Is Healthcare O2O Too Good to Be True? A Reality Check Beyond the Hype

Currently, in the rapidly emerging field of internet healthcare, the roles played by various entrepreneurs are becoming increasingly clear. However, what will sustain future growth is a question that many startups of considerable scale must consider calmly. Can the O2O (Online-to-Offline) model, which has seen success in other sectors, also shine brightly in the healthcare industry? Where is pharmaceutical O2O headed? How long can the cash-burning game continue? These contradictions represent widespread challenges that the entire industry urgently needs to resolve.

On September 11, the Internet Healthcare and O2O Offline Themed Salon, supported by VCBeat and hosted by Yiou.com, reignited discussions on several keen topics that directly address the pain points of entrepreneurs. The event invited renowned industry leaders to join forces with startup founders and investment institutions in exploring these issues together. In the eyes of several well-known representatives from the internet healthcare sector, medical O2O is as follows—

Ren Bin, Founder of Yaogeli

First, from the perspective of the pharmaceutical industry, China’s annual hospital drug expenditure amounts to RMB 1 trillion, while non-hospital sales, primarily through retail pharmacies, account for RMB 300 billion. In contrast, in the United States, non-hospital sales constitute 80% of the market, with hospitals accounting for only 20%. The timing of deregulation and decentralization in Chinese hospitals, allowing drug sales to return to market mechanisms, is the decisive factor constraining the industry’s development.

Relaxing hospital restrictions on pharmaceuticals appears to be an emerging trend. In May of this year, the national government introduced relevant policies to launch pilot programs for the separation of prescribing and dispensing in 100 cities across 31 provinces. While major hospitals in Beijing have been somewhat slower to act, local hospitals have responded more swiftly to the directives from higher authorities. Ren Bin believes that the replacement of hospitals by retail pharmacies in China’s pharmaceutical sales landscape is an irreversible trend. He noted that Yaogeli has already reached 500,000 users in Beijing, marking the first large-scale implementation of online-to-offline (O2O) pharmaceutical services.

Compared with the online sales performance of other products, the proportion of online orders for medications stands at merely 1.5%. This low level of internet penetration is attributable to the dual factors of product pricing and delivery timeliness. Products that compete solely on price have demonstrated strong performance through online channels, such as those on JD.com and Taobao. For products where both price and timeliness are critical, outcomes vary by category: food delivery services are thriving, while fruit sales remain sluggish.

As pharmaceuticals are specialized products with high demands for timeliness, can pharmaceutical O2O disrupt traditional models and meet the critical need for immediate delivery? Yaogeli’s approach involves partnering with thousands of pharmacies in Beijing, dividing the city into multiple small zones, and assigning the nearest pharmacy to fulfill orders after they are placed. This strategy has resulted in a user retention rate of 42%, meaning nearly half of its users are repeat customers. Currently, Yaogeli provides services in two cities: Beijing and Guangzhou.

Since e-commerce eliminates the cost of renting physical stores, it can significantly reduce product prices. Yaogivei also plans to reduce its physical pharmacies to one-tenth of their current number, thereby lowering consumer costs. In addition, similar to CVS Health in the United States, Yaogivei has launched a “Minute Clinic” service that targets 50 minor and common conditions, allowing professional physicians to answer users’ questions online before they place orders for medications. Conditions beyond these 50 still require hospital visits. Because doctors have the ultimate authority in determining which medications are appropriate, whereas pharmacy staff may, driven by sales targets, persuade customers to purchase expensive or unsuitable drugs that customers are unable to properly evaluate, the Minute Clinic helps partially address this issue.

Lessons from Yaogeili: The Pitfalls of Medical O2OFirst, the internet and healthcare are two industries with fundamentally different characteristics. For them to integrate seamlessly and develop in harmony, mutual understanding and respect are crucial. Furthermore, Ren Bin believes that the true test of whether a product meets an essential demand is to halt cash burn and remove subsidies, then observe user retention rates. If business growth remains slow, stable, or even declines, it still indicates that the product or service has a viable market. However, if the user base drops precipitously, it may suggest that the product is not as indispensable as assumed.

Zheng Zhihua, Co-founder and CTO of Tanghushi

Mobile healthcare O2O has evolved through three stages: the 1.0 era, which initially connected patients with hospitals; the 2.0 era, which connected patients with doctors; and the 3.0 era, which comprehensively manages patient health through data while integrating all medical resources related to patients.

