Sector Report

China healthcare – New life, new vision

by David Li / Jul 30, 2019

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While China is the world’s fastest-growing and second-largest healthcare market, per-capita spending is still only about 1/20 that of the US. But this is steadily rising along with the country’s economic growth. To meet patients’ needs for better services, reforms are prompting hospitals to improve their services and the government is also encouraging development of the private sector.

China’s hospital industry
Without a proper referral system in China, general public hospitals dominate the supply side. As such, these typically state-owned hospitals registered about 3.05/0.16 billion outpatient/inpatient visits last year, representing 85%/82% of the country’s total. While professionals in the public system are overworked, some other medical institutions struggle and many resources go to waste. To address the problem of overburdened public hospitals, the government has established several policies to encourage the private sector.

Policies for the hospitals
One of the major reform policies – zero mark-up on drugs – eliminates a major income source for hospitals, forcing them to shift their business model from drug-sale to service-driven. With hospitals now conducting centralised procurement, overall drug prices will decline. As prices fall, we expect public hospitals to focus on basic healthcare needs covered by national insurance; and private hospitals to provide high-end services for people willing to pay.

We prefer private hospitals
The acceleration of China’s healthcare reforms will impact medicinal-product manufacturers and distributors. However, hospitals will be left relatively intact and their performance should remain steady due to their operational nature. On top of that, private hospitals enjoy higher profit margins as they are not subjected to service-price caps. Specialised hospitals meanwhile are more competitive due to higher entry barriers and rising demand for quality, resulting from economic growth.

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