Healthcare and Life Sciences Industry as a Strategic Focus for South Korea
A Look at the Promises and Challenges
An interview with Joo Hun You
By Claire Topal and Sandra Ward
April 7, 2015
Several Asian countries, including China, Japan, and Singapore, have prioritized the development of their domestic health industries in the past several years—in many cases backed by clear government policies and significant funding. In recent years, the South Korean government has pursued advancement of its domestic healthcare and life sciences industry as an engine for renewed economic growth. The government's R&D investment in the industry grew from $0.5 billion in 2008 to $1.1 billion in 2012, part of the country's steady increase in overall R&D spending over the past decade. In January 2014, President Park Geun-hye endorsed healthcare as a strategic industry for South Korea.
NBR interviewed Joo Hun You, a director in South Korea's Ministry of Health and Welfare and Visiting Fellow at NBR, to learn more about the impetus for this government effort. Mr. You discusses the relationship between the country's domestic health industry and healthcare system and comments on the implications for the U.S.-South Korea strategic relationship in light of the Korea-U.S. Free Trade Agreement (KORUS FTA).
Why does the healthcare industry hold such promise and importance for South Korea?
Recent economic and social changes in South Korea provide a critical context for understanding South Korea's interest in developing its healthcare industry. Many South Korean manufacturing companies have shifted their production base to countries where costs are significantly lower, such as China. As a result, employment in Korea's manufacturing sector has declined. At the same time, as a country with one of the lowest birth rates in the world, South Korea is faced with the health and economic challenges of a rapidly aging population. This demographic change poses a key threat to the Korean economy's long-term growth.
The healthcare industry offers numerous ways to help address these challenges. For one, the health services sector offers potential for higher-wage job creation at a consistently high level. According to Statistics Korea, in 2014, about 140,000 new jobs were created in South Korea's healthcare and welfare service sector, which represents the highest growth rate of all industry sectors in the country. More broadly, the growth potential of the health market has drawn the Korean government's interest in developing this sector.
Globally, healthcare is one of the fastest-growing markets. In terms of health system outcomes, Korea has also seen consistently good results. For example, according to OECD health data, Korea's five-year relative survival rate of cervical cancer surpassed that of both the United States and Europe—at 76.8%. Korean medical institutions are well-equipped with the latest technology. Moreover, the cost of medical services is less than in other developed countries like the United States and Japan, making Korea an attractive medical tourism destination. The number of medical tourists increases annually.
In South Korea, population aging has only deepened the demand for high-quality healthcare. The country's investment in its domestic health system accomplishes two things: (1) it meets a clear demand from the country's population, and (2) technologies and medicines developed by the healthcare industry bolster the economy while improving health and quality of life.
What are the most successful elements of South Korea's healthcare system?
One of the greatest advantages of Korea's healthcare system is its effectiveness—in terms of both costs and outcomes. The Korean people, as well as foreigners who live in Korea, have access to high-quality care at a low cost.  The administrative cost of the health insurance structure is notably low. A financial analysis of the National Health Insurance Service (NHIS) in 2013 reported that its program budget utilized about 94% of funding to directly provide insurance benefits, with less than 4% being diverted toward administrative expenses. The reserve fund, thanks to fiscal surpluses, reached more than $1 billion (3%) in 2013.
The number of people that visited hospitals and clinics for ambulatory care in 2012 was 14.3 times the 2008 number, the highest rate of increase among the OECD countries for the same period. While the average length of a hospital stay in Korea ranked second only to Japan among the OECD countries, Korea's national expenditure on healthcare remains low at 7.6% of GDP, which is less than half of U.S. health expenditure and lower than Japan's rate of 10.3% according to World Bank data. Korea's national per capita healthcare expenditure based on purchasing power parity was $2,291 in 2012, which the OECD finds is about one-fourth of the United States' $8,745.
Given these achievements, many developing countries planning to introduce health insurance systems have shown great interest in Korea's healthcare system. Since 2004, 53 countries have dispatched personnel to learn about this system. The United Nations and World Bank sent experts to Korea last year to refer to the country's health insurance system while establishing a new millennium welfare plan that is scheduled to be launched this year.
