An overview of the China healthcare market, its structure, trends in reform and growth drivers and constraints. Key challenges to participating in China healthcare are highlighted as are best practices of successful foreign companies playing in China healthcare.

1. An Overview of the China
Healthcare Market
Presented by Kent D. Kedl
Vice President & General Manager

2. China Healthcare – a sector in
transition
China has a challenge on their hands … how to care for the
health of over 1.3 billion people.
 Healthcare used to be guaranteed under the old State-owned
enterprise system but that social safety net has gone away as the
economy has privatized
 Four factors will drive the growth of China healthcare:
– GDP Growth: As GDP increases, health spending as a percent of GDP
will also increase, at a higher rate than GDP, driven by middle class
consumers willing to spend more on healthcare.
– Urbanization: The urban population in China will increase by about
150 million over the next ten years, and these people will have greater
access to quality care, driving up underlying demand.
– Lifestyle Shift: Middle class and urban consumers tend to consume
more calories of meat and fat, driving up incidence of “modern”
chronic diseases such as hypertension, diabetes, and heart disease.
– Demographic Shift: The population over 50 will increase by about
100 million over the next ten years, and these people will have greater
need for healthcare.
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3. Age-shift in China
There will be 181 million people aged 65+ in China by
2020, more than the entire population of Russia, 25% of
the world's total elderly
The high savings 140
rate in China –
average 35% of 120
total income – is
attributed, in part, 100 1978
Population in millions
to people’s concern
over being able to 80
2008
afford healthcare for
their parents and 60
themselves
40
20
0
0-4 10-14 20-24 30-34 40-44 50-54 60-64 70-74 80+
Age 3
Source: China Statistics Yearbook; Euromonitor, Technomic Asia analysis

4. China Healthcare vs the U.S.
China has seen explosive growth in their healthcare sectors.
However, there is still additional room for growth compared
levels in the US.
$ (billions) Historical Healthcare Expenditures: China & the U.S.
Healthcare Overview – China & the US
China US
Healthcare
+20% 6.9%
annual growth
Beds per
1,000 ~2.30 ~3.60
population
Basic health
insurance ~30% ~84.7%
penetration
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Source: WHO World Health Statistics 2009, China and India Ministries of Health; Technomic Asia analysis

5. China Healthcare Share of Wallet
It is estimated that over half of healthcare costs in China are
paid by consumers, out-of-pocket and healthcare
expenditure in China is estimated to double in the next two
decades in terms of its percentage of a consumer’s total
spending.
Evolution of the Chinese Consumption Portfolio
Transportation and
communication
Recreation and
education
Personal items
Discretionary
Household Items
Semi-Necessity
Housing and utilities
Necessity
Healthcare
Apparel
Food items
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Source: China Statistical Yearbook; McKinsey; Technomic Asia analysis

6. China Healthcare: Rural/Urban
China healthcare is characterized by inefficient allocation and
use of healthcare resources between rural and urban areas –
80% of government health expenditures go to urban areas,
even though only 45% of the population lives in urban areas.
Allocation of Urban/Rural Healthcare Resources (2006)
– Large urban hospitals are overused,
resulting in unnecessarily high number of
patients per doctor and costs per patient.
– Instead of quality patient care, excessive
market-orientation creates incentives for
over-prescription and overutilization of
services.
– <10% of hospital income comes from the
government, with the rest coming from
Gov’t. Spending Physicians Hospital Beds
Per Person Per 10,000 People Per 10,000 People fees; >44% from drug sales alone.
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Source: Ministry of Health, McKinsey and Company, Technomic Analysis

7. Chinese Medical Institutions
There nearly 289,000 medical institutions in China in 2008, of which
19,700 were hospitals. Clinics perform only basic outpatient services,
while community health centers do limited diagnosis & testing.
Chinese Medical Institutions (2008) China Hospital Ownership (2008)
5% <10%
25%
■Grade III 29%
■Grade II 2%
■Grade I 16%
■Ungraded 7%
50%
66% >90%
Hospitals
19,701
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Source: China Ministry of Health; Technomic Asia analysis

8. Hospital Utilization
China’s core issue in providing healthcare services is that the top
hospitals – Class III – are the fewest in number but care for a
disproportionate volume of patients.
Utilization of Graded Hospitals (2008)
Grade III
The Chinese government
will be investing heavily Grade II
in Class II hospitals to
improve the level of
service and make them
more attractive places to
seek treatment
Grade I
9,934 1.471 billion 79 million
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Source: Ministry of Health, Technomic Analysis

9. Challenges for Foreign
Companies in China Healthcare
While the high growth rate in China healthcare – over 20%
annually – is attractive, foreign companies need to pay close
attention to several key features of China’s healthcare markets
 Quality and pricing tiers – while the Class III hospitals will spend on
imported equipment, the real growth opportunities are in Class II hospitals
where quality and pricing expectations are a bit lower.
 Complex purchasing procedures – State-owned hospitals typically work
through a bidding process to purchase medical equipment and
pharmaceuticals and suppliers need to work with distributors who have
access to this process.
 Fragmented distribution – no distributor in China healthcare has
nationwide access and suppliers must work with many distributors to get
broad yet effective coverage.
 Many competitors – there are many Chinese suppliers (over 3,000
pharmaceutical companies and over 10,000 medical device manufacturers)
flooding the market, most of them sub-scale but with strong footholds in
very local markets.
 Complex and “flexible” regulatory environment – medical equipment
and pharmaceuticals need to go through a complicated and often-opaque
regulatory process that takes significant time and guanxi (relationships) to
navigate
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10. Foreign Investment Trends in
China Healthcare
Foreign companies are doing several things to give them their
best chance of success in penetrating the China healthcare
market…
 Know your customer – gather deep market intelligence on
who your target market is … what they want, how much are
they willing to pay, how they purchase.
 Use the right channels – and find the distributors most able
to get you to those segments. Don’t contract with a distributor
without knowing just where they are strong and where they are
weak.
 Know your competitors – you will always have Chinese
competition … they will often have “good enough” products,
good pricing and will typically have very good relationships
among the buyers.
 Think “acquisition” – more and more, foreign companies are
looking to acquire companies already in the market, gaining
access as well as speed to market. This is particularly
successful when trying to penetrate the Class II hospital market.
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11. Technomic Asia
Room 502, Jin Tai Building
58 Mao Ming Road (South)
Shanghai 200020, China
Tel: +86-21-6473-2588
Fax: +86-21-6390-6659
www.technomicasia.com
Kent D. Kedl, Vice President & General Manager
kkedl@technomicasia.com
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