China Digital Healthcare - Network Dynamics Associates

By Ken Zita

China is one of the world’s most attractive healthcare markets and offers by far the largest growth opportunity of the big emerging economies. The sudden emergence of an affluent middle class and the dawn of digital healthcare delivery present a promising opportunity to create jobs in the U.S. through virtual healthcare and cloud-based services.

{An earlier version of this paper was prepared in 2014 and subsequently revised in 2018, prior to a deterioration in bilateral trade relationships and increased competition in digital services.}

China’s exploding middle class – now 68% of households up from only 4% in 2000 and soon to be on economic par with Italy and Brazil – has bold expectations. The newly flush consumers are showing strong appetite for aspirational brands, luxury goods, and lifestyle services and better healthcare is widely understood to be the next “must have” as material desires are met. Growing concern over environmental toxicity and an alarming increase in chronic illnesses has prompted deep reflection. People expect a healthier life to match their newfound wealth and are demanding better health care services.

Inadequate healthcare facilities and services have long been a source of simmering social dissatisfaction. In 2010 over 17,000 healthcare workers were attacked by patients and their families, a dismal testimony to the current state of service. Egregious clinic wait times, hurried doctor examinations, and gruff patient care are the norm.

Beijing Capital Hospital, the largest in the country, admits 8000 new patients per day. The high rate of admissions is due to the low penetration of primary care facilities, which is true throughout the country; many areas have none. Overcrowding and delays at public hospitals can be acute. Anecdotal reports indicate that the registration queue at Beijing Capital can approach three hours merely to get processed, and the wait to see a physician can be an additional three hours more. Time spent with a physician is conversely compressed; doctors may see 60 patients in a morning and an average visit is estimated to include a total of about five minutes of professional care.

Keenly aware that the people were growing tired of inferior medical services, Beijing launched a $124 billion stimulus in 2009[i] to construct tens of thousands of new hospitals, clinics, and primary care facilities and to modernize traditional healthcare management with digital systems and virtual care services. Sector spending doubled from $156 billion in 2006 to $357 billion in 2011 and is forecast to surge past $1 trillion by 2020. The huge investments target data centers, dedicated communications networks, digital patient records, remote diagnostic devices, and other digital applications to hasten delivery of virtual care.

Despite the massive investments, demand for quality healthcare services far outstrips supply. An estimated 95% of healthcare treatments are made at hospitals because of the near absence of primary care facilities, and outpatient visits are growing at twice the rate that new doctors are added. The government hopes that digital platforms and service virtualization will enable patients anywhere in China to reach specialists concentrated in the big city hospitals. Rural areas lag dramatically behind and the disparities between rich and poor remain a source of political concern.

China Healthcare Market Trends that Support Virtualized Services

China is investing massively to modernize healthcare institutions and services to meet surging market demand.

Central government expenditures on healthcare rose 13.3% year on year to 820.9 billion yuan in 2013 ($135 billion). From 2009 to 2011, China built 2116 county-level hospitals, 6449 township health centers, 2410 community health centers and 21,000 village doctor’s offices. As of 2011 there were 954,000 medical and health institutions around the country, of which 38%, or 165,000, were established with private investment. Despite the staggering rate of expansion, healthcare spending still constitutes only 5.1% of GDP in 2011 and projected to rise to 7-8% in the years to come.[ii]

Even with the huge scale of investments, a major gap exists between institutional capacity to deliver quality services and consumer needs and expectations.

The system is taxed. In 2011, medical institutions hosted 6.27 billion outpatients as compared with 2.15 billion in 2002. Public trust in healthcare providers is low, and poor clinical outcomes and rising frustration with healthcare services have precipitated a disturbing rise in violence against healthcare staff. Health ministry data shows that attacks on doctors and other healthcare workers in the form of murder, beatings, threats, kidnappings, and verbal abuse reached 17,243 cases in 2010, affecting as many as 60 percent of hospitals.

The rapid emergence of an affluent middle class creates a new set of demands for higher quality healthcare.

Just 4 percent of urban Chinese households were middle class in 2000 but that figure reached 68 percent by 2012, according to McKinsey.^[iii] By 2022, more than 75 percent of China’s urban consumers will earn 60,000 to 229,000 yuan ($9,000 to $34,000) per year which, in purchasing-power-parity terms, is equivalent to the average income of Brazil and Italy. The upper middle class is an especially important engine for private and premium healthcare purchases. Those with household income of 106,000 – 229,000 yuan ($17,000 – $34,000) accounted for 14% of urban households in 2012 but that group will surge to 54% in 2022. These new customers want better healthcare, and they are voting with their wallets.