What are the biggest challenges that South Korea's health system currently faces?
All Koreans, except those who qualify for the service at no cost, pay monthly contributions for compulsory health insurance. Healthcare providers may not reject national health insurance patients. Under the single-payer system, for services covered by the national health insurance there are essentially no other insurers from which the provider can choose. (Although there is a private health insurance market in Korea, it mainly covers costs not covered by the national health insurance, such as out-of-pocket expenses, elective medical costs, and nursing fees.) Consumers are thus in an advantageous position in price negotiations with healthcare providers. Pharmaceutical companies are in the same situation as providers because the national health insurance covers the majority of prescription medicines. According to OECD data, in 2012 19.8% of national health expenditures went toward covered prescription medicines and medical supplies, a decrease of 2.9% from 2007.
As population aging places more demands on the healthcare system, the Korean government must address concerns about the sustainability of the existing structure. Many other countries are experiencing similar pressures. Many hospitals and clinics in Korea are privately owned. As with any private institution, profit is critical for hospitals to stay in business. As a result, many hospitals are incentivized to increase the quantity of the medical services, given that the payment from the national health insurance system is fixed per service. Doctors and hospitals are paid for each service provided for a patient's illness or course of treatment, which can lead to the rapid growth of healthcare costs under fee-for-service medicine.
Unfortunately, this system sometimes leads hospitals to provide unnecessary or excessive services. On the other hand, because patients can visit any hospital or doctor in the country at low cost, they seek medical services more frequently and often opt to visit the best doctor in the country for any ailment. This, along with the fast rate at which Korea's population is aging, could accelerate a waste of resources, thereby increasing financial pressure on the health insurance system. To cope with these problems and to boost the sustainability of the healthcare system, the Korean government is trying to reform the health insurance compensation system by means such as bundled payments to strengthen the management system for chronic disease and to increase investment for disease prevention.
What does the international community need to understand about the evolution of South Korea's domestic pharmaceutical industry—vis-a-vis its transparency and approach to innovation?
The Korean government has increased efforts to establish infrastructure that fosters fair competition and innovation. Some people perceive Korean pharmaceutical companies as having relied more on marketing for their product sales, sometimes via illegal rebates, than on R&D to develop new drugs. In 2008, marketing costs for domestic pharmaceutical companies reached 20% to 30% of total costs, but R&D investment was only 6%. As a result, the Korean government has recently imposed strong regulations and conducted crackdowns against illegal rebates in the drug industry, as well as promoted significant reform on pharmaceutical affairs laws. One of the largest Korean pharmaceutical companies was investigated on suspicion of offering illegal rebates last year. In Korea, doctors as well as pharmaceutical companies can be punished if they receive kickbacks from companies for prescribing their medicine. Those drugs are also removed from the items paid for by the national healthcare insurance if the companies producing them are caught more than twice engaging in such illegal activities.
The Korean government anticipates that such actions will contribute to an increase in pharmaceutical companies' investments in innovation, a decrease in marketing costs, and overall enhancement of the global competitiveness of Korean healthcare companies. This outcome seems to be supported in part by data from the Korea Health Industry Development Institute showing that many pharmaceutical companies have recently increased their percentage of R&D investment. Furthermore, according to the Korean Ministry of Science, ICT, and Future Planning, in 2012, South Korea's overall rate of R&D spending to GDP was the highest among developed nations, totaling $49.23 billion.
In what ways do government and domestic pharmaceutical companies see eye-to-eye, and in what areas do tensions exist?
Some level of tension between government and industry is inevitable and healthy in every democratic society. The ambiguity of the healthcare industry over what goods and services are or should be "public" versus those that are not makes the spectrum of competitiveness more complex. There are many cases where decisions or policies around health system reform are delayed because of the conflicts among different sectors in the healthcare market.
Government-driven telemedicine in Korea, which allows patients to consult with doctors and obtain prescriptions remotely using information technology provides an illustrative case. Some argue that telemedicine is critical to improving public health and curbing medical costs. However, others are concerned that electronic healthcare policies may compromise the "public" aspect of the healthcare industry by increasing providers' commercial gains and undermining the business structure of small hospitals and local clinics.
