No less than 50 percent of the drugs manufactured in Russia will be high-premium innovative drugs that could be marketed outside of Russia. The government projects to have at least 200 of such blockbuster Russian drugs by 2020, with annual sales exceeding $50 million for each drug.

To achieve these objectives the government planned to spend over $5 billion until 2020 to stimulate innovative drug development and train highly-qualified specialists for the sector.

Foreign drug manufactures will be pressured to localize their production in Russia or to sell licenses to Russian companies to produce their innovative medicines. Only Russian-made generic drugs will be put on the government drug reimbursement lists, while prices for innovative patented drugs will be capped. Tight guidelines to measure the economic effectiveness of costly drugs (their impact on life expectancy of patients and healthcare budgets) will be introduced.

Some big international pharmaceutical companies are already taking note. Sanofi-Aventis is going to produce insulin at a modern facility near St. Petersburg. GlaxoSmithKline sold a license to produce its bestselling vaccine against cervical cancer at a plant in the Moscow region. And Bayer Healthcare has unveiled plans to invest in innovative oncology research centers in Russia.

But all of that was before the crisis. We will soon see whether it will slow down the modernization of Russia’s healthcare industry.
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