Primary Care Clinics: The Offline Pathway for Internet Healthcare (Part II)

By Wu Chong

We believe that the development of internet healthcare in China will unfold in three stages:

I. “Connected Healthcare” that integrates all elements of the healthcare industry via internet connectivity;

II. “High-Quality Healthcare” Enabled by the Internet to Improve Medical Quality;

III. "Controllable Healthcare" through Cloud-Based Intelligent Management of Medical Insurance Data

In 2016, the internet healthcare industry was forging ahead with considerable challenges in its second stage, characterized by typical models such as internet hospitals, general/specialty clinics, and third-party medical service centers. The offline expansion of internet healthcare is not merely a simple monetization of online traffic in offline settings; rather, it involves more deeply breaking down hospital barriers, reshaping diagnosis and treatment processes, and improving medical efficiency and quality. Previously, we elaborated on the value of internet hospitals (Internet Hospitals: The Offline Path of Internet Healthcare), this article focuses on general practice clinics.

Internet Healthcare’s Expansion into Primary Care Requires Attention to Two Key Points: Capturing Offline Medical Entry Points and Delivering Higher-Quality Diagnosis and Treatment Services.

In simple terms, healthcare access points are divided into offline and online channels. The former is represented by healthcare institutions (with 21 million daily patient visits), while the latter is represented by search engines (with over 25 million daily searches). Offline access is primarily driven by government administrative planning, which allocates healthcare resources based on regional population size and economic development. Its defining feature is a regionally distributed three-tier healthcare system spanning “province/city–county–township/village.” Although hospitals account for only 2.6% of all healthcare facilities, they serve as the largest conduit for patient flow, providing nearly 40% of all clinical consultations. Online access, by contrast, is dominated by internet technologies and network effects. Currently, Baidu holds a dominant position, while 360 and Sogou are rapidly catching up.

Investor-Focused Variables. The healthcare entry point is undergoing significant changes, and internet-based healthcare is one of the largest sources of these variables.

The trend in offline healthcare access is characterized by the increasingly prominent role of primary care institutions as entry points, driven by the tiered diagnosis and treatment policy. This shift reflects the state’s broader economic imperative to control the growth of total healthcare expenditure. World Bank projections indicate that, without reform, China’s total health expenditure as a percentage of GDP will rise from 5.6% in 2014 to over 9% by 2035, representing an annual growth rate of 8.4%. More than 60% of this increase will stem from inpatient services. To effectively curb these costs, greater utilization of outpatient and primary care services is essential.

Although the tiered diagnosis and treatment policy appears complex, from the perspective of patient flow entry points, it essentially leverages administrative, medical insurance, and market forces to reposition primary healthcare institutions as the primary gateway for medical services. The core guidelines of tiered diagnosis and treatment are initial consultation at the primary level, two-way referrals, separate management of acute and chronic conditions, and coordination between different levels of care. Its key objectives include increasing the proportion of outpatient visits at the primary level, thereby highlighting the role of primary healthcare institutions as distribution hubs for medical demand, particularly in the diagnosis and treatment of chronic diseases.

Conversely, the evolution of healthcare access points is also linked to the repositioning of hospitals: “Hospitals are no longer isolated institutions at the core of the service system or the sole entry point for services, nor do they provide ‘one-stop’ services. Instead, they are increasingly becoming part of a service network, collaborating with providers such as primary care institutions, diagnostic centers, and social service agencies. Hospitals will evolve into demonstration centers for clinical treatment focused on technology and specialization, dedicated to delivering highly complex medical services and life-saving emergency care, while providing personnel, technical assistance, and training to lower-tier healthcare institutions.”

In the short term, a market increment of nearly RMB 60 billion is expected to shift from hospitals to primary care institutions. According to statistics from the National Health and Family Planning Commission, outpatient visits at primary care institutions reached 3.24 billion in the first three quarters of 2015, accounting for 57.6% of the total outpatient visits (5.68 billion). To achieve the 2017 target of 65%, primary care institutions need to increase their annual patient visits by 603 million. Based on an average outpatient cost of RMB 97 per visit, the market space shifting to primary care could amount to RMB 58.49 billion (as estimated by Ping An Securities).

