Understanding buying power and insurance coverage in China’s most profitable hospital segments

In this article, we will describe the factors and mechanisms that drive the income and buying power of hospitals in China and elaborate where medtech companies are likely to find the most attractive segments.

The financial power of a hospital in a specific province is largely based on how much they can charge the patient for their services, and influenced by the extent to which insurance covers the patient.

The following anecdote is only an illustration of the complexity of both hospital tariffs and of the reimbursement system in China.

My colleague’s mother, who is living in Ningbo, a tier 2 city in China, had to undergo a complicated dental operation. The local level 3 hospital will bill her for 6,000 RMB, of which roughly 50% will be reimbursed by her healthcare insurance. If, however, she decided to go a top level 3 hospital in Shanghai, it would have cost her only 1,000 RMB.  On the other hand, since Shanghai is in another province, her local insurance program would only have reimbursed 20% of the bill.

Financial Flows in Hospitals

The 3 main components of hospital costs are financially fueled by different sources:

  • Staff salaries are mainly paid by the (local or national) government
  • Capital investments are financed partially by individual resources coming from patient payments, and partially by (local or national) government subsidies
  • Operational costs (including pharmaceuticals, consumables, disposables etc.) are fully covered by patient bills
China Reimbursement Model
China Reimbursement Model

Hospitals’ tariffs and billing

The hospital bills the patient for:

  • Diagnostics and treatments
  • Hospital-stay related expenses
  • Pharmaceuticals

In some provinces, there are maximum tariffs for specific diagnostics or treatments in line with the package pricing policy, which aims to avoid overconsumption and stimulate the usage of less expensive products or techniques. In other provinces, reference tariffs per diagnostic method and therapy are applied.

Hospital stay related costs are billed according the length of stay (e.g. ICU days).

Finally, the hospital charges for the pharmaceuticals, nutrition products etc. prescribed during the hospital stay.

Price levels for the billing-items mentioned above are listed by the regional DHRSS (Department of Human Resource and Social Security), often as advised by regional and national clinical experts and related administrations. These price levels are reviewed by the regional Price Bureaus.

The DHRSS will also categorize the drug, diagnosis or treatment into A, B and C specifying what percentage of the costs will be taken into account for reimbursement:

  • A: Reimbursement based on the total amount spent
  • B: Reimbursement based on portion of the total amount spent
  • C: 100% is paid for Out-of-Pocket

Above all, the tariffs and categorizations are (sometimes very) different from one province to another.

Patients’ healthcare costs and insurance coverage

The patient always pays the full amount of the hospital cost himself or herself after receiving care. They can use their social security card; the card’s funds are financed by the card owner, the employer and the government.

The patient submits the hospital bill/forms to their medical insurance.

The insurance provider will calculate to what extent the patient is reimbursed for the care they received based on the type of coverage the program provides and on the categorization (A, B or C).

Depending on the type of hospital (tier 1-3), the reimbursement rate will vary within each of the patient’s corresponding insurance types.

The overall trend is that care provision from more specialized hospitals (i.e. tier 3) is generally reimbursed at lower rates than from tier 1 or 2 hospital.

Insurance programs cover care that is obtained within the same province where the patient resides.

Care obtained in a facility outside the patient’s province is not always entitled to reimbursement, but more and more provinces are making cross-provincial agreements and extending their coverage to include additional provinces.

There are several healthcare insurance programs in place:

Basic medical insurance and large expenditure/severe diseases aid
  • Covers employees, residents, farmers (residents and farmers will merge – started in 2016)
  • Financed regionally (through government, households, employer)
Social medical subsidy
  • For destitute families and people with disabilities
  • Financed regionally (civil affairs)
Military medical insurance
  • Serving soldiers
  • Financed nationally (military) and at select hospitals
Free medical service
  • Covers provincial organizations (Hubei, Jiangsu & Guangdong) and national organizations
  • Through regional and national financing (government)
Retired public service managers insurance
  • For those who started working before 30 Sept. 1949
  • Through regional and national financing (government)

Also within this context, the HC insurance landscape differs from province to province. Depending on the region, there are a different number of insurance types available. These can vary between 3-10 different insurance types/plans.

Overall, a patient in the Chinese healthcare reimbursement/insurance system can expect to pay around 50% of their tier 2-3 medical care Out-of-Pocket.

Consequently, people who can afford it will subscribe to private insurance policies. We estimate that 10% of patients currently have private healthcare insurance.

Finally, each year around 75,000 Chinese patients go abroad for medical treatment, e.g. for oncology (Japan), IVF (Thailand), plastic surgery (S. Korea), etc.

Priority segments

Private hospitals and military hospitals:

Private hospitals that are part of the national healthcare system and that have been accepted by the HC insurance programs, are often more profitable than general (public) hospitals. The main reason is that they tend to concentrate on less expensive pathologies and treatments. For the same reason, military hospitals are financially stronger and invest into more modern equipment and techniques.

Provincial capitals:

The highest quality care and medical resources are typically found in the capital cities of a given province.

Based on the hospital services tariffs, categorization and insurers’ policies, hospitals in the following regions have superior buying power and more frequently turn to innovative and sophisticated treatment and products:

  • Beijing
  • Shanghai
  • Sichuan
  • Guangdong
  • Zhejiang
  • Hunan
  • Shandong
  • Jiangsu

Want to have a conversation about the China healthcare market and its reimbursement system?

Call us at +32 (03) 201 64 00 or leave your details here and we will contact you on the same day.

 

About Bart Van den Mooter

Bart is the founder of TforG and works closely together with over 50 global companies such as Abbott, Baxter, GE, J&J, Medtronic, Philips, Stryker and Covidien. In this function, he spends a lot time with Key Opinion Leaders and Health Policy makers in Europe and in Emerging Markets.

He graduated at the Polytechnic University of Leuven with a Master of Engineering and has an MBA (Flanders Business School).