The role of the government as a neutral mediator is very important in Korea. As a result, official channels for both formal and informal cross-sector communication that brings together representatives from all involved sectors have been important. A typical example is the health insurance policy review committee, whose members include hospital representatives and doctors, pharmacy representatives and pharma companies, unions, employer associations, consumer organizations, and others. This group helps determine the rate of increase for insurance premiums and sets the compensation portions.
It took much time and effort for the government and healthcare players to see eye-to-eye on some policies. One example is the sale of over-the-counter drugs outside pharmacies. The practice was disputed for more than ten years (because of strong objections from pharmacies) and finally permitted in 2012 after long-term discussion through formal and informal communication channels involving pharmacy representatives, civil groups, and professionals.
Please compare and contrast South Korea's approach to strengthening its domestic health industry with the approaches of some of its Asian neighbors?
South Korea, along with China, Japan, and Singapore, seeks to strengthen the global competitiveness of the domestic pharmaceutical and medical device sectors. Each of these countries is also working to improve the quality and efficiency of its domestic health system at a time when population aging is placing increasing strain on services everywhere.
Each country approaches today's challenges with a unique track record of success. For example, China's health sector is weaker than Japan's and South Korea's in terms of health outcomes and the number of domestic life science innovations on the international market. However, China's current growth—and growth potential—is gigantic with such a large and widespread population. On the other hand, Japan has a relatively long history of success in terms of health outcomes and domestic life science innovations on the international market. Finally, Singapore distinguishes itself in medical tourism.
In the case of Korea, the quality of care in its health system is world-class, but the country's sophistication as a hub for life science innovation and manufacturing is weaker than that of Japan. In recognition of this reality, the Korean government is making concerted efforts to improve the competitiveness of its domestic life science industry. With the goal of entering the global top seven in the pharmaceutical industry by 2020, the Korean government enacted a special law in 2012 to promote the pharmaceutical industry and issued a five-year plan (between 2013 and 2017) that seeks to simplify the regulatory process for new drugs, support pharmaceutical companies' R&D investments (with the aim of increasing R&D from $1 billion in 2011 to $3 billion in 2017), and support the overseas expansion of domestic companies. Specifically, Korea has built high-tech medical complexes in Taegu and Osong to help make Korea a bio-industry hub, like the Houston medical cluster, the Boston bio cluster, and the San Diego bio cluster in the United States, or like the Kobe-Osaka-Kyoto triangle in Japan. Begun in 2009, this complex is scheduled for completion by 2017.
The Korea-U.S. Free Trade Agreement (KORUS FTA) contributed to an increase in pharmaceutical exports from the United States to South Korea in 2014. How do you see this strategic relationship evolving as South Korea's health industry expands?
The KORUS FTA was helpful for the pharmaceutical industries of both countries. According to the Korea Health Industry Development Institute, during the two years following the agreement, Korea's drug exports to the United States increased by 20.5%, while its imports of drugs from the United States increased 25.4% during the same period.
As Korea's health industry develops, the need for strategic cooperation and partnerships between the two countries may increase. Joint Korea-U.S. research between pharmaceutical companies, as well as hospitals and universities, for developing new drugs (for example, antidiabetic and arthritis medication) is increasing. Such collaboration also opens new markets for domestic Korean companies, some of which are exploring the sale of Korean-developed drugs through the overseas networks of multinational pharmaceutical partners, such as Bayer, MSD, and Sanofi.
In fact, global cooperation and partnerships for enlarging new market opportunities have become more and more common recently. The concept of "open innovation," which promotes innovation by sharing resources, ideas, networks, or experience with external companies or researchers, is a new trend in the pharmaceutical industry. The result will be globally beneficial in terms of needed medical innovation, strengthened economies, and the creation of more common ground for collaboration in other areas.
Claire Topal is Senior Advisor for International Health at NBR. Sandra Ward is Director for Communications and Brand Development at NBR.
 Foreigners who reside in Korea for more than three months for study, employment, marriage purposes, and so on are eligible to enroll in the state healthcare system.