China's Healthcare Industry in Turmoil: Two Decades of Struggle and Innovation (Part I)

The aftershocks of major reforms, such as the elimination of drug markups and the implementation of the “Two-Invoice System,” had not yet subsided when the National Health Commission and the National Healthcare Security Administration were officially established in mid-2018. Shortly after its inception, the National Healthcare Security Administration aggressively advanced the “4+7 Volume-Based Procurement” program, delivering impactful measures that sharply reduced prices. As a result, the evolutionary trajectory of China’s healthcare industry in this new phase has become increasingly clear. Nevertheless, the deeply entrenched mechanisms of China’s historical healthcare system remain firmly rooted. How can the long-standing systemic ailments be linked with the main thrust of the new healthcare reforms to form a new trend? And amidst the surge of policy changes, what potential opportunities remain for the market? These are questions worthy of our consideration.

Previously written“Winter Is Coming: How Will Non-Public Healthcare Respond?”Attempting to explore the transformation challenges faced by non-public medical institutions within the current healthcare system, which is dominated by strong public entities and government leadership, also reflects the immense pressure these institutions face in competing for medical services. However, medical services represent only the tip of the iceberg of the entire healthcare industry. The uniqueness of the healthcare sector lies in the intricate interconnections among its various segments; a change in one area can impact the whole. Focusing solely on a single niche segment is akin to blind men touching an elephant, often leading to erroneous judgments.

Amid the mounting pressures facing pharmaceutical manufacturers, distributors, and private healthcare providers, what potential opportunities lie on the other side of this stress? The interplay between opportunity and pressure reflects the inherent dynamics of the industry; but what drives these underlying patterns?

In this article, we aim to highlight several core features of the current healthcare system, outline key industry trends likely to shape its future development, and identify the accompanying opportunities.

We can broadly divide the timeline into three phases:

1. The two decades from “1990–2009” constitute the first phase, which is also the primary formative period for the characteristics of the healthcare system we experience today;

2. The decade from 2010 to 2019 served as a transitional phase in which the new round of healthcare reform began to explore new directions, marked by both attempts and setbacks;

3. Since “2020---”, the new main storyline has been clearly defined, and the effects of various trends will gradually manifest, fostering the formation of a new healthcare ecosystem.

The following discussion will also be divided into two parts: the first part will address the distortions and struggles that emerged during the initial phase of the healthcare industry, while the second part will explore the mainstream trends that gradually took shape during the transition period and their implications for the future. This article primarily focuses on the initial phase of the healthcare industry.

Before proceeding, it is important to clarify that despite the numerous challenges, the achievements of China’s healthcare sector far outweigh the problems it has generated. However, due to space constraints, we will focus primarily on the issues at hand. Furthermore, while the following discussion may involve certain critiques or commendations of the behaviors of various stakeholders, it is widely understood that most developments within the system are not dictated by individual will. Therefore, our analysis will concentrate on trends rather than moral judgments of right or wrong.

We divide the healthcare industry into three major entities:Public hospital-dominated healthcare providers, medical insurance-dominated payers, and pharmaceutical- and device-dominated product suppliers. This also aligns with the current policy classification of healthcare services, pharmaceuticals, and medical insurance. Policy considerations constitute the main thread of the healthcare industry; policies are adjusted in response to broader trends, thereby shaping the next wave of major developments.

Clearly, it is essential to recognize that China’s healthcare industry is not a domain dominated by market forces. However, government leadership and market dynamics are not entirely opposed; policy sets the direction, while supply and demand in the market serve to validate its feasibility and shape its outcome, determining whether it develops in a healthy or distorted manner.

The relationships among the three major stakeholders clearly define the first characteristic of the healthcare industry’s initial phase (1990–2009): service providers held dominant power, payers were weak, and product manufacturers became subordinate to service providers.

Let’s start with the payers.: It is only natural that service providers (hospitals) should serve the demand side (the general patient population). However, patients themselves lack medical knowledge and are in a position of information asymmetry; furthermore, the patient population is relatively dispersed, lacking the capacity and platform for direct feedback. Therefore, to some extent, the payer (medical insurance) acts as the advocate for the demand side (the general patient population), striving on one hand for higher-quality services and on the other for more reasonable and affordable prices.