It bears noting that even with the rise in middle class prosperity, most of China is underserved by strained healthcare facilities. Most cannot afford even basic services despite a government insurance safety net that is said to cover 95% of the population. Fear of potential medical bills creates a damper on consumer spending and an obstacle to the government’s efforts to promote domestic consumption.

Virtual healthcare services are a way to reduce healthcare costs, widen access to resources, and temper the wide gap between the haves and the have-nots. As a 2012 State Council white paper notes, “The basic goal of [the 2009] reform was to provide the whole nation with basic medical and health services as a public product, and ensure that everyone, regardless of location, nationality, age, gender, occupation and income, enjoys equal access to basic medical and health services.”^[iv] The paper states that individual out-of-pocket spending declined from 57.7% in 2002 to 34.8% in 2011, “showing that health financing is working better in the area of risk protection and re-distribution.” Many elect not to seek even subsidized medical treatment.

China is rapidly upgrading its healthcare information infrastructure to enable virtual healthcare services.

The government is pouring investment into healthcare IT. The funds subsidize “regional healthcare information networks” that enable virtual medical services such as teleradiology, diagnostic collaboration, electronic health records, emergency medical services and others. Cisco contributed more than $50 million to an innovative public-private partnership called “Connecting Sichuan” that has helped build 66 healthcare organizations, six regional healthcare data centers, two operations centers, an emergency response center, and training center in China’s most populous province. The project was initiated by a grant from the U.S. Trade and Development Agency (USTDA).^[v]

Virtual healthcare services are strongly received by Chinese consumers.

Cisco conducted a global study to capture evolving attitudes toward telehealth. The findings in China were remarkable:

76% surveyed would choose a virtual medical consultation over an in-person meeting with a doctor, perhaps reflecting widespread dissatisfaction with the conventional medical establishment and shortage of primary care facilities;
87% would “give up anything” to secure premium healthcare, indicating that most people are willing to pay more for quality care over mediocre, and that securing reputable care is of paramount importance;
70% would trust automated devices to determine whether to see a doctor, a clear precursor for virtual diagnostics and monitoring; and,
40% express strong interest in finding telehealth information on their phones, highlighting common acceptance of m-health.

Market Opportunity for the U.S.

From a U.S. perspective an interesting question emerges. If a patient in China can secure virtual healthcare services from the best doctors in China from the comfort of their apartment tower, could the doctor or healthcare service just as likely be in Los Angeles as Beijing? What is the opportunity for U.S. healthcare companies to provide virtual healthcare services to China?

Network Dynamics’ research indicates that the fundamental shift toward digital healthcare delivery in China represents a potentially significant opportunity for U.S. healthcare providers, technology innovators, and insurance companies to usher in a new era of virtual exports.

Growth in services is fueled by America’s clinical care services and strong competitive advantage in cloud and virtual services which enables a variety of emerging digital businesses and employment opportunities. Remote healthcare and telemedicine are among the most promising sectors poised for expansion as middle-class consumers in emerging economies seek access to world-class healthcare in the U.S. via virtual medical applications.

Healthcare accounts for one in seven American jobs and is targeted as the leading sector for future job growth. Global market demand for telemedicine is expected to double from $16.1 billion in 2013 to more than $35 billion in 2018.^[vi] The United States Trade Representative estimates that for every billion dollars of services exports, more than 4,500 jobs are created in the U.S.^[vii] Excellent job creation opportunities exist for highly skilled doctors and diagnosticians but associated roles are also being created in laboratories, online web services, software companies and startups, healthcare information systems, medical devices, telecom, IT, and other areas.

Boosting trade through cloud-based virtual services implies a major paradigm shift in conventional thinking about exports. Rather than focus on shipping goods and services to China, virtual services bring the Chinese customers to the U.S. Or put another way, cloud-based digital healthcare can catalyze an expansion of the U.S. healthcare market by adding new international customers electronically rather than by localizing in the China market and selling to them there. This reframing of opportunity brings the economics of the Internet to the advanced healthcare services sector.

The advantages of cloud-based services for healthcare are numerous but a few are particularly notable in the context of China:

The potential customer base is not bounded by geographic location, which is typical of healthcare services, and U.S. healthcare organizations can compete virtually against local providers.
American healthcare providers can do “business-as-usual” largely as they would in the U.S., leveraging existing clinical methods and operations, without the hassle or expense of significant local market customization – long a significant impediment to China market entry.
Healthcare companies can focus narrowly on competencies they wish to extend to China, for example those that are most profitable, rather than invest in full-service local hospitals.
Intellectual property and know-how are protected because professional services are provided directly from the U.S.
Competitive differentiation is based on quality and brand, where U.S. institutions can excel.
Consumers in China can obtain world-class healthcare directly from American specialists.

