Yin Pengcheng of Eight Roads Ventures: Payment Innovation Drives Comprehensive Upgrade of Trillion-Dollar Healthcare Industry Chain

Yin Pengcheng, Vice President of Investment at STCapital Healthcare Fund, recently shared the team’s investment perspectives on the healthcare payment segment at a closed-door session on “Healthcare Payment Innovation” hosted by STCapital. This article aims to further elaborate on these insights, with the goal of encouraging more professionals to join the cause of healthcare payment innovation and collectively drive the industry’s future development.

VCBeat’s focus on innovation in healthcare payment stems from repeated reflections on the long-standing and stubborn problem of “difficulty and high cost in accessing medical care” in China. In his bestselling book *Freakonomics*, University of Chicago economics professor Steven D. Levitt presents an intriguing theory: “incentives are the cornerstone of modern life.” Due to various historical factors, many management mechanisms within China’s healthcare system have lagged behind, causing market development to be driven by distorted incentives for a period. Encouragingly, however, the central government has undertaken bold reforms in recent years, yielding initial positive results and bringing hope to the entire industry.

The National Healthcare Security Administration’s series of measures—cracking down on insurance fraud, removing “miracle drugs,” and fully implementing the “4+7” volume-based procurement program in conjunction with generic drug consistency evaluation—are commendable. However, constrained by its massive population base, the government-led social medical security system (social insurance) will likely remain limited to providing “basic coverage” for a considerable period. The intensifying aging of the population, upgrades in healthcare consumption, and advancements in new technologies all suggest that “high medical costs” will continue to be a major challenge.

The growth in demand for health security among urban and rural residents will be particularly pronounced. While funding for this segment of social insurance primarily comes from local government budgets, the rate of increase in fiscal subsidies cannot keep pace with the natural rise in medical costs, leading to mounting pressure on medical insurance payments. In this context, we believe that now is an excellent time for healthcare entrepreneurship and investment to leverage market forces to assist a determined and proactive government in addressing livelihood challenges and truly realizing the critical role of “insurance” as a product.

Yin Pengcheng, Vice President of Investment at Sida Medical Fund

In recent years, Stocapital has leveraged its global resource network to conduct research on healthcare systems in multiple countries, including the United States, identifying many valuable insights and best practices. Healthcare is an industry with pronounced regional characteristics; therefore, a vast territory with significant population density substantially increases the complexity of healthcare service delivery and payment management.

In the United States, commercial health insurance is backed by robust technological infrastructure, enabling it to assume certain governmental administrative functions and maximize social efficiency. The challenges of cross-state management encountered in the U.S. are also present in China. Regarding social health insurance, China’s current pooling units are relatively smaller in scope, making administration already difficult; the challenges that will arise with future efforts to raise the level of pooling are thus imaginable. Therefore, we anticipate that commercial insurers with more rational incentive systems will serve as an effective supplement to social health insurance.

Managed care is the core healthcare security model that the United States currently relies on. The pilot programs for Diagnosis-Related Groups (DRG) payment and unified medical coding recently introduced by China’s National Healthcare Security Administration also signal a shift toward this reform direction. Against this backdrop, how can market-oriented institutions effectively supplement social insurance? Below are our insights derived from several years of investment observation and reflection:

1. Compared with traditional life and property insurance, health insurance imposes significantly different requirements on operational teams. The products of the latter two are relatively standardized and primarily sales-driven, whereas health insurance places greater emphasis on risk control and refined management. In the long run, as an upstream player in the healthcare industry chain, the goal of healthcare payers is to coordinate various providers to create a sustainable new ecosystem balance within the industry;

2. The “demographic dividend” continues to offer market opportunities. Companies that can create win-win value and tap into incremental markets will find it easier to establish a foothold. China’s per capita income ranks in the middle globally, and its per capita insurance policy count lags far behind that of developed countries. From the perspectives of both actual coverage levels and channel efficiency, “cost-effectiveness” will be the keyword for innovative insurance products, particularly in the vast grassroots market.

3. Data intelligence can help enterprises build long-term competitive barriers. In recent years, a wave of startups has emerged in the United States, aiming to enhance the operational efficiency of traditional health insurance companies through data empowerment. With its larger internet user base, mobile payment ecosystem, and gradually improving underlying data-sharing infrastructure, China is well-positioned for data intelligence to drive a significant leap in the management capabilities of its healthcare security institutions.

Throughout our research, we have often asked ourselves: what pitfalls of the U.S. commercial health insurance system should be avoided even as we draw lessons from it? The United States has the highest healthcare expenditure as a percentage of GDP globally, yet its life expectancy does not rank among the top tier. Is managed care truly effective? Professor David Dranove of Northwestern University provides a detailed exposition on this topic in his book *The Economic Evolution of American Health Care* (which has been translated into Chinese and published by Professors Huang Cheng and Xu Yongguo of Shanghai Jiao Tong University). We observe that while numerous studies consistently affirm the effectiveness of managed care, they also highlight many new problems arising from it, such that healthcare spending remains a significant burden on American society.

