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LETTER FROM CHINA: Reform and Growth, Position for Success in
Chinas Healthcare Market
In thirty years, China has transitioned from a government-administered public health care system to a
decentralised system that is increasingly open to private involvement and foreign investment. In the
past five years alone, China has spent RMB 3 trillion (US$ 480 million) on healthcare reform. In 2014,
China has rolled out a healthcare reform plan aiming to reduce staff shortages and overcrowding,
expand primary care facilities (the general initial point of contact for healthcare needs) and step-down
facilities (nursing units with an intermediate level of care), and reduce the overprovision of services
and the over prescription of pharmaceuticals.
Beijing aims to tackle these challenges by increasing access to healthcare services, especially at the
lowest levels, and encouraging private domestic and foreign investment in the healthcare sector. With
an aging population, China is expected to be home to nearly half a billion senior citizens (or 35% of its
population) in 40 years; only 12% of Chinas population is composed of seniors today. Chinas
healthcare market is already the third largest in the world and is expanding by the double digits.
These reforms, coupled with Chinas rapidly growing healthcare market, which is largely unsatisfied
with the current provision of healthcare services, have created a unique opportunity for healthcare
ventures.
While in the US, an average 2.4 physicians and 10.8 nurses serve 1,000 people, in China, a mere 1.8
physicians and 1.7 nurses serve 1,000 people. This extreme talent vacuum has contributed to poor
service, with disconcertingly brief consultations and overcrowding being the standard at Chinese
facilities. In a long-term effort, Beijing has successfully reduced out-of-pocket costs for the individual
from 60% to 35% of the total cost, but in doing so, they have, arguably, created a healthcare system
that ensures unsatisfactory treatment. Overall, healthcare facilities are unable to keep up with the
demand of Chinas aging population and rising middle class.
Chinas underutilization of primary care and step-down facilities has resulted in an inefficient
allocation of resources. For example, Chinese patients first contact with a healthcare provider is
typically with a specialist, even for common ailments, such as the common cold. Moreover, the
absence of step-down facilities further contributes to the plague of overcrowding at Chinese
hospitals because Chinese patients tend to stay in the hospital longer than average. A recent study
determined that the average length of stay at a Chinese hospital is 10.5 days, where as it is only 5.4
days in the US.
Notably, Chinas fee-for-service system has resulted in the overprovision of services and the over
prescription of pharmaceuticals. Moreover, fees charged by medical facilities in China are, arguably,
too low. As a result, healthcare facilities have looked elsewhere to balance their budgets, some of
which have resulted in conflicts of interest. Chinese hospitals typically award bonuses to doctors
based on the number of patients served and use of the medical facilities.
Chinese hospitals sell pharmaceuticals directly, and many of them have been implicated in instances
of corruption, in which a pharmaceutical company used red envelopes to encourage a given facility
to prescribe their medication, sometimes at an above market rate. The over prescription of
pharmaceuticals has resulted in Chinese hospitals attaining a very high ratio of their profits from
pharmaceutical sales. This practice has also resulted in a measured reduction in effectiveness in
pharmaceuticals in China. While in the OECD, pharmaceutical sales contributed to an average of 19%

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of hospital revenues, they contribute to 40% of hospital revenues in China. Some studies indicate
that Chinese patients consume, on average, 10 times more antibiotics than American patients.
Moreover, Chinese physicians are overworked and underpaid. A 2011 survey determined that the
average starting salary for a certified physician in China was RMB 2,000 (US$ 321) per month. Thus,
they have been vulnerable to offers of bribes, which have, in turn, resulted in their being untrusted
by much of the population. Reports of violent assaults on doctors frequently grace the headlines.
And doctors routinely accept red envelopes from the family members of patients.
Beijings 2014 healthcare plan aims to mitigate these challenges in a variety of ways: increasing
subsidies for residents, increasing prosecution of corruption in the pharmaceutical industry and
attracting foreign and domestic private investment in the sector. While Beijing has limited the
foreign holding in an enterprise in the healthcare sector to a maximum of 70%, the State Council
recently announced plans to scrap that condition for investors from Hong Kong, Macao and Taiwan,
and ease foreign investment limitations for investors from other nations. Interested in attracting
internationally leading technologies and practices, Beijing has effectively embarked on a program to
attract foreign investment in Chinese healthcare ventures.
With massive reform and rapidly increasing demand, the healthcare sector is ripe for investment.
The growth potential is remarkable China spends a mere 5% of its GDP on healthcare, where Japan
spends 10% and the EU spends 18% and exists throughout the sector, but a few notable examples
are worth mentioning. First, Chinese hospitals demonstrate low capacity with regard to health
technology. The use of advanced tools would present the opportunity for more efficient service and
reduction of overcapacity. Second, the government seeks to standardise the patients personal
health records. Third, primary care and step-down facilities are needed to free up capacity in
hospitals. Beijing has already begun implementing plans to increase the number of general
practitioners.
Seizing these opportunities will require a well-crafted entry strategy powered by a strong
understanding of the sectors dynamic composition and how to position ones firm amongst
competitors.