China's Diagnostic Imaging System Market: Healthcare Reform & Domestic Companies' Advantage
By Giananthony Rizzo, DRG
With the release of its 13th Five-Year Plan, China has charted a course toward national development with healthcare reform placed front and center. An expanding middle class — with expanding global connectivity — is increasingly demanding congruency with Western healthcare standards. While China’s 12th Five-Year Plan planted seeds, the fruit it bore remains largely inadequate; the standard of care and distribution of medical devices unilaterally favors urban China, health insurance coverage is largely seen as insufficient, and the public healthcare sector is significantly overburdened.
Healthcare reform is unanimously seen as essential for China to progress as a nation. With a rapidly aging population, the laxation of the “one-child” policy, and the metastatic sprawl of non-communicable diseases, like cancer, diabetes and cardiovascular disease, China’s current healthcare infrastructure will have trouble supporting the weight of a not-so-distant universe.
Central to China’s problem is an over-dependence on tier 3 hospitals. As it stands, there is a dearth of family medicine practices, and decades of neglect of lower-tier public facilities (and their role in the health care hierarchy) and the stigmatization of private centers has created a generation of patients that lack trust in anything other than top public facilities. As of 2015, bed utilization in tier 3 facilities was at 102.7 percent, compared to 89.7 percent in tier 2 and 63.5 percent in tier 1 facilities.
As a consequence, patients have come to expect premium health services in tier 3 facilities, even for the most basic of medical needs, and deviation from these expectations often translates to disputes with physicians. Thus, tier 3 facilities, less bound by government purchasing restrictions, purchase the most high-end systems, which leads to higher patient co-payments. However, this further exacerbates the gap between tier 3 hospitals and the lower tier — for instance, tier 3 facilities generate 40 percent more revenues from out-of-pocket expenses, compared to tier 2 facilities.
The revenue and standard of care gap, and government subsidy gap, for that matter, is even wider when urban and rural China are dichotomized. While China’s rural population makes up roughly half of the country’s overall population, in some regions, only 5 percent of practicing physicians have attended medical school, and 50 percent of rural healthcare centers lack medical equipment.
The diagnostic imaging system market closely follows economic development, principally because of those systems’ large up-front costs and replacement cycles. With the Chinese government investing heavily in healthcare reform, the market is set to see rapid expansion. The government has prioritized developing rural and lower-tier healthcare through the creation of a pyramid-structure healthcare system, akin to most systems in the Western world, and has vowed to standardize health personnel training and properly allocate medical resources. In theory, this will bolster sales in the mid-range (defined as value-based systems capable of performing core imaging needs) market segment — especially ultrasound and general radiography systems, considering their ubiquity in all hospital tiers. Furthermore, the government has committed itself (more so than ever) to establishing a private healthcare sector.
However, the influx of dollars and the sudden permissibility of private care come loaded with challenges. For one, the government stands in front of Everest personified in trying to convince an indoctrinated mass of 1) patients to put their faith in lower-tier facilities, even for the most basic of medical needs, and 2) doctors to work outside the public space. Moreover, the 13th Five-Year Plan and new National Health and Family Planning Commission (NHFPC) policies strongly favor the rapid development of domestic industry, while increasingly ostracizing foreign companies, evident by China’s reluctance to accept the terms of the Information Technology Agreement (ITA), or inability to participate in the Trans-Pacific Partnership (TPP).
China’s deep pockets and centralized decision-making presuppose that healthcare reform measures outlined in the 13th Five-Year Plan will be rapidly enacted. However, given the weight thrusted on domestic industry, partially substantiated by the looming fear of the middle-income trap, how feasible are the timelines and what are realistic goals? It would appear that policy-makers in the healthcare space may be succumbing to over-ambition. Outside of tier 3 facilities that ably rival top-tier centers in the U.S., Europe, and Japan, can China’s healthcare ambitions be adequately satiated by the current selection of domestic manufacturers?
This two-part article outlines the key challenges and opportunities resultant of China’s 13th Five-Year Plan and healthcare reform, starting with a look at domestic systems' place in the imaging market. Part two will examine foreign manufacturers’ role.
An Introduction To The Chinese Diagnostic Imaging Systems Market
The Chinese diagnostic imaging systems market has historically been monopolized by foreign vendors. Siemens Healthineers (formerly Siemens Healthcare), GE Healthcare, and Philips Healthcare all have capitalized on first-mover advantage and captured a massive share of the total market. Currently, their combined business infrastructure in China is vast, with Chinese manufacturing playing a role in the global supply chain, and internal sales forces usurping the role of distributors in some regions.
It took more than two decades for domestic manufacturers to be able to compete in the diagnostic imaging space, and even then, their products only managed to penetrate the low-end system segment. Today, private Chinese companies — namely Neusoft Medical Systems and Mindray — have slowly begun to penetrate the mid-range and, in some cases, the premium market space. These companies have been the beneficiaries of venture funding and joint ventures with foreign companies, which have helped them grow to their current scale.