However, we can also take a more proactive view of the value inherent in this current landscape. More than half of global innovations in medical technology originate from the United States, a phenomenon we believe is closely tied to the robust development of healthcare payers. Examining the U.S. healthcare industry, major players emerge not only from the sectors of new pharmaceuticals and medical devices but also from health insurance. Currently, there are seven health insurance companies in the U.S. with market capitalizations exceeding $10 billion, most of which trace their origins back to the 1970s, the nascent stage of managed care. Although healthcare payers and providers may check and balance each other in the short term, they are mutually reinforcing in the long run. Without the drive from effective payers, the development and innovation of providers would be constrained, leaving researchers and service providers without adequate incentives.

Supply-side structural reform, as a current national policy, holds particularly significant guiding implications for China’s healthcare industry. Payment innovation will drive advancements in medical technology and services. Faced with challenges similar to those in the United States, we firmly believe that China possesses a more fertile ground for innovation. We look forward to seeing “Healthy China” lead the world in the near future.

Innovation in healthcare payment requires cross-disciplinary talent. Through cross-sector communication and integration, as well as the accumulation of experience in new business areas, companies can continuously optimize their service systems to build and extend their own competitive moats, which constitute the core competitive barriers for startups. Stone Ventures’ investment strategy in healthcare payment and healthcare information technology is centered around these considerations and logic. It aims to leverage the agility and flexibility of startups to bring innovation to society, facilitate a virtuous cycle within the entire healthcare system, and ensure that people can afford medical care when they fall ill. Stone Ventures’ investments in the field of healthcare payment innovation include Wanhu Liangfang, Medbanks Health, Si Pai Health, and Fucunbao Technology.

Wanhu Liangfang aligns the Pharmacy Benefit Management (PBM) model with China’s healthcare reform initiatives, particularly the tiered diagnosis and treatment system. Centered on the core objectives of “lowering drug prices, safeguarding medical insurance funds, and benefiting public welfare,” the company provides comprehensive solutions for China’s pharmaceutical and broader health industries. By innovating in chronic disease management, Wanhu Liangfang offers patients a sustainable care model, delivering high-quality services to enrolled members through community health service centers.

Magi Health approaches the issue from the payment side, focusing on two key areas: “New Payment” (including pharmaceutical benefits, installment plans for medications, and efficacy insurance) and “New Retail” (including DTP pharmacy networks and cloud pharmacy home delivery). By integrating the upstream and downstream segments of the healthcare value chain, Magi Health helps patients access cutting-edge drugs and medical services more conveniently and at a lower cost, thereby effectively improving the accessibility of medications and high-quality healthcare services. Currently, Magi Health has partnered with numerous domestic and international pharmaceutical companies and insurance institutions to develop innovative commercial health insurance products for several blockbuster drugs.

Focusing on oncology, the disease category most likely to cause patients to fall back into poverty due to illness, Sipai Health has partnered with numerous domestic insurance institutions to develop health insurance projects and establish a health insurance management network. Leveraging its medical data capabilities, Sipai Health has built a nationwide PPO (Preferred Provider Organization for Oncology) to help major insurance companies design innovative products and provide patient-centric professional services. Sipai Health’s first nationwide DTP (Direct-to-Patient) pharmacy network is now operational, using Sipai Pharmacy as the physical service hub across 290 cities in China. It provides specialized medical follow-up services for patient medication and offers one-stop DTP pharmaceutical solutions for health insurance products.

Fucunbao Technology focuses on the medical payment capacity of rural populations, striving to expand coverage and enhance protection levels for residents in towns and townships. Urban residents often struggle with high out-of-pocket expenses for serious illnesses; rural populations, who have lower levels of medical security, face even greater challenges. Villagers can enroll and pay premiums online, while Fucunbao designs reimbursement plans digitally. By adopting the National Health Commission’s CN-DRGs application standards, the platform classifies diseases online and provides equitable subsidies across 1,539 disease categories. This approach offers Chinese villagers more cost-effective medical insurance solutions, effectively assisting the government in addressing critical shortcomings in rural livelihoods.

FountainVest’s global resource network and long-term investment strategy enable us to support the growth of our portfolio companies by providing tailored services that address their development needs at different stages. FountainVest also invites and looks forward to like-minded partners joining the ecosystem companies in its healthcare payment innovation sector.

Welcome to contact Eight Roads Capital for any inquiries. (cody.yin@eightroads.com)