Product manufacturers (pharmaceutical companies) refer to the suppliers of drugs and medical devices, representing a critical component of value delivered to patients by service providers (hospitals) beyond clinical services. The situation in China is clear: for a long period, the health insurance authority primarily assumed the role of financial supporter and guarantor. It effectively fulfilled its mandate from a funding perspective, covering the vast majority of the population across all socioeconomic strata and providing a solid foundation for public stability and well-being. However, it has largely failed to act as an “advocate for the demand side,” imposing minimal requirements on public healthcare institutions. Although initiatives such as global budget prepayment and monitoring of excessive prescriptions have been introduced in recent years, they have only drawn limited attention from dominant public hospital leaders and fall far short of establishing a balanced counterweight.

Next, the service provider: Public hospitals have experienced rapid development over the past few decades. On the positive side, this has laid a solid resource foundation for the construction of China’s healthcare system. On the negative side, their scale has expanded significantly, with large tertiary Grade A hospitals siphoning off the majority of resources and patients. Distorted objectives have led to the establishment of self-contained ecosystems and internal logics from top to bottom, resulting in a phase of unconstrained expansion driven by self-interest, largely lacking external checks, balances, and strategic guidance.

At this stage, top-tier public tertiary hospitals, positioned at the apex of the healthcare hierarchy, have secured substantial resources by leveraging support from the government, medical schools, and land-based fiscal revenues, as well as by capitalizing on the inelastic demand from a vast patient base. Even when certain resources are invested in patient care, the objectives tend to align with the hospitals’ self-interests—such as the commonly observed “constructing new buildings, purchasing equipment, and opening new departments,” or, in more advanced cases, pursuing “cutting-edge technologies and premium treatments.” However, there has been little significant investment in improving efficiency, controlling costs, or enhancing customer service.

Finally, the product side: The overall prices mandated by the government are low, with service fees being particularly undervalued. This has compelled medical institutions to rely on “excessive” use of “pharmaceuticals and medical supplies” to balance hospital surpluses and increase personal income. On the surface, public hospitals and pharmaceutical companies appear to achieve a win-win outcome: public hospitals drive up usage volumes and negotiate higher selling prices, benefiting both parties. Indeed, this has been the predominant trend observed over the long term.

At a deeper level, pharmaceutical companies are also a disadvantaged group constrained by public hospitals within this system. They have become appendages parasitic on the irrational public healthcare system and the phenomenon of overprescription, causing a significant amount of their resources and capital to flow into public hospitals in the form of kickbacks. This has also deprived them of the vitality and innovative capacity driven by the mission to benefit patients, which is detrimental to their long-term development.

In summary, a vicious cycle has emerged within the healthcare system: patients and health insurance funds are in vulnerable positions, while public hospitals hold dominant power. However, due to price controls, these powerful public institutions have resorted to subsidizing medical services through pharmaceutical sales and overprescribing medications. As this trend intensifies, public hospitals accumulate greater resources, creating a siphon effect that further exacerbates inefficiencies and imbalances across the entire healthcare system. The system becomes increasingly disconnected from principles of efficiency and cost-effectiveness, further marginalizing patients. In some cases, public hospitals even leverage patient needs to pressure health insurance funds, leaving insurers financially strained and morally criticized, while pharmaceutical companies reap substantial profits by aligning closely with public hospitals.

The second characteristic is an interest-based coalition linked by the chain of “government–public institution staffing quotas–medical schools–public hospitals–medical insurance.”This public-sector-dominated interest chain demonstrates that the absolute resource high ground and insurmountable barriers in the healthcare sector lie with the public side; moreover, these barriers are not established by a single entity but are jointly constructed by multiple stakeholders.

Under the influence of policy and regulatory bias, coupled with relatively stringent market entry requirements; given the generous benefits associated with public institution staffing quotas and the unique academic and research promotion pathways within the public sector; supported by the symbiotic relationship between medical schools and public hospitals; bolstered by the substantial human, financial, and material resources of public hospitals themselves; and reinforced by the preferential treatment afforded to public institutions by health insurance as the core payer—formidable barriers have been erected. Consequently, whether it is commercial insurance or HMO integrated care models exerting pressure solely at the payment level, individual prominent physician groups focusing exclusively on the provider side, private hospitals striving at the institutional level, or online lightweight consultation platforms targeting patients, none of these isolated efforts can shake the existing system when viewed independently. As a result, it remains difficult to cultivate a new ecosystem.

