China’s Hospital Market

The hospital industry in China is growing at an extraordinary rate. Thirty percent of the country’s 2009 healthcare reform initiatives are earmarked for building new health facilities.

In other words, since 2009, the Chinese government has been injecting $37 billion into the hospital industry. This inflow of money into the industry will continue to act as a driver to bolster the hospital industry throughout the next five years.

This column provides an introduction to the China hospital market and also presents a number of important issues related to selling devices in these facilities.

Overview of China’s Hospitals

Hospitals represent only one portion of the healthcare facilities available in China. China’s Ministry of Health recognizes more than nine types of healthcare facilities. Some rural areas in China primarily are serviced by community health centers, clinics and others. However, for devices companies, the China hospitalmarket should be seen as holding the key clients.

The total number of hospitals in China by the end of 2010 increased by approximately 250 facilities compared to the end of 2009. The United States, in comparison, only has approximately 6,000 hospitals. Most hospitals in China are state-owned. Hospitals that are not state-owned currently represent about 20 percent of the country’s hospitals.

The China hospital market is categorized into three tiers. Tier 3 hospitals are the most sophisticated with multiple differentiated departments. These are the ones that citizens think of as the provincial or metropolis hospitals, and they usually have more than 500 beds. Tier 2 hospitals are medium-sized and—usually—also have a number of departments. They sometimes may be referred to as “district hospitals.” Tier 1 hospitals are small and primarily are sought out for general health conditions. Many consider these community hospitals.

Distribution of Devices at China’s Hospitals

In order to successfully sell devices in the entirety of the China hospital market, one needs to consider listing and tendering/bidding.

Listing: In many instances, an imported device will not be considered for sale in a hospital unless it is listed on the hospital’s authorized equipment list. Usually, there is an official application process where a company can request to have their product listed with the hospital. Eventually, the product will need to be represented by a department head or a key opinion leader associated with the hospital and he or she will present the product to the hospital’s advisory committee. The advisory committee makes the final decision on whether the product should be listed. There are a lot of details and potential pitfalls in this process. In some cases, developing a relationship with the hospital may accelerate the process of being considered by the advisory committee. The entire listing process can take as few as three months or as much as three years.

Tendering/Bidding: After a successful listing, an important factor in establishing your product in the China hospital marketis tendering. Hospitals specify a device product category and invite price bids from authorized distributors. There are two products that can be accepted for each product category—one that is a lower value domestic product and one that is a higher value imported product. Bidding for low-value devices usually are carried out by hospitals themselves every year. In contrast, higher-value device bids most often are handled by the country’s Ministry of Health.

Purchasing and Pricing

Each hospital will have established departments that decide the sell-in volume and payments for devices. For example, some hospitals may designate their logistics department to make these critical decisions. When a product is being presented for listing or bidding, tailoring the marketing of the product to the audience can increase chances of success. Thus, it will be helpful to research which department will review your product.

When introducing a product to the China hospital market, foreign medical device companies also may want to consider the number of inevitable markups that are added before the product reaches the consumer. In many instances, foreign device companies will need to collaborate with distributors because China’s regulations require that hospitals buy devices from authorized distributors. These distributors will require a profit for their services.

Furthermore, the hospital will increase the product’s price. The hospital’s contribution can be split into two parts: a bidding fee and a selling fee. After the bidding, the hospital usually will choose to increase the price. Hospitals often also increase the price further when finalizing the product’s selling price to the consumer.

Hence, when foreign medical device companies are deciding the price to the distributor, these additional fees should be taken into consideration in order to determine a competitive unit price. The distributor’s profit and the hospital’s two fees usually are calculated as a percentage of the bidding price. With quality market research, an appropriate bidding price can be determined.

The China hospital market continues to grow quickly. The Chinese government’s healthcare initiatives are a strong indicator that this growth will continue for the rest of this year. As a direct result of this growth, foreign medical device companies can expect to have greater opportunities to sell their products in China.