With the rapid advancement of internet healthcare, online medical entry points are undergoing significant changes. Baidu, once the monopolist of medical search engines, suffered severe damage to its public credibility following the Wei Zexi incident, leading to the collapse of the traditional “Baidu–Putian Network” medical distribution model. New opportunities for entry points have emerged in online consultation platforms driven by internet healthcare. The launch of Chunyu Doctor’s fully open online consultation platform in August 2016, along with its further development of “patient and medication guidance” services, marked a landmark event in this trend. Strong competitors in this space include Haodf, Ping An Good Doctor, and Guahao.com. (In fact, in the more specialized maternal and child health sector, many online consultation platforms have already made successful attempts to provide consultation capabilities to traditional offline maternal and child stores.) As internet healthcare companies increasingly expand into offline services, a new “online consultation–primary care clinic” medical distribution pathway is beginning to take shape.

Comparison of Two Major Healthcare Entry Points

Data Source: National Health and Family Planning Commission

Internet Healthcare Goes Offline to Meet Consumption Upgrades in the Medical Sector and Provide Higher-Quality Primary Care Services. Currently, Systemic Opportunities Lie in Primary Care Clinics, with Strategic Themes of “Self-Built,” “Chain Operations,” and “General Practice.”

Building proprietary clinics is a capital-intensive strategic choice. In their exploration of offline clinics, internet healthcare companies have historically debated two pathways: self-construction, represented by DXY, and partnership, represented by Chunyu Doctor. (Ping An’s Wanjia Medical layout is excluded from this discussion, as its strategic path differs due to its role as an insurance payer.) The advantage of the partnership model lies in its asset-light nature, which facilitates rapid replication and expansion. However, Chunyu Doctor’s recent divestiture of its clinic business and strategic pivot toward independently developing self-built clinics suggest that the partnership model faces insurmountable challenges. Compared with self-built clinics, partnerships with offline medical institutions currently suffer from the following drawbacks: 1) Physician supply is highly unstable; since physicians remain within the public healthcare system, their available time is limited, and without sufficiently attractive compensation, their interests are not tightly aligned with the platform; 2) Most private hospitals engaged through partnerships belong to the “Putian network,” which is plagued by numerous management issues; 3) It is difficult to standardize and monitor physicians’ diagnostic and treatment behaviors. From an investment perspective, the fundamental issue stems from the conflict between old and new models: traditional offline medical institutions cannot accommodate new healthcare service models. Therefore, the capital-intensive self-construction model is an unavoidable initial choice for internet healthcare companies establishing offline operations.

Chain operation is an inevitable choice. In January 2016, the first DXY Clinic opened in Binjiang District, Hangzhou, followed by the second clinic in Xihu District, Hangzhou, in July, marking DXY’s formal entry into chain operations. Underpinning this chain model are stringent quality control standards and a unified brand image, which are also essential for internet healthcare companies seeking to establish new online-integrated clinics. Currently, favorable policies for clinic establishment, the trend toward privatization of clinics, and the liberalization of physicians’ multi-site and independent practice have laid the foundation for the chain operation of clinics.

General practice represents an incremental growth opportunity. According to estimates by DXY, there is a shortfall of 100,000 clinics in China. The shortage of general practitioners (GPs) further compounds the gap in upgrading and transforming existing clinics, which are predominantly focused on integrated traditional Chinese and Western medicine. In the United States, half of the one million licensed physicians are general practitioners. In contrast, among China’s more than 2.6 million licensed physicians, only 170,000 are GPs, most of whom hold licenses but do not actually practice as general practitioners. Positioning as a general practice clinic, focusing on common diseases, frequently occurring conditions, and chronic diseases, and delving into family health management constitutes an incremental growth strategy for internet-based clinics. Leveraging the online platform of internet healthcare enterprises, which boasts millions of physician resources, to support specialists in providing general medical services and building a team of general practitioners for clinics presents both opportunities and challenges.

Comparison Between DXY Clinic and Traditional Clinics

Seizing the opportunity presented by the shift in healthcare access points, and providing primary care general practice services that align with the upgrade in healthcare consumption, support tiered diagnosis and treatment, and serve as chronic disease management and family health gatekeepers, represents a significant strategic opportunity for offline clinics of internet healthcare companies at the current stage. Internet healthcare enterprises that connect doctors, users, pharmaceutical companies, insurers, and other healthcare stakeholders are delivering true “value-based healthcare” to China’s primary healthcare system, warranting joint exploration by businesses and investors.

This article is authored by Wu Chong, an investment manager at Lian Fund, and does not represent the views of VCBeat (WeChat official account: vcbeat). This article was exclusively first published after being edited by VCBeat. Please cite the source when reprinting. If you have more ideas and perspectives on internet healthcare, we welcome you to share them with us.