China’s 2009 healthcare reforms have been a catalyst for growth in the country’s hospital industry. One-third of all reforms were dedicated to constructing and equipping both new and aging medical facilities. This has resulted in government investments of $41 billion since 2009.
By the end of 2012, China had more than 22,000 hospitals. In comparison, the US had just 5,700. Apart from hospitals, China has a vast network of medical institutions, including clinics and rural community health centers. Their numbers are rising quickly — community health centers alone posted an annual growth rate of 35 percent from 2004 to 2010.
But foreign medical device companies should focus their efforts on hospitals, which are the main buyers of medical equipment.
Most of China’s hospitals are publicly run, but the number of private hospitals is rising rapidly. From less than 10 percent in 2001, private hospitals now account for nearly 25 percent of China’s hospital market. However, their capacity is much smaller than that of government run facilities. In 2011, private hospitals accounted for just 12 percent of China’s hospital beds.
Hospitals in China fall into three tiers, based on the variety of services offered. Tier three hospitals are the most sophisticated, with multiple specialized departments. They are usually located in bigger cities, and they have more than 500 beds. By comparison, tier two hospitals — called “district hospitals” — are smaller, with fewer specialty departments. Tier one hospitals are the least sophisticated. These community hospitals provide preventive care and general healthcare.
HOSPITALS AND MEDICAL DEVICE DISTRIBUTION
Selling medical devices to Chinese hospitals involves two steps: lobbying for inclusion on the authorized equipment list and submitting bids to individual hospitals.
Hospitals in China rarely consider purchasing imported medical devices not listed on their authorized equipment lists. To get onto an authorized equipment list, a medical device company must first apply, and then have a representative present their case to the hospital staff. This representative should be a department head at the hospital or a key opinion leader in the medical field. Once the representative presents his or her case to the advisory committee of the hospital, it is up to the advisory committee to decide whether the device will be listed.
Obtaining listing is not simple, and the process can be full of complications. Oftentimes, fostering good relationships with the hospital advisory committee can speed the approval process, which can last from three months to as long as three years.
After medical devices have been listed on the hospital’s authorized equipment list, companies can start promoting their products through tenders. Hospitals ask for tender proposals from authorized dealers each year for specific categories of medical devices. For each category, they generally accept two bids — one for a higher-priced import product, and one for a lower-priced domestic product. The hospitals themselves decide which low value device they will carry, while the Ministry of Health (MOH) usually determines the high value device.
BUYING AND PRICING
Specific departments in all hospitals determine both payments and sell-in volumes for medical devices. Therefore, medical device companies should make a serious effort to investigate which department will be making the decisions. This way, the company can tailor its pitch and secure a deal.
International medical device companies should also understand that multiple markups are going to take place before their products reach Chinese consumers. For example, Chinese regulations stipulate that only local distributors can sell to hospitals. As a result, foreign medical device companies must partner with local distributors, who will inevitably increase prices before selling to hospitals. The hospitals themselves will also raise the price of medical devices after the bidding process has concluded.
When setting a competitive price, foreign medical devices companies must take into consideration these substantial distributor fees and hospital price hikes.
China’s hospital market will continue to grow rapidly. According to a recent report by Deloitte, China’s medical services market is increasing at an 18 percent annual rate. It is projected to reach $500 billion by 2015. This represents a considerable opportunity for foreign medical device companies to increase global product sales.