Two major forces continue to drive China’s healthcare environment for the foreseeable future. It is common knowledge that the aging population (over 60) is expected to peak from the current 17.5 per cent to 35 per cent by 2050 – a number larger than the entire US population today.

What is interesting however, is that despite the shift to a two-child policy, the fertility rate will continue to stay low due to the rising cost of living. According to data from Xinhua University, families having two children peaked in 2017 since the 2014 change, but has been on a downward trend since.

The other key factor is the dramatic shift in the type of health conditions that are becoming prevalent. China reached a tipping point this year as chronic conditions have overtaken infectious diseases as the leading cause of death. The shift to chronic conditions is substantial and shows no signs of slowing down. Examples include pancreatic cancer which has jumped from 57th spot in 1990 to number 24 in just 27 years. Alzheimer’s jumped from number 28 to the 8th spot for the same period, according to the Chinese Centre for Disease Control.

Chronic conditions are by far the number one driving factor of healthcare costs. In a population consisting of a typical distribution of ages and degree of health, 1 per cent of the most chronically ill can drive as much as 50 per cent of the total health expenditures for that population. According to an analysis done by Dr. Ezekiel Emanuel at the University of Pennsylvania, there is a very strong correlation (more than 90 per cent) between a country’s GDP per capita and its health spending. So, with China predicted to be the largest world economy in 2050 with roughly $48 trillion in GDP, its healthcare spending alone can exceed the entire current GDP of a country like Germany.

Despite these record-setting market opportunities, investors familiar with the Chinese market understand that tapping into that market is easier said than done. Several challenges present themselves for a foreign investor, the most important of which is the role of the government. Another important and often overlooked factor is the unique features of how the average Chinese person approaches spending on their healthcare needs.

The government has been able to provide coverage to almost every citizen through its social insurance program. The challenge is the amount of coverage for an average citizen is roughly half his/her total health expenditure, compared to developed economies where the out-of pocket is around 20 per cent. This financial burden is an obstacle in the government’s effort to shift the economy to a consumer-driven model.

Another growing financial burden on the average citizen relates to long-term care. With the Chinese tradition of the offspring taking responsibility for the care of their elderly parents, the legacy of the one-child policy means that the average couple can be responsible for up to four elderly parents. In terms of receiving care, China is probably the only country encountered, where the average person trusts the government-run hospitals more than private entities – a clear legacy built overtime since the establishment of the PRC.

The net result is tier one public hospitals (usually in Beijing) are overwhelmed with patients from across the entire country, while tier two and private hospitals struggle to fully utilise their capacity. The government has attempted to encourage the domestic private sector to fill in the gap for both insurance and care delivery. So far, the efforts have not yielded much change. A study done by NanKai University has shown that the private insurance sector only contributes 3 per cent or so of the average health expenses.

Furthermore, most private hospitals struggle to make a profit even those who have been established for over 20 years. Such heavy reliance on the government means that innovation and adoption of new technology will be a slower than needed process. This is evident in how the care delivery model is very hospital centric in China, much more than any other developed country.

Care delivery through a hospital has proven to be a very costly method especially when dealing with chronic illnesses. New innovation is focused on moving care out of the hospital, leveraging new technologies. So, as the number of hospital bed days in most developed systems continue to be driven down, China has one of the highest average bed days and the number continues to rise. Finally, bringing preventive care to the day-to-day lives of the average person is virtually impossible with overworked, understaffed tier one public hospitals.

Foreign investment needs to be very focused on those pockets where they can have a level playing field. Understanding the government’s objectives and upcoming reform is key, establishing a relationship and being able to demonstrate direct benefit that works towards solving their healthcare burden, is even more important. Investing in care that provides a foreign institution direct access to Chinese patient data is probably too sensitive for the Chinese authority to allow free reigns.

Furthermore, return on investment in hospitals and long-term care facilities may be a long way away, especially when dealing with local competition that are willing to set profitability aside and invest for the very long term. For example, Taikang, a holding company whose main subsidiary is a life and health insurance business, is also investing in building care delivery facilities for the past decade, and is willing to put profitability on the back burner, at least for a while.

One area that foreign capital and know how has the edge over domestic competition lies in how the middle class is evolving much faster than the primarily publicly run health system. Very soon they are going to lose patience with the rate of modernisation of care delivery and may continue to look to overseas services. This has been seen with the popularity of medical tourism, the question is how will that evolve. Recent investment in remote/telemedicine has been very promising, showing how the average Chinese is comfortable using technology to receive part of their care.

Foreign entities capable of filling this need to a technology savvy Chinese, across the entire ecosystem from insurance coverage, most advanced prescription drugs, might be where they have an edge.

Sam Radwan co-founded Enhance International LLC in 2009, a consultancy, that advises Chinese insurers, headquartered in Chicago with offices in Beijing, Shanghai and Taipei. He has advised the director of health reform at China’s National Health and Family Planning Commission as well as the private health insurers including China Life and Taikang. He’s currently conducting a joint research exchange with the China Academy of Social Sciences.

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