Why Invest in Grassroots Healthcare Projects Despite Low Profitability? Future Opportunities Lie in 'Medical Services, Pharmaceuticals, and Diagnostics'

"Investing in primary healthcare is a grueling endeavor," is the heartfelt sentiment many investors have conveyed to VCBeat.

Although the primary healthcare market is vast, enterprises in this sector face significant challenges due to weak payment capacity, difficulties in decentralizing medical resources, and a lack of distributors. For investors, identifying truly valuable companies within this space requires rigorous analytical logic.

At present, investment in primary healthcare must focus on three key points:Entry Timing, Time Horizon, Founding Team。

First, determining the right timing to enter the primary healthcare market is crucial. The maturity of primary care services and the adequacy of health insurance reimbursement at the grassroots level are prerequisites for the rapid growth of the primary healthcare market. While it is widely acknowledged that primary care holds significant potential, the sector struggles to gain traction without a reliable payer.

Secondly, in the existing primary healthcare market, it is difficult for enterprises to find a single distributor capable of directly selling products to all primary medical institutions. Consequently, the emergence of second- and third-tier agents is inevitable. Compounding this issue is the inherently limited payment capacity at the primary care level; if further markups are added by intermediate channels through subcontracting, companies’ profit margins become severely constrained. The disconnect between market potential and payment capability constitutes a current paradox in primary healthcare, making it challenging for enterprises to strike a balance between the two.

Furthermore, high-quality, qualified physicians are concentrated in large hospitals, while medical resources at the primary care level are extremely scarce. How and when these resources will be decentralized is a hurdle that all startups must overcome, as well as a key factor considered by investors.

Zuo Chenlong, General Manager of Haichuang Health, believes that primary healthcare is not, in fact, a high-margin or quick-return segment within the overall medical service system. Rather, it is a field that requires time and substantial effort to cultivate, gradually growing stronger through practical operations. However, with the promotion of tiered diagnosis and treatment and the further downward shift of outpatient traffic, particularly in large markets represented by first-tier cities, primary healthcare holds immense potential and promise for the future.

As a gateway for patient traffic, primary healthcare presents both challenges and opportunities.

First, the investment horizon is relatively long, making it difficult to achieve significant returns in the primary healthcare market within a short period. Second, primary healthcare places greater emphasis on operations; therefore, projects that truly stand out must not only possess a robust business model but also cultivate a strong operational team and establish a rapidly scalable model. Consequently, the selection of project teams becomes critically important for institutional investors during the investment process.

Furthermore, as grassroots healthcare projects are more grounded in local realities, the challenges encountered during their growth tend to be more fragmented and complex, requiring founders to devote substantial effort to maintaining government relations at various administrative levels. Consequently, investors often need to commit greater resources to supporting and guiding these enterprises through their development journey.

Tiered diagnosis and treatment is the future trend, but investors need to assess the intensity of this trend and identify investment opportunities in products and services along the upstream and midstream sectors. From the perspective of medical insurance cost containment, revenue growth at large hospitals is slowing down. Moreover, as a large number of secondary hospitals rapidly upgrade to tertiary status, they will assume some of the functions previously held by existing tertiary hospitals.

On November 8, 2018, the National Health Commission and the National Administration of Traditional Chinese Medicine issued the “Notice on Printing and Distributing the Work Plan for Comprehensively Enhancing the Comprehensive Capabilities of County-Level Hospitals (2018–2020).”

“The Notice” explicitly states that, in the effort to enhance the capabilities of county-level hospitals, further improvements in their comprehensive capabilities should be made on the basis of completing the first phase of work covering 500 county-level hospitals, so as to meet the medical service needs of residents within the counties.

By 2020, 500 county-level general hospitals and county-level traditional Chinese medicine (TCM) hospitals shall meet the service capacity requirements for “Grade III General Hospitals” and “Grade III TCM Hospitals,” respectively. Efforts will be made to ensure that 90% of county-level general hospitals and county-level TCM hospitals across China meet the basic standards for medical service capacity.

As a result, large hospitals will increasingly take on the treatment of complex and rare conditions, while small and medium-sized hospitals will handle the diagnosis and treatment of common diseases and chronic conditions.