It is precisely for this reason thatSeveral sectors that have developed well in the medical industry in the past are those attached to this system and capable of generating mutual benefits, including: pharmaceutical companies(having reaped substantial profits in the past, but recently facing some constraints, as will be discussed below),Medical Device Companies(Overall, it is fully aligned with the hospital’s interests; the government’s unilateral management of large-scale medical equipment addresses only the symptoms rather than the root cause)Pharmaceutical Distribution Companies(Pharmaceutical distribution companies of varying sizes, by aligning themselves with dominant players in the aforementioned cycle, can reap benefits alongside public institutions. The current squeeze on distribution channels follows a similar logic to the pressure faced by pharmaceutical manufacturers, as will be discussed later.)

Next are a few cases performed.Struggling Subsectors: For exampleMedical Services。

Supply Chain-Centric Service Model: The first to be successfully validated in the healthcare services sector was Phoenix Healthcare (now China Resources Phoenix), which adopted a model combining healthcare services, IOT-based trusteeship, and supply chain management. Its core strategy still revolved around optimizing the supply chain, which does not necessarily prove the success of the healthcare service model itself.

General Hospitals and Clinics:Next, let us examine general hospitals and clinics. Based on the spending power of the target population, they can be categorized into high-end, mid-range, and standard medical services.

Premium Healthcare, we can see that United Family Healthcare (UFH), which targets expatriate and high-net-worth clients, has become a successful model of premium healthcare in China after more than 20 years of operation at its Beijing campus. However, its several expansion efforts in other cities have been less than satisfactory. While there are other brands with premium positioning in first-tier cities, none have achieved significant success to date.

This indicates that the high-end expatriate market is a relatively segmented one. In theory, high-end healthcare providers can avoid competing with public hospitals and operate independently of national health insurance by carving out their own niche—a strategy validated by the success of United Family Healthcare (UFH). However, with Beijing UFH operating at a scale of only 100 beds, growth in demand from expatriates is gradually stagnating, while the local affluent population still relies on specialists from public hospitals. Given that the additional value brought by international care processes cannot be fully realized, it remains uncertain how much room for growth remains in the high-end medical market and whether more advanced international hospitals can be successfully replicated across different regions.

Mid-Tier Healthcare, can be defined as advocating for “value-based healthcare.” For self-pay patients, commercial insurance will serve as the primary payment method in the initial stage. The aim is to break the vicious cycle of “funding healthcare through drug sales” entrenched in public hospitals by offering “value-based care and high-quality services,” thereby providing patients with a completely new medical experience. The vision is idealistic, but in reality, when benchmarking against mid-tier hospitals, “New Public” (e.g., newly built or under-construction branch campuses of public hospitals, or main campus relocation projects undertaken in the past five years; or several large private healthcare institutions serving a broad base of medical insurance patients, such as Peking University International Hospital, Tsinghua Changgung Hospital, and Shulan Hospital).

“New Public” hospitals have already far surpassed the so-called mid-tier hospitals that claim to provide value-based care, in terms of geographic location, talent staffing, and even environmental infrastructure and information technology. When lacking medical insurance coverage and aiming for a higher positioning in the mid-tier healthcare market, but actually delivering healthcare quality below the average level of “New Public” hospitals, their market competitiveness is significantly insufficient. Meanwhile, it is not easy to establish hospitals meeting the “New Public” standards through social forces; this requires substantial medical resources and support from local governments. Merely collaborating with one or two medical institutions is not enough. Furthermore, the non-profit nature of such hospitals is often a prerequisite for securing medical resource support and government backing.

Mid-Range Clinic: Mid-tier clinics, which generally cater to self-paying and insured patients, face the following issues:

First, there is no medical insurance coverage;

Second, in the absence of public support, can the physician team establish a hierarchical structure ranging from core experts to attending physicians, while ensuring coverage across all key specialties?

