A Macro Glimpse at Financial Leasing of Medical Equipment in China

The medical business in China has always been a government-led system, rather than a market-driven one. If we look specifically at the use of medical equipment, the overwhelming fact that strikes us, is that most hospitals in China will actually buy in one go, rather than renting or paying by installments for high-value equipment. In this blog, we will examine how the so called “med-finance” could help transform China’s medical ecology and what the obstacles are from a macro perspective.

The pervasive approach to financial leasing of medical equipment, in countries like the US, India, and Japan, are rarely seen in China. Reasons accounting for this phenomenon are various; the most fundamental one is due to the restrictions on the financial sector imposed by the Chinese government. However, as the financial reforms continue to proceed rapidly (as of last year, 2016), the term “med-finance” has become a new trend in the medical field.

According to the Guides On the Development of the Medical Industry in China (issued by the Chinese central administration in 2016), there has been a nation-wide effort to encourage qualified hospitals to rent or pay per installments, in order to obtain access to medical equipment. Under such policies, the market has witnessed a growing number of hospitals turn to renting, rather than buying equipment. This has led to an enlarged market penetration of leasing deals from 16.9% in 2009 to 26.67% in 2013.

What we can be certain of in the moment, is that “med-finance” will continue to be adopted more and more frequently, even though the practices are not yet perfectly regulated.

Prospects

  1. The financial leasing of medical equipment caters to the drastically increasing demand for medical services in China, driven by the ageing Chinese population. China is experiencing a steady growth in gross medical expenditure, estimated to reach ¥6124.2 bn in 2018 (around €782 bn).With such an immense potential in demand, almost every medical institution in China is more or less motivated to purchase new devices or upgrade current installations, especially for large-scale equipment. Observing this trend, one can ask, how do these entities acquire the money needed to improve their facilities?There are three typical ways for hospitals in China to raise funds:
  • Accumulating internally
  • Government grants
  • External financing

    From experience, it is known that accumulating internally as well as government grants take a long time to collect and reach the set amount desired. Moreover, these set sums are often absolutely outdated, when considering the tremendous demand for better (and often more expensive) equipment that prevails now.Alternatively, through leasing approaches for medtech procurement, the renters-vendors of medical equipment can dispose of their stock and receive installments from hospitals. This type of reciprocal financial-leasing-model allows both sides to benefit from long-term cooperation; i.e. whilst the equipment vendors can profit through rentals -more importantly- the hospitals can (afford to) improve their medtech capacity and satiate the demands of the patient populations.Respectively, we can predict that a golden age for “med-finance” is just around the corner, as a response to the population’s structural changes in China.

  1. “Med-finance” revolutionarily transformed the way how hospitals allocate their incomes and expenditures, making it possible for them to reduce chronic financial strains.As China aims to push forward a deeper reform for its medical healthcare system, the medical field has become rather competitive as more capital flows in, similar as to when the financial-system reforms were made. In order to stand out among other healthcare providers, adopting more advanced technology and equipment has become a top priority when it comes to differentiating one’s facility from a competitor’s.However, when investing in such high-value equipment, the players must have sufficiently convincing forecasts that the particular device being procured will generate profits, or more generally, raise funds for the hospital.For example, a branded MRI machine usually costs ¥6 m (around €770,000), which means that not every hospital is actually capable of buying one upfront. Now, with the “med-finance” model, hospitals must simply spare a relatively small amount of money to obtain access to an MRI and use it. It is assumed that this would not hurt the capital flow of a hospital to an irreversible level.We can expect that as the med-finance market becomes more mature, hospitals of different sizes and with various medtech needs, will be able to find whatever they need from the supply side without bearing on previous financial risks.

Obstacles

  1. The complexity of the debt structure of medical agencies in China, along with the government’s ban on medicine markups, has rendered the issue of income-decline a real concern for public hospitals. Unfortunately, the financial leasing of medical equipment -though it can significantly relieve hospitals of financial pressure- is in essence a lending behavior based on loans. Such practices are banned in government-issued regulations that created the monetary guidelines for public hospitals.In fact, this too-good-to-be-true “med-finance” has inevitably become a catalyst to corruption. The pros and cons still remain to be weighed for the wider application of “med-finance” for medtech procurement, through the support of stronger monitoring tools.
  1. Since President Xi Jinping expressed the desire to enhance the administrative mechanisms in regards to financial entities and practices in China (at the National Meeting for Finance Development in 2017), the chances of government restrictions being reduced appear to have diminished.

Without the freedom to rent and lease, there is not enough leeway for this new model to grow in China. Whether what we envision in the section on “Prospects” will become true or not, heavily depends on how the Chinese government will treat and regulate “med-finance” in the future.

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About Zhen Nie

Zhen is in charge of Asian Operations at TforG, with more than 6 years of experience in project management and business consulting for local and international companies. She works in a continuous basis with an extensive network of Key Opinion Leaders and Health Policy makers in Asian markets. She graduated at the University of Antwerp and has a Master Degree in Finance. Tel: +32 3 201 64 24 Mobile: +32 485 89 98 84 Email: z.nie@tforg.com