The leap in medical service capabilities of county-level hospitals and central hospitals requires the support of several key elements. Currently,“Medicines, Laboratory Tests, and Medical Services” Are the Core Demands of Primary Healthcare Institutions and the Market。

Ge Zhanyi, a researcher at GaoTeJia Investment, a well-known domestic healthcare investment firm, believes that from the payer’s perspective, the willingness to pay in China’s primary healthcare market decreases sequentially across “pharmaceuticals, diagnostics, and medical services.” For the general public, spending on medications and diagnostic tests at the primary care level is considered essential and non-discretionary. In contrast, raising consultation fees remains a formidable challenge for society as a whole, with no short-term solution in sight. Consequently, enterprises relying solely on “medical services” for profitability will find it difficult to develop independently.

In the medical device sector, import substitution with domestically produced alternatives has been the fundamental driver behind the growth and expansion of a host of star enterprises, including Mindray Medical, Wondfo Biotech, and Mingde Biology. These companies initially entered the market through primary-care hospitals and secondary hospitals, gradually penetrating tertiary hospitals, and ultimately achieved rapid, extensive scale-up from scratch.

Uncertainties surrounding distribution channels and technology have led investment firms to impose stringent requirements on primary care startups, demanding robust comprehensive capabilities. Large corporations possess substantial financial and technological resources; even if smaller companies launch new devices, these incumbents can rapidly follow suit by leveraging their established distribution networks.

For investment institutions, it is necessary to analyze and determine which types of primary care diagnostic equipment have the potential to break through the channel and technological monopolies held by major listed companies. For instance, the market for primary care IVD and certain immunoassay segments offers substantial room for growth and is poised for rapid expansion.

Village clinics are the most fundamental providers of primary healthcare services, and their service categories reflect the broad needs of the general population at the grassroots level. By comparing the functional scope and revenue structures of village clinics with those of higher-level institutions, such as township health centers and county central hospitals, investors can identify opportunities for incremental market growth.

In Ge Zhanyi’s view, the issue of drug accessibility at the primary care level has long been a major bottleneck constraining the development of primary healthcare institutions, particularly with regard to certain chronic disease medications. For these enterprises, channel acquisition capabilities are more critical than technological prowess. It is advisable for management teams to possess backgrounds in both medicine and pharmaceuticals, along with experience in local markets. AKangHealth is a representative enterprise that exemplifies this model.

According to a survey by AKangHealth, a primary healthcare service provider, over 62% of primary healthcare institutions in China’s grassroots medical service system—comprising 670,000 village health stations—frequently face medication shortages. Additionally, 89% of grassroots physicians require consultations with pharmacists. While 1.4 million village doctors serve nearly 700 million people, their prescription volume accounts for less than 4% of the national total.

In light of this, AKangHealth has established a centralized dispensing pharmacy to provide integrated supply chain services to all primary healthcare institutions within the region, building a disease-centric pharmaceutical supply system. Meanwhile, it extensively collaborates with “Internet + Healthcare” enterprises to facilitate the decentralization of both diagnosis/treatment and medication services, thereby enhancing the accessibility of high-quality medical resources.

Primary healthcare institutions are geographically dispersed, with fragmented medication demands. Therefore, these institutions should not adopt a “comprehensive and all-encompassing” model for drug stocking, as this would lead to unnecessary resource waste. The solution lies in establishing centralized dispensing pharmacies: setting up a central pharmacy within a region to centrally supply medications to primary healthcare institutions in its jurisdiction. AKangHealth is one of the practitioners of the centralized dispensing pharmacy model.

AKangHealth has been in operation for 14 years, consistently providing disease-specific services ranging from oncology to hepatology. The company has established both B2B and B2C platforms, aggregating 12,000 pharmaceutical products, covering 1,300 disease types and more than 5,000 medication regimens, and engaging a network of 300,000 village doctors. It aims to leverage the establishment of distribution pharmacies to better serve village doctors and clinics.

Recently, AKangHealth’s Cloud Pharmacy has developed China’s first innovative offline prescription dispensing center pharmacy, with pilot programs launched in Jieyang and Shanwei, Guangdong Province. AKangHealth envisions a scenario where more patients can undergo follow-up consultations, obtain medications, and receive rehabilitation care at primary healthcare facilities, thereby enhancing medication accessibility for local communities. The company also aims to integrate these prescription dispensing pharmacies with regional medical institutions. In the future, patients who seek treatment at large hospitals will be able to collect their prescribed medications from partnered pharmacies and drugstores, with AKangHealth providing robust pharmaceutical supply chain services.