Our investigation reveals many green shoots of opportunity for trade in services to China’s burgeoning healthcare sector. Among the most prominent:

Remote pathology, diagnostics and second opinions, via virtual collaborations between hospitals. UCLA, Cleveland Clinic, Pittsburg, Sloan Kettering, Union Methodist, Children’s Hospital of Seattle, and others have initiatives in place.
Computing-centric laboratory and data analysis, including laboratory testing, especially for oncology, geriatrics, and chronic diseases.
Personalized medicine and healthcare by matching individualized medical assessments with customized care programs, including remote monitoring.
Computer aided diagnostics including evidence-based analytic tools and new devices and software applications.
Specialized manufacturing customized for patients’ specific conditions.
Hospital management, in the form of architectural, management consulting and training services for the many facilities under construction.
Remote surgery, as telecommunications networks improve, for example, but connected 5G smart hospitals with cloud computing.

And in the future,

Virtual healthcare provider exchange, facilitated by service aggregation and payment networks, possibly in conjunction with insurers.

Challenges to International Virtual Healthcare

These and other opportunities being shaped by the market show great promise. But China is a difficult market, especially so for services. Obstacles are formidable. People understand paying for material goods, but it is common to encounter a cultural attitude that can be described as a ‘contempt for the intangible’^[viii]. The value of services is typically considered to be negotiable, or of no value at all, an attitude that has proved a frustrating reality for businesses involved with intellectual property and copyright violation. In the Communist era, such beliefs applied to all medical services which were assumed to be an entitlement provided by the state. Some sentiments linger. Even today a resident out of medical school earns about the same as a taxi driver. Attitudes are fortunately changing. As the middle class grows more affluent, people are more willing to invest in lifestyle ‘experiences’ and professional relationships, a trend that bodes well for premium healthcare.

In addition to overcoming cultural barriers the greatest obstacles to virtual healthcare services in China for U.S. firms include:

Trade in digital services is handicaped by differing approachines to cloud computing, privacy, data nationalization, and competitive trade policy.
The Chinese and American approaches to medical care are vastly different at every level and bridging the gap requires insight and fortitude.
The early-stage contours of virtual healthcare services are just taking shape and there is much uncertainty in how the market will evolve in China.
Local healthcare capacity is adequate for routine medical services and local institutions may be resistant to foreign involvement in the sector, especially as capacity improves.
The national healthcare strategy encouraging telehealth could enact trade barriers favoring domestic providers.
U.S. entrepreneurs with cutting-edge solutions already have their hands full in the larger and more lucrative American market and may not have the interest or resources to explore export opportunities.
Language is a significant barrier to providing services directly to Chinese consumers and a qualified translation capability is essential.
Absence of electronic medical record standards makes it difficult to transfer patient data.
No insurance payment mechanisms are in place for virtual healthcare consultations; by law if a medical service is not “scheduled” by the government it cannot be charged.
The legal liability of cross-border medical consultations has not yet been tested and there is no precedent to address potential claims.

Observations and summary

China’s new middle class is demanding better healthcare services and has the means and willingness to pay a premium for quality care. Increasingly, healthcare will be provided via virtual services as remote diagnostic tools get better and more cost-effective, and patients grow more familiar with electronic consultations. Personalized medicine and monitored care will streamline the time needed for personal doctor visits although virtualization presents the promise of more focused relationships between caregivers and patients.

The U.S. has considerable competitive advantage in cloud-based healthcare services, with particularly promising prospects for healthcare. If the right market frameworks are put in place, it is possible to build a broad virtual healthcare ecosystem that can spur job growth in the U.S. The early stage of the market is dominated by hospital-to-hospital expert exchange. Future steps will need to harness the ingenuity of healthcare service entrepreneurs with the market power of institutional insurers.

[i] China Healthcare ICT: Reinventing China’s national healthcare system through electronic medical records, telecom networks and advanced IT services, Ken Zita, April 2009

[ii] Update: Healthcare spending rose to 6.64% of GDP as of 2019 (Statistica)

[iii] McKinsey & Company, June 2013, Mapping China’s Middle Class.

[iv] China State Council, December 2012, Medical and Health Services in China.

[v] Network Dynamics worked with the Sichuan Health Bureau to design this U.S. technical assistance grant.

[vi] Global markets for Telemedicine Technologies 2013, BCC Research

[vii] Trade Agreements and Jobs, USTR

[viii] China Law Blog, May 27, 2012, Providing Service To Chinese Companies. Get Paid Upfront Or Don’t Bother