With healthcare reform, the government has vowed to significantly increase healthcare infrastructure, mainly in rural centers, while also increasing the number of hospital beds nationwide. An increased emphasis on cost-containment procurement measures, aimed at reducing rampant spending patterns, as well as more equitable distribution of medical technology and services, has created a dynamic and expansive market for manufacturers, specifically with midrange systems. Healthcare digitization, increased collaboration, and the 13th Five-Year Plan’s emphasis on economic development have created opportunities for both domestic and foreign companies to become active partners in the Chinese market, and to usher in a new dogma of healthcare.
Domestic Systems’ Place In The Chinese Healthcare Market
The 13th Five-Year Plan schematically illustrates China’s march toward becoming a high-income nation, and given the significance of the next five years, more emphasis has been placed on all facets of economic development. With China’s GDP per capita reaching roughly $15,000 this year, the perils of the middle income trap lay dangerously close. While the diagnostic imaging space, and the medtech space as a whole, carry only a marginal share of the burden, a nationwide reform of public industries is desperately needed.
For one, the government needs to stop financially buoying its state-owned enterprises (SOEs) and pushing its products on the economy; some estimates have China’s debt level at 280 percent of its GDP. These companies are dragged down by debt, which in turn pulls dollars away from R&D and product development. The state needs to stop its interventions, even if that means letting these companies fail and/or exit the market. Second, China must transition more rapidly toward an innovation-driven and high value-added market, something that private diagnostic imaging companies are working toward. In that regard, education must focus on creativity, innovation, and critical thinking in order to develop the highly-skilled graduates necessary to stay abreast of foreign competition.
China has prioritized the development of its domestic industry, epitomized through the unveiling of “Made in China 2025.” The medical device industry is one of 10 sectors identified by the Chinese government as a central focus. In the diagnostic imaging space, private domestic vendors (like Neusoft Medical and Mindray) have begun successful globalization efforts. A combination of venture funding and joint ventures — both on the rise in the past few years — were integral to helping these companies scale to their current stature. The government’s noncompliance with the terms of the ITA, its inability to participate in the TPP, and its negative list approach to trade have also been seen as a vote of confidence for local industry.
However, in the Chinese healthcare market, the most popular diagnostic imaging systems are premium-priced foreign systems; but import fees, distributor markups, and manufacturing and technological superiority all contribute to higher end-user prices. The current healthcare scheme is a profit-oriented system, which comes by way of over-prescribing drugs and performing more expensive procedures. While 95 percent of China’s population is covered under some form of government health insurance, reimbursement for diagnostic imaging procedures varies wildly by region and system used, and some of the more sophisticated procedures are not reimbursed. Hospitals are able to generate more profits with foreign systems (through over-prescribing more complex procedures). Paradoxically, despite out-of-pocket expenses being much higher, Chinese patients have come to expect the best diagnostic imaging systems, especially in tier 3 facilities.
Importantly, Chinese companies have begun penetrating the once-internationally monopolized mid-range and, to a much lesser extent, premium system segments. In fact, the emergence of domestic brands has prompted larger foreign companies to develop China-centric systems to better compete in the rapidly expanding mid-range market segment. These systems benefit from reverse-integration from the more premium systems, and are usually designed and manufactured by Chinese.
In concert with new economic policy, the government needs to better establish domestic vendors’ place in the Chinese diagnostic imaging space. This will shift revenues toward Chinese companies, while also indirectly curving rampant out-of-pocket expenses through the procurement of less expensive systems. New NHFPC guidelines and government investment in domestic companies seek to boost the adoption of Chinese-made diagnostic imaging equipment in larger, public hospitals — although the current model relinquishes too much purchasing power to tier 3 hospitals. The penetration of Chinese systems into more expensive segments — like higher-T MRI, larger-slice CT, and nuclear medicine — and cognisant investment in servicing options have aligned Chinese diagnostic imaging system manufacturers more closely to their foreign competitors.
But, while revamping and introducing new policy is a positive step, changing consumer perception of domestic products remains a barrier to increased adoption. Creating a friendlier environment for foreign investment will translate to larger working capital at the expense of domestic ownership. Accelerated globalization — Neusoft Medical recently partnered with Hony Capital and Goldman Sachs to ramp up its globalization efforts, while Mindray Medical merged with a subsidiary of Excelsior Union Limited — will increase brand reputation and, hopefully, drive adoption. Taken all the together, healthcare reform and expansion has identified domestic vendors as central players.
Check back next week for part two of this series, which will take an in-depth look at challenges and opportunities for foreign vendors looking to compete in the Chinese diagnostic imaging space.
About The Author
Giananthony Rizzo is an analyst on the Medical Device Insights team at Decision Resources Group. His main areas of focus are global diagnostic imaging systems, and contrast agents and radiopharmaceuticals markets. Giananthony holds a M.Sc. with a specific focus on molecular biology and targeted therapy for head and neck cancer, and a B.Sc. in medical sciences from the University of Western Ontario.