Third, how to gain patient trust and implement two-way referrals between primary and tertiary care providers in the absence of public medical consortia and brand licensing.

Fourth, with higher rent and personnel costs compared to community hospitals, and without access to medical insurance reimbursement, how can one remain competitive?

In response to these issues, mid-tier clinics should gain advantages in the following areas:

First, although targeting mid-tier customers, the payment structure should still be based on basic medical insurance, while innovating value-added self-pay services. In China, commercial health insurance remains a “dessert” in the short term and cannot sustain chain clinics. While individual high-end clinics have room to survive, the market size is insufficient to support multiple chain clinics in a single city within a short period. (For those positioning themselves in premium business districts targeting high-income white-collar workers, commercial insurance and premium pricing may be viable; some cases have achieved notable success, but this requires a certain period of market cultivation. Moreover, supply in any given region must not be excessive, making such models difficult to replicate—similar to the dynamics observed in high-end hospitals.)

Second, a team is essential. This explains why some chain clinics perform well in a specific region but struggle to expand: scaling requires support from medical schools, public institutions, and an in-house talent development system. An alternative approach is to establish a partnership mechanism capable of attracting and retaining teams.

Third, strive to integrate into the network system of public medical alliances, which offer advantages in brand recognition, expert consultations, bidirectional referrals, and multi-site surgeries.

Fourth, to highlight its convenience and the advantages of value-based healthcare, consideration should be given to locating in core business districts or new urban areas lacking adequate medical facilities, rather than in general residential communities. In top-tier CBD areas, a clinic with a strong brand reputation may see companies in the same building purchase its services as employee benefits.

To capture a larger share of the mainstream market, clinics must compete on convenience while delivering high-quality services at lower prices. This demands exceptional operational capabilities and the ability to secure medical resources at low cost—a significant challenge. While some regional entrepreneurs with access to local resources can meet these standards within their own areas, scaling this model across cities is difficult. Although there are many prominent players in the clinic startup space with substantial resources, profitability remains lackluster. The average return on investment hovers around 5%–15%, with many operations incurring losses, making it difficult to achieve self-sustaining growth and replication.

In short, whether mid-tier hospitals or mid-tier clinics, they remain constrained by “government” due to the unavoidable head-to-head competition with public institutions.—Public Institution—Medical Schools—Public Hospitals—The systemic constraints of “medical insurance” have made the operation of mid-tier healthcare services extremely difficult.

Finally, general hospitals facing the mass market have virtually no advantage over public hospitals. Most ordinary clinics need to establish a differentiated positioning relative to public institutions or develop their own specialized services. It is also rare to find clinics with a clear profit model that can be scaled up extensively. This point will not be elaborated further here.

Specialized Medical Care: In the healthcare services sector, those that generally achieve strong performance are specialized medical institutions focused on specific specialties. These specialties can be categorized into two types,One category of specialties is consumer healthcare specialties., such as dentistry, medical aesthetics, health checkups, obstetrics and gynecology, and ophthalmology.One category consists of specialties that address essential, non-discretionary medical needs., such as cardiology, oncology, neurology, pediatrics, and rehabilitation.

Essentially, consumer healthcare segments inherently possess weaker medical attributes. Due to low pharmaceutical revenue shares, a lack of high-value consumables, lengthy procedural and treatment times, and a higher proportion of out-of-pocket payment items, these segments are less favorable for public hospitals and physicians, rendering them relatively marginalized departments. Conversely, for non-public institutions, these areas represent disciplines with strong consumer-oriented characteristics. They feature uneven quality among public providers, low reliance on medical insurance, and limited dependence on renowned experts, particularly in fields such as ophthalmology, obstetrics and gynecology, medical aesthetics, and health check-ups.

In successful cases within this specialty, it is evident that exceptional efforts are required on both the supply and demand sides to achieve success.In addition to possessing their own medical resources, these institutions must also implement robust marketing and operational service strategies to succeed, as demand often requires guidance and stimulation rather than being entirely rigid or constant. For instance, Aier Eye Hospital has established a solid foundation in both medical resources and market operations, whereas Topchoice Dental demonstrates greater strength in the medical domain compared to other leading dental chains in the industry.

