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Jingjing, 4, with her grandparents Li Defang, left, and Zhao Benyou Photographer: Qilai Shen/Bloomberg

Li Defang remembers the day she considered giving up on her granddaughter — a four-year-old battling leukemia.

Money had dried up, and little Zhao Jing was in a hospital in Hefei city in eastern China. She was struggling, feverish and coping with an infection. In those desperate hours back in October 2014, Li recalls whispering sadly to her: “If one day grandma runs out of money for your medicines, maybe I will have to abandon you.”

Such life-and-death calculations aren’t that rare in a China that is home to the world’s largest number of cancer cases, and where patients can sometimes pay among the highest prices in the world for drug treatments. For the past year, Li and her granddaughter have lived in a slum near the hospital. Called Wujianong, the tenement is home to about thirty other families who have also journeyed hundreds of miles to seek better care for their sick children. Here they live in damp, moldy rooms just off a narrow street strewn with plastic bags and muddy puddles. They’ve all found that cancer can be a financial catastrophe in a society where private insurance is a rarity and many costs for serious illnesses aren’t covered by government insurance.

Surging health-care costs are turning into one of the biggest threats to the world’s second largest economy and its consumers. About $115 billion will be spent on pharmaceuticals in China this year. As patients struggle to pay, international drug companies face slower growth in the country and government pressure to curb prices. For families, their biggest adversary isn’t only the disease, but the prohibitive cost of care.

Jingjing at her home in Hefei Photographer: Qilai Shen/Bloomberg

Remission

Zhao, whose nickname is Jingjing, suffers from acute lymphoblastic leukemia, a type of blood cancer, and has rallied after 12 rounds of chemotherapy over the last year. Her chances of full remission are high, her doctor says. But times are hard again for her grandparents and another round of drugs may be out of reach.

Vfend, an anti-fungal treatment made by New York-based Pfizer Inc., helped Jingjing fight several infections last year. But it cost her grandparents about 3,800 yuan ($590) for every ten tablets — about half their yearly income. A chemotherapy medicine from a Chinese drugmaker, Jiangsu Hengrui Medicine Co., came at just under 5,000 yuan ($780) a vial.

About a year ago, her grandparents left their farm in eastern China’s Huoqiu county and relocated 100 miles away to live near the Anhui Provincial Children’s hospital. The slum is just behind the hospital complex, and the city’s glimmering skyscrapers and towering residential apartments stand only a few blocks away.

Jingjing’s neighbors are other children who have cancer. Their families rent the rooms for about $60 a month to save on the expense of a hospital stay or rental apartment, and to stretch their budgets a little longer for the drugs that are the difference between life and death for their kids. Even little Jingjing senses the dangers of this precarious balance. She picked up on her grandmother’s worries that day in the hospital. Now, when Li goes out to buy food or pay a bill, Jingjing worries she’s left for good, sometimes saying tearfully, “Grandma, please don’t abandon me, when I get better I want to go to school.”

The Wujianong neighborhood Photographer: Qilai Shen/Bloomberg

Drug Costs

The children of Wujianong are an outgrowth of China’s unprecedented cancer epidemic powered by pollution and sedentary lifestyles. According to the World Health Organization it takes the lives of 2.2 million Chinese a year. It’s also a crisis escalated by high costs for drugs, with patients bearing an unusually large proportion of the burden by international standards.

China’s struggles echo the ongoing debate in the U.S., where pharmaceutical pricing has drawn scrutiny from lawmakers. The big difference is that China is a middle-income economy, where average disposable income per person was about $3,200 last year versus more than $40,000 in the U.S. The Chinese government has for years sought to curb prices, especially for brands sold by multinationals such as Pfizer or Roche Holding AG., and that pressure may accelerate.

“Chinese families scrimp and save for that fateful diagnosis that will leave many of them financially broken,” said Jason Mann, managing director of ProMed Advisors, a consultancy. “The government is aware of how this dampens consumer spending and its potential to spur social unrest. Officials are racing to tackle health-care costs to maintain power and stability, but the question is: Can they do it fast enough?”

Chinese patients can pay between 80 percent to 120 percent of U.S. prices for foreign cancer medicines, according to a study from consultancy ChinaBio Group. The retail price for Vfend is higher in the U.S. at about $800 for 10 tablets, according to the website GoodRx. But unlike China, uninsured parents in the U.S. might have support from government programs like Medicaid. Only the poorest and uninsured may pay the full retail price in the U.S., and this group is probably a small percentage, said Mann.