Enterprises participating in internet healthcare can be broadly divided into two categories. The first category consists of large, comprehensive platforms that provide general practice services for all types of diseases, primarily focusing on consultation and diagnosis. Examples include Chunyu Yisheng, Haodaifu, Ali Health, and Ping An Good Doctor. The second category comprises deeply specialized vertical platforms in niche segments, which require multi-party participation from upstream and downstream enterprises to collaboratively build integrated solutions. Examples include Tang Hushi (Nurse Sugar), which focuses exclusively on diabetes, as well as Kangkang Blood Pressure and Lepu ECG.

However, an overview of the current state of mobile health reveals that it remains in its early, nascent stages. User habits have yet to be established, with very few people using apps to manage their physical health. When illness strikes, the immediate instinct is to visit a hospital rather than seek online consultation first. Furthermore, actual data indicate that the industry has not yet achieved scale. Last year, the number of hospital visits across China exceeded 7 billion, whereas the mobile health user base stood at only 90 million. Therefore, the industry is far from saturated, which also presents significant opportunities for stakeholders.

Zheng Zhihua identifies several major pitfalls to be wary of in the mobile health sector: First, the business model is unclear, leaving it uncertain who will foot the bill. At a time when companies across the board are burning cash to play the internet game, if a company goes against the grain by charging users directly, will users still accept it and be willing to pay out of pocket? Having medical insurance or the government cover the costs is also problematic; given the national context, fiscal expenditures on medical insurance are already a burden on the government, and medical insurance systems have not yet been integrated with mobile health platforms, making government payment unfeasible for the time being. While the penetration rate of commercial insurance remains low, it is encouraging that commercial insurers have begun to engage in diabetes management, having established collaborations with Tang Hushi (Diabetes Nurse). Charging pharmaceutical companies appears to be a viable option.

Second, the fragmentation of the mobile health industry. If users need to access various services such as information queries, medication purchases, consultations, diagnoses, and long-term management across different platforms, the experience will inevitably be poor, deviating from the original intent of providing easy and convenient internet-based services. Therefore, Tang Hushi is addressing this issue by bridging these disparate segments to create a coherent and seamless user experience.

Third, high-quality medical resources are scarce. If doctors fail to respond promptly to users’ online inquiries, users are likely to lose patience, uninstall the app, and never return. Therefore, the doctor-centric mobile health model will face significant challenges in the future.

Fourth, user adherence in chronic disease management is poor. This is a global challenge, but there are successful cases abroad where mobile health solutions have been leveraged to improve adherence.

Jiang Tianjiao, General Manager, Strategic Development Division, XYWY.com

As healthcare enters the O2O era, the number of players adhering to purely online services is dwindling. For instance, Chunyu Yisheng has opened offline clinics, signaling that O2O is the future trend, while XYWY.com has also effectively embarked on an O2O development model.

Why Is Purely Online Service a Paradox? There Are Three Considerations. First, regarding service: the earliest internet healthcare companies have already explored the full scope of online services, raising questions about what purely online models can actually deliver. Second, regarding profitability: to date, there have been no successful cases of purely online medical services in China, although purely online telepsychotherapy has been proven effective abroad. Third, regarding data collection: how can the authenticity and reliability of data sources be ensured? For instance, with currently popular step-tracking wristbands, how can one verify that the device is worn by a human rather than by a pet dog for step counting?

Over the past few years, XYWY.com has drawn valuable lessons from its development, which are worth sharing. Reports from multiple consulting firms have emphasized that the online penetration rate of pharmaceutical sales in China remains low. So, what are the limitations of the O2O (Online-to-Offline) model for pharmaceuticals? Unlike other consumer goods, medications rarely stimulate cross-purchasing behavior; users only buy the drugs they need. Even with significant discounts, consumers are unlikely to purchase medications unrelated to their health conditions. Therefore, entrepreneurs must consider how to stimulate purchasing desire and encourage consumption of additional products or services, such as health supplements.

The second pitfall is poor adherence in chronic disease management and insufficient user stickiness. Diabetes management, for instance, may appear promising on the surface. Moreover, with intense competition focused on price and service offerings, companies are currently in a phase of aggressively vying for users, making it difficult to achieve direct profitability.

The third pitfall is online services. Although healthcare operates as a market-driven activity where paying for medical care is considered standard practice, the reality is that users do not perceive online consultations as genuine medical services. This is the core issue. If the experience of online consultations could be made entirely consistent with that of in-person visits, users would naturally accept the online model. To address this, Xunyi Wenyao developed a highly niche app called “Shengxin Medical,” with the aim of ensuring users truly feel that the service they receive online is a medical service rather than something else. This approach paves the way for logically exploring a direct fee-for-service model for online healthcare.