Although general dental chains often handle a large volume of business, sometimes even exceeding that of Topchoice Medical, they suffer from long-term losses. While their output per employee is comparable, their revenue per square meter of clinic space is lower than that of Topchoice, indicating insufficient resources on the medical side. Furthermore, patient traffic at clinics in different regions is unstable, and the high proportion of overall marketing expenses reflects that the multi-clinic model demands far more from market operations than the single dental hospital model. The significant losses incurred by stores in second- and third-tier cities also highlight uneven operational capabilities across regions and a shortage of operational talent. Therefore, consumer healthcare specialties are better suited for institutions that possess advantages in both medical delivery and operational management.

For specialty sectors with inelastic demand (oncology, neurology, pediatrics, and rehabilitation), the overall market is characterized by supply falling short of demand. This imbalance is particularly evident in pediatrics, rehabilitation, and oncology. Meanwhile, access to supply-side resources remains challenging: there is a systemic shortage of certain professionals, such as pediatricians, while core resources in fields like oncology and neurology are predominantly concentrated within public hospitals. Therefore, building robust reserves of medical resources is key to competitive success. The primary profit logic lies in providing scarce supply to meet rigid demand; institutions such as Sanbo Brain Hospital and Wuhan Asia Heart Hospital stand out for their exceptional expert resources. Furthermore, specialty sectors with inelastic demand typically have large service radii. Because patients require essential treatment, they often seek care across cities or even provinces. If an institution possesses strong medical resources, market demand is generally not a concern.

However, as the demand is spontaneous rather than driven by consumption upgrades, patients’ economic status varies significantly. The vast majority tend to rely on medical insurance coverage based on their individual purchasing power.

Furthermore, specialized disciplines with inelastic demand and strong capabilities can directly target consumers (2C). However, most still need to rely on business-to-business (2B) channels through large public hospitals for patient referrals during the early stages. Rehabilitation is a unique discipline; although it represents an inelastic demand, end consumers generally lack the necessary knowledge. Consequently, many patients require referrals from B-side institutions. In the initial phase, significant resources should be allocated to channel development rather than brand promotion.

Whether future rehabilitation can gain recognition among the general consumer base and attract greater patient-driven demand will significantly impact market development. On the other hand, whether rehabilitation treatment protocols can be integrated into standard clinical pathways and covered by medical insurance will also determine the pace of B-side market expansion.

The above briefly outlines how market participants in the healthcare services sector are constrained by the entrenched characteristics formed over the past two decades—namely, “dominant public hospitals, weak health insurance, and product dependency”—as well as by the influence and constraints of the “government–public institutions–medical schools–public hospitals–health insurance” ecosystem.

Beyond the relatively struggling medical services sector, we can see that the development of internet healthcare has also encountered significant challenges. Initially, internet giants and several star startups aimed to “disrupt traditional healthcare” and thoroughly resolve the longstanding issues in China of “difficulty and high cost in accessing medical care.” Today, however, most surviving internet companies are actively serving public hospitals, government entities, and medical experts. B2C telemedicine platforms that have managed to survive, such as Ping An Good Doctor, have largely relied on substantial internal procurement from Ping An Group’s insurance business. Meanwhile, some established B2C telemedicine enterprises, despite boasting high traffic volumes and considerable valuations, still lack a clear path to profitability.

Compared with the United States, China’s internet healthcare sector is at a very early stage of development. It remains largely confined to appointment scheduling, registration, internal informatization, and marketing promotion. Although there have been attempts in core areas such as clinical diagnosis and treatment, chronic disease management, Health Maintenance Organizations (HMOs), and medical big data, these initiatives have yet to establish viable business models.

At this point, one might find it somewhat puzzling: China’s internet sector has long been at the global forefront, and these technologies have now matured. Many projects, whether in consumer-grade or clinical-grade applications, have already demonstrated clear benefits in improving patient treatment outcomes while reducing costs. Why, then, has progress in the field of internet healthcare lagged significantly behind other sectors?