Chinese patients bear the brunt of about 77 percent of all private health-care expenditure in their country through out-of-pocket payments, according to the WHO, while U.S. patients cover 22 percent.

Universal Coverage

Private insurance is rare in China and Beijing claims it offers more than 95 percent of its citizenry health-care coverage. While the public system pays for conditions like a broken foot or a bad cold, expensive foreign drugs for cancer are often not covered. Six years ago, China’s government began a $460 billion overhaul of its health-care system, seeking to reduce the cost of drugs and improve insurance coverage.

Even as China’s economic boom has enriched millions, government data show that health-care costs drive more Chinese families into poverty than any other factor. About 42 percent of China’s 89 million registered poor, or those who earn just below $1 a day, were impoverished due to health-related difficulties, according to a department of China’s State Council.

Jingjing’s family already owes their hospital more than 10,000 yuan ($1,560) for her last chemo treatment. If they can’t pay up, her grandmother said the hospital won’t agree to begin the next round.

Since Jingjing got sick in September last year, the family estimates it has paid about 260,000 yuan ($41,000) for her care, mainly through loans from relatives. Most of those costs were for drugs. Her two most expensive medicines — Vfend and the chemotherapy treatment made by Jiangsu Hengrui — weren’t covered by government insurance and medical records show the family paid the full amount for them.

Zhao Benyou holds a stack of medical bills for Jingjing’s treatment Photographer: Qilai Shen/Bloomberg

Jiangsu Hengrui, maker of the chemotherapy drug Jingjing was given, launched an aid program in 2011 for poor patients, the company said in an e-mailed statement. Compared to the $780 Jingjing paid in China, the drug called pegaspargase injection can be sold at an average price of $4,505 a vial in the U.S., the company said, adding that it aims to sell Chinese patients treatments at reasonable prices.

A complex set of factors affect access to medicines and price is not the only obstacle, Pfizer said via e-mail, adding that there are many generic alternatives for Vfend in China. The drug is on China’s national reimbursement list, the company said, but hasn’t been included in a list for rural areas that is essential for ensuring access to patients there.

“Underdeveloped health systems, lags in regulatory approvals, delayed reimbursement, or lack of reimbursement, all create significant barriers,” the U.S. drugmaker said, adding that it is “encouraged” by the government’s efforts to integrate rural and urban insurance schemes. The company didn’t disclose revenue from Vfend in China.

Switzerland's Roche, which sells cancer drugs in China, said in an e-mail that it has sought to develop new alternatives in China, and its partnership with reinsurer Swiss Re is regarded as the successful model for cancer insurance.

China’s public hospital system depends on profits from drug sales to supplement government subsidies, which can fall far short of operational costs, said Greg Scott, chairman of ChinaBio. That can create a natural incentive for hospitals to sell patients the most expensive treatments. Drug sales accounted for 40 percent of public hospital revenues in 2012, according to the latest statistical yearbook from the health ministry.

Insurance for serious illnesses among urban and rural residents is currently managed by various agencies, and coverage should be expanded and the level of protection improved, the National Health and Family Planning Commission said in an e-mail.

As the next step, the agency said it will guide local regions to precisely calculate and scientifically determine the funding and coverage levels needed to sustain the serious illness insurance system.

“If patients don’t have the money, they don’t get treated.”

Chinese patients also rely on branded international drugs for other reasons. Local generic medicines don’t always suppress infections as effectively as the original Vfend and sometimes the expensive drug is the only option, said one doctor who works with leukemia patients in Hefei city.

“If patients don’t have the money, they don’t get treated,” the doctor said. “If they have the money they can live, it’s that simple with this disease.”

When sent questions via fax, the China Food and Drug Administration referred to an August press conference, where one official said that some people believe the efficacy of certain Chinese generic drugs, especially those approved before 2007, isn’t as good as imported products. China is seeking to improve generics by reviewing and benchmarking their efficacy against the original products, the official said.

China has an increasingly affluent middle class that is getting more willing to spend on health care, and pharma companies have invested in the hope of big returns in the coming years. Chinese patients often pay higher prices even for off-patent products with local generic versions due to a perceived safety and “prestige premium” for international brands in China, Mann said.

Higher prices can even reinforce “the aspirational quality of the imported products and a discounted rate may compromise that,” he said.