Furthermore, given the low-frequency nature of healthcare demand—if we assume an incidence rate of once per month—it is rare for an individual to suffer from 12 different diseases in a year. Consequently, a user typically opens the app fewer than 12 times annually. Such low-frequency engagement makes it difficult to generate substantial profits.

How to Cope with the Harsh Reality? One possible approach is to first acknowledge that medical services are low-frequency interactions, which opens up opportunities for collaboration with insurance companies, as insurers also have similar expectations. Alternatively, low-frequency treatment behaviors can be transformed into high-frequency long-term health management activities, where physicians proactively engage and motivate patients to stimulate demand. However, this approach entails high user education costs and still has a long way to go. Entrepreneurs need to consider how an app can effectively accommodate low-frequency demands.

Let’s examine the pitfalls of O2O. At first glance, O2O seems relatively straightforward: funneling users from online consultations to offline services, partnering with medical institutions and clinics to complete diagnoses, and generating revenue. However, in practice, if you segment offline medical services along two dimensions—disease categories and geographic location—you’ll find that the pool of potential users is left nearly nonexistent.

Because offline pharmaceutical services emphasize timeliness and require proximity to users, their operational scope is geographically limited. When further considering the incidence rates and patient populations of specific diseases—such as the top ten most prevalent conditions—the intersection of these factors results in a very small target population for any given specialty. Coupled with limited conversion rates, this ultimately translates into low-frequency demand.

There is also the issue of cash burn. Who should receive the subsidies? If targeted at users, the low frequency of engagement makes it unlikely to recoup costs in the long run. If directed toward doctors, the industry faces intense competition as players vie for physician acquisition; hospitals are duplicating infrastructure and integrating with multiple mobile health vendors, making it difficult to lock in a single service provider.

Given the scarcity of physicians, entrepreneurs have turned their attention to nurses and caregiving staff. For instance, some have proposed offline medical accompaniment services provided by nurses. However, nurses already earn a monthly income of RMB 7,000–8,000, which is not low, and they have limited available time. Unless subsidies are sufficient, it may be difficult to retain them. In addition, O2O services such as in-home caregiving, health maintenance, and traditional Chinese medicine (TCM) wellness remain subject to further market evaluation, making it premature to draw definitive conclusions at this stage.

When it comes to the pitfalls of wearable devices, they are only meaningful to users if accompanied by follow-up services and guidance. Since medical service guidance must be provided by qualified healthcare professionals to carry authority, it is essential to establish connections with physicians.

The current stock market presents a significant challenge for entrepreneurs. As secondary market valuations decline and the ChiNext board faces a downturn, what can you offer to restore investor confidence? In the past, investors bought into founders’ narratives, but that faith may now be wavering. Therefore, to all fellow entrepreneurs who have not yet secured funding: strive to close your financing rounds as soon as possible in 2015.

The business model of Xunyi Wenyao is centered on building a platform that connects various partners. On the physician side, it features a reliable doctor-focused app called “Yimai.” The strategy aims to bring in more stakeholders—including healthcare enterprises, industrial distribution companies, commercial insurance providers, and even health-focused real estate developers—inviting diverse players from the ecosystem to collaborate and achieve shared profitability. We have also expanded our portfolio into areas such as maternal and child health, women’s health, and chronic disease management, with projects developed through self-built initiatives, internal incubation, investments, and partnerships.

Jianmeng Founder: Shen Yiqing

Jianmeng has established its own startup incubation and acceleration platform. Who are the main entrepreneurs in the internet healthcare sector? We have compiled statistics, which show that they primarily come from backgrounds in the internet industry, medicine, marketing, IT, and pharmaceutical companies. Those with an internet background include Yi Hu Doctor (YiHu Yisheng), founded by Ma Haiping from Baidu; as well as Chunyu Doctor, Haodf, Yaogeli, and Asthma Manager.

Another group of physician-led platforms includes Xingren Doctor, Purple Medical, Hyacinth, DXY, Zhuojian, Zhenlipai, and Jingyiwei. The founder of Jingyiwei is a physician, a postdoctoral fellow, and the Chairman of the Chinese Medical Association’s specialty committee. By focusing on cervical spine health, the platform addressed O2O challenges in traditional Chinese medicine. Other examples include 32 Bei in the dental care sector.