The cause is clear:Public tertiary hospitals lack incentives, as the projects are not covered by payers.。

First, within the logic of “dominant public hospitals–weak health insurance–subordinate products,” public institutions have no incentive to adopt measures that could improve efficiency and control costs. Procuring internet-based products does not bring them additional benefits; on the contrary, it may sometimes undermine their own status.

Second, under the systemic constraints of the “government–public institution staffing–medical schools–public hospitals–medical insurance” framework, innovative projects lack coverage from basic medical insurance and, consequently, from commercial health insurance as well, often relying entirely on out-of-pocket payments. This is a common challenge for many innovative initiatives: while numerous innovative designs, technologies, and medical interventions demonstrate efficacy in small-scale trials, the absence of basic medical insurance coverage, coupled with the limited scale of commercial health insurance, makes it difficult to gain widespread consumer acceptance when relying solely on out-of-pocket payments.

At this point, you may ask: Internet-based B2C products often defy conventional logic, rapidly disrupting established industry characteristics through viral propagation, thereby compelling traditional industries to adapt to the rules and attributes of the internet.Why B2C Internet Healthcare Cannot Create New Industry Rules: Three Reasons：

Reason 1Indeed, the internet has successfully disrupted traditional industries in many sectors, such as Alibaba and JD.com in retail, Ctrip in travel, Didi in ride-hailing, Dianping in dining, and Airbnb in homestays. However, these industries generally share two characteristics: first, an oversupply of resources, as seen in retail, travel, and dining; second, if there is a shortage of supply, the platform can mobilize or create new supply. For instance, besides mobilizing taxis through surge pricing, Didi has created new service categories like Express and Premier rides. Similarly, Airbnb has enabled individuals to create numerous homestay opportunities. In contrast, in the healthcare sector, expert resources are not only in short supply but also cannot be easily mobilized or created.

The Second Reason, the B2C segment of internet healthcare possesses the following inherent characteristics, thus precluding viral propagation among consumer-end users:

1. Low frequency: low utilization rate in medical projects.

2. Privacy: Many medical procedures are not suitable for sharing with others;

3. Counter to human nature: Many remote chronic disease management and health-related projects require self-discipline, unlike platforms such as Douyin, Toutiao, or games, which are designed to sustain continuous user engagement.

4. Non-essential demand: At the current stage, B2C projects centered on remote consultations can be partially substituted by in-person hospital visits and over-the-counter (OTC) medication purchases at pharmacies.

5. Reluctance to Pay: As most Chinese internet products are free, medical services are generally low-cost, and payments are typically covered by health insurance, users find it difficult to pay out-of-pocket in the absence of insurance coverage.

6. Poor user stickiness; most users leave after completing their transactions in B2C projects, without long-term retention.

The Third Reason, most internet healthcare initiatives are service-oriented rather than product-centric, as commonly understood in the tech industry. Consequently, they require robust online and offline operational capabilities beyond mere product design, posing higher demands for large-scale B2C replication.

Given the combined impact of these three factors, B2C internet healthcare initiatives—primarily centered on remote consultations, chronic disease management, and wearable devices integrated with health management—have consistently struggled with weak market penetration when adhering strictly to an internet-centric development model. Conversely, reverting to traditional healthcare models presents its own challenges, namely the inability to incentivize hospitals and physicians, as well as the core issue of lacking a sustainable payment mechanism.

In comparison, B2B projects in the internet healthcare sector—such as remote imaging, remote consultations, B2B e-commerce, smart hospitals, AI-plus initiatives, and physician empowerment solutions—currently appear more promising. They offer stronger competitive moats and better monetization potential. However, although these projects serve hospitals, physicians, and pharmaceutical retailers by empowering them with improvements in efficiency, service quality, and cost control, procurement decisions lack sufficient external environmental pressure and incentives. Hospitals and physicians exhibit limited autonomous willingness to make such purchases, making it still challenging for these solutions to become a major industry trend.

Part II will explore the emerging mainstream trends during the transition period and their implications for the future; details are provided in the following article.

Author:Liu Mochao, Deputy General Manager of Capital Medical Ai Yu Hua Women’s and Children’s Hospital. VCBeat has made additions and deletions without altering the author’s original intent; the views expressed herein represent solely those of the author.