Zhang Xiaoqin holds two-year-old Youyou Photographer: Qilai Shen/Bloomberg

Paying Up

Li and her husband, both in their fifties, used to make 7,000 yuan ($1,094) annually from farming small rice paddies. Even that was stripped away when they came to care for Jingjing in the city. The girl’s father is a migrant worker in a county in the eastern coastal province of Zhejiang, but they say he doesn’t pay for Jingjing’s treatment because he has to support her mother and brother.

When not at the hospital, Jingjing and her grandparents live in a room in the slum that is about 10 square meters. The walls are plastered with old newspapers to absorb the humidity. A mattress on the floor doubles up as the lunch table, sofa or bed depending on the hour of the day.

Their neighbors in this cancer slum have similar stories. Two-year-old Youyou, whose full name is Liu Ying, is a shy toddler with thin hair in a bright yellow jacket. She has been through several rounds of chemo. Her mother Zhang Xiaoqin and her husband say they have spent over 300,000 yuan ($46,900) for her treament. Half of that was borrowed from siblings and friends.

Vfend alone accounts for more than a quarter of that crushing figure, they said. After her transplant, Youyou had to take three boxes of Vfend monthly for six months, generating an astronomical bill that forced her father to sell a thriving furniture carving factory and go back to painting walls. The drug provides protection against fungal infections for patients like Youyou, who at one point had almost no white blood cells after aggressive chemotherapy.

Another heavy burden for YouYou’s family is an anti-infection drug named Mycamine, sold in China by Japan’s Astellas Pharma Inc. The little girl has used about 59 boxes, totaling some 35,000 yuan ($5,400), her mother said. Astellas declined to comment.

Consultancy IMS Institute for Healthcare Informatics estimates that annual growth in pharmaceutical spending in China will fall to less than 10 percent by 2020 from 14 percent over the last five years. That’s partly due to the burden on individuals to pay for drugs. By 2020, total pharma spending in the country could reach about $150 billion to $180 billion, it estimates, with about 23 percent coming from sales of branded drugs.

Youyou's medication Photographer: Qilai Shen/Bloomberg

Mark Ups

China’s convoluted drug distribution system is one of the main reasons behind the high prices. A drug typically goes through two to five middlemen as it is transported from the drugmaker to patients in hospitals. At each level the middleman or distributor takes a cut that can range from five to 20 percent.

That means a manufacturer might get only about 40 percent of the retail price, with distributors and hospitals getting the rest. Drugmakers have to compete in government bidding processes that are run separately in provinces and hospitals, and these negotiations are getting harder for international companies. In some cases, companies lower prices to maintain access. But overseas drugmakers also stopped selling certain treatments to hospitals in provinces where prices went too low, according to an industry group.

State-run news agency Xinhua in an unveiling of the nation’s 13th five-year plan in November said people can expect more social safety nets and the Communist Party will continue expanding insurance to cover critical illnesses. In May, the government also issued guidelines for a pilot program that would scrap mark ups in a limited number of hospitals.

This month Xinhua reported that China plans to combine public health insurance schemes for urban and rural residents to equalize access to health care.

Sibo holds up a box of Pfizer's VFend Photographer: Qilai Shen/Bloomberg

Tough Choices

The mothers of Wujianong, meanwhile, struggle to get by. With most of their money squirreled away for medical necessities, some of the Wujianong mothers have come up with a creative system to keep their children — and themselves — fed.

Three mothers share a monthly food budget of about 1,800 yuan to ensure their children have some pork, fish or eggs in every meal. They wait until the kids finish to eat what’s left. When asked if he’d like new toys, one little boy, Sibo, gave an answer that was uncharacteristic for a four-year-old: “No, I need to save money to buy medicines, I need the medicines to live.”

There were times Sibo has felt nauseated after taking his drugs, his mother said. “He would try to stop himself from vomiting, saying: this is my expensive drug, I can’t puke it out,” she recalled.

Jingjing likes to wear a pink beret with a bunny sewn on top — it keeps her warm after she lost all her hair due to chemotherapy. She also wears a cotton face mask, a rudimentary protection against bacterial infection. Though she’s pale and easily fatigued, the little girl often fills her dingy room with bursts of bright laughter.

Watching Jingjing hop around and play with her doll on the bed among piles of quilts on a recent winter day, Li sighed and said to herself: “Look at her, how could we give up on her?”

( Updates with China's National Health and Family Planning Commission comments. )