Those with an IT background include Guahaowang and Zhangshang Yaodian, among others. Many come from medical marketing media backgrounds, such as Yi and Qingpingguo. Examples of platforms under the Jianmeng alliance include Beilian and e-Peizhen; e-Peizhen leverages the non-scarce resource pool of nurses.

Diandian Doctor is a highly pragmatic physician group project. Its founder, formerly a media director, worked at 365 Cardiovascular Network before starting the venture. Diandian Doctor initially focused on four medical specialties and has completed contracts with physicians as well as offline partnerships with hospitals.

There are also many mobile health entrepreneurs with backgrounds in pharmaceutical companies, including Dingdang Kuaiyao and Little Apple Pediatrician. The latter adopts an O2O model that connects a pediatric group comprising approximately 300 pediatricians, providing end-to-end services for children from consultation to diagnosis and treatment.

Current Status of Investment and Financing in China’s Mobile Healthcare Sector: Our statistical analysis reveals that since the first half of 2015, the number of financing deals in mobile healthcare across angel, Series A, B, and C rounds has indeed been declining, showing a notable difference in volume compared to 2014.

Ma Haiping, founder of Yihu Doctor, holds a different view from the four individuals mentioned above regarding the many pitfalls in internet healthcare and the investment winter. Ma believes that the notion of a "capital winter" is unfounded; the capital market has never fundamentally changed, and bubbles or downturns are merely normal market fluctuations.

Someone has offered a very apt analogy: the capital market is like a person walking a dog. At times, the dog runs far ahead; at other times, it returns to circle around its owner; then it dashes off again. Nevertheless, it ultimately follows the owner’s pace. Do not focus excessively on bubbles and “winters” in the capital market. In fact, talk of a “capital winter” sometimes carries conspiratorial undertones, aimed at undermining entrepreneurs’ confidence to drive down valuations.

Second, investors can only make money by deploying their capital, so a “winter” in the strict sense does not actually exist. However, amid widespread pessimism and calls to pull back, the entire market is affected, and early-stage investors become more cautious. Last year, early-stage investors were investing blindly; angel rounds were easy to secure, truly reflecting a surge of mass entrepreneurship. Yet mass entrepreneurship is misguided; not everyone is suited to start a business. It is when companies raise Series A and B rounds that their true strength is demonstrated.

Ma Haiping further emphasized that the so-called “pitfalls” mentioned by the previous speakers do not actually exist; the difficulties are merely imagined. The internet healthcare industry is still in its early stages and has not encountered many genuine pitfalls. From this perspective, it is not too late to start a business now. Conversely, however, it is indeed late, as securing financing has become significantly more challenging.

If anyone is still considering entering the field of mobile health today, I would advise proceeding with caution. Securing angel-round funding has become challenging, and raising Series A capital is even more difficult. As stages progress, the failure rate increases exponentially.

Ma Haiping also believes that the essence of mobile healthcare lies in service. It is premature to rely on internet-based technologies for remote consultations and big data analytics. In addition to challenges related to user habits and industry policies, the technology itself remains unreliable. Can a system that integrates physicians’ textbooks and databases into an algorithm—much like fortune-telling software—produce results that are truly credible and trustworthy?

Medicine is far from simple; it primarily relies on years of accumulated experience and human judgment. Do not assume that computers can dominate every aspect of healthcare. Perhaps such a scenario might become feasible only when robots achieve autonomous consciousness. We must adhere to fundamental principles: the internet serves to enhance efficiency and address information asymmetry.

Guided by this principle, burning cash is futile. Healthcare utilization is a low-frequency event, so pouring money into it yields no return. Beyond service delivery, being patient-centric is key. In fact, there is nothing mysterious about internet healthcare; healthcare is fundamentally a market-driven activity. Only through market guidance can we return to the core tenet that “the customer is king.” Medical care holds value only when patients are satisfied. Otherwise, what is the point of publishing 20 academic papers? Such metrics reflect a self-indulgent evaluation system rooted in the planned-economy era, not a market-based assessment mechanism. Therefore, delivering high-quality service and ensuring user satisfaction is the ultimate path to success.

Whether focusing on vertical integration or platform development, comprehensive services or specialized offerings, these distinctions are ultimately moot; what matters is the final product’s effectiveness. If it can solve real-world problems, it has value; otherwise, it does not. Everyone should set aside the concept of “platforms” and instead focus steadfastly on addressing the practical challenges patients encounter during their medical care. This is the right path, and there is no greater good than this.