Ge Zhanyi believes that for new-type enterprises to excel in grassroots medication, they need to establish differentiated advantages on both the pharmaceutical and service fronts:

1) Generic products must be priced competitively: Expanding grassroots business is labor-intensive, and traditional distribution giants and upstream manufacturers struggle to reach these markets directly. Medicines undergo multiple layers of markups before reaching end-users; therefore, emerging enterprises must leverage internet-based solutions to streamline transaction processes, thereby delivering lower prices and faster speed to the terminal market.

2) Curated Product Categories: Enterprises should carefully select chronic disease medications with proven efficacy that are commonly used in large hospitals. These essential drugs are currently unavailable at the primary care level, creating a situation where patients have no access to treatment. They are the medicines most urgently needed for decentralization to primary care institutions and represent an incremental market.

1) Physicians’ recommendations are the primary driver of patients’ medication purchases. To leverage this, companies need to establish strong connections with primary-care physicians, provide ongoing training, and offer comprehensive disease-specific solutions. By driving pharmaceutical sales through value-added services and continuously creating value for physicians, companies can build their core competitiveness.

2) Actively embrace new collaborative technologies, such as Huimei Medical’s clinical decision support system, which localizes the Mayo Clinic’s knowledge framework and authoritative medical knowledge base in China. Pharmaceutical companies can embed this system into their own platforms, thereby strengthening engagement with primary care physicians and enhancing their own competitiveness.

From the perspective of national policy, as healthcare reform and tiered diagnosis and treatment gradually enter a critical phase, the medical industry is becoming increasingly open to social capital. The state also encourages social capital to explore and establish new healthcare service systems through various forms, participating in the practical implementation of tiered diagnosis and treatment. In this process, primary care is playing an increasingly important role; as long as a service system recognized by residents can be established, the aggregated patient flow will continue to grow.

In Zuo Chenlong’s view, regardless of the project category, any initiative that can effectively help the primary healthcare market retain patient flow is worth investing in. For chain community medical centers and chain clinics that have achieved scale, controlling a significant patient flow gateway enables daily outpatient volumes to create numerous commercial opportunities for the enterprise.

“I believe that healthcare service enterprises (chain medical groups) are most likely to first establish a comprehensive system, develop a successful model, and become a typical case in a specific region or field in the coming years,” Zuo Chenlong told VCBeat.

In September 2018, Zuo Chenlong partnered with Gu Guangyao, Liu Yaoyu, and others to establish Anhui Haichuang Health Management Co., Ltd., dedicated to building its Hailan Doctor brand into China’s most influential chain of community healthcare institutions, serving as a comprehensive primary care platform and a gateway for medical patient traffic.

Currently, the company is undergoing rapid expansion by concentrating its layout in specific regions/cities through acquisitions, trusteeships, and new constructions, thereby establishing regional advantages.

Zuo Chenlong believes that projects capable of addressing pain points in healthcare possess absolute potential. High-quality chain community medical services can, to a certain extent, alleviate the current industry-wide challenge of “difficulty in accessing medical care.” This is why, after gaining experience in consulting, technology, and the investment and operation of large-scale medical institutions, the team ultimately chose to launch the Hailan Doctor project in Anhui Province, focusing on the development of community-based healthcare.

Within six months, Haichuang Health has established six community medical institutions in Wuhu City, each with a floor area of 200–400 square meters. Zuo Chenlong aims to achieve thorough market penetration within a single city to leverage economies of scale. With an existing large local general hospital in its system, Haichuang Health is expanding continuously at the primary care level. By introducing commercial insurance and payment systems at the appropriate time, Haiblan Doctor is poised to effectively implement a Chinese-style HMO model.

Based on Dr. Hai Lan’s practical experience, particularly in third- and fourth-tier cities, investments by chain institutions in hardware, environment, and even service often fail to yield a proportional increase in patients’ willingness to pay. However, patients remain consistently willing to pay for improvements in medical quality.

According to Zuo Chenlong, chain clinics in first-tier cities with an average transaction value of around RMB 1,000, those in new first-tier and second-tier cities with an average transaction value of RMB 500–700, and those in third-tier cities with an average transaction value of RMB 200–300 are all performing well.

The key lies in whether it truly helps patients improve the quality of medical care they receive during primary diagnosis and treatment. This is why Hailan Doctor has always prioritized personnel training and operational standardization in its development, thereby striking a balance between market potential and payment capacity.