More than a thousand Chinese healthcare apps have been launched in the past five years. These startups, targeting the seemingly super-hot intersection of booming smartphone usage and modernizing healthcare, were supposed to be the next big thing. And many have been backed by top venture capitalists and leading Chinese companies such as Alibaba Group Holding, Tencent Holdings and Ping An Insurance Group.
But as of yet, there have been only a few significant successes in Chinese mobile health. In fact, most health apps have failed to generate significant numbers of active users, let alone produce much revenue. And you can forget about profits.
Now as investor sentiment in the idea cools (somewhat), many of these startups are cash poor and heading towards a painful shake out. Chinese healthcare appears to have mostly defeated China’s smartest entrepreneurs.
There are lots of reasons for this. But at the simplest level, investors just knew a lot more about China’s smartphone market than its healthcare system.
In smartphones, China is not only the world’s largest market, but per capita usage is also remarkably high. For example, the average user of Tencent’s WeChat Pay service already makes approximately 50 transactions a month. More than 150 million Chinese use Alibaba’s Taobao shopping app every day. And approximately 70% of all on-demand ride bookings made globally now happen in China.
And investors did know that Chinese spending on healthcare has been surging. In 2010, healthcare spending was $350 billion, equivalent to approximately 5% of GDP. By 2020, it is projected to almost triple to $1 trillion, or about 7% of GDP. And this is still far below the US, which is at an admittedly crazy 17%.
So everyone concluded that healthcare apps are a nice combination of the smartphone usage story and the healthcare spending story. Chinese consulting company iResearch reported 221 investments in mobile health in 2015 alone. And that was 45% more than the previous year.
Within that investment frenzy, the greatest excitement was in online diagnosis and treatment, seen as offering the highest potential revenue. Second to this was e-commerce for pharmacies and pharmaceuticals (also lots of revenue). And then there were lots of niche apps for information and reference services for healthcare providers, business services (including appointment booking and billing), user discussion platforms and many others. Most of this did not happen.
So what happened?
Problem 1: Stuck outside the core healthcare system.
The glow has now faded on Chinese mobile and digital health. There have been few major successes. A typical downloaded healthcare app is used less than three times a year, according to Chinese research company Analysys International. Venture capitalists are now asking much tougher questions. And many startups are scrambling to find new business models. So what has gone wrong?
One conspicuous problem is that mobile users are mostly young, and this is not a population with many medical problems. The vast majority of healthcare usage and spending is on hospital care, the elderly and people with chronic diseases. These are not young Chinese consumers glued to their smartphones.
A more fundamental problem is that China’s healthcare system remains overwhelming financed by government insurance and run through government hospitals. Absent any significant participation by these state-owned companies, internet companies remain shut out of most of China’s healthcare economy, information and operations.
Being shut out means healthcare apps also have the same problem private health insurers have struggled with in China: no access to data. Internet companies can sign up doctors and collect some basic patient information but patients’ clinical and billing information remains with the public hospitals and government insurance programs. It’s not easy to do healthcare software without the most important healthcare data.
But this is only part of the problem. Mobile apps have mostly been stuck at the fringes of Chinese healthcare. They are not in the financing, clinical care or operations in any major way. So they can be used to make some hospital appointments. They can be used to pay some bills. They can be used for certain business-to-business services such as providing online reference guides and headhunting. And, of course, they can create lots of lists of registered doctors. But this is still mostly peripheral. They are largely outside of the day-to-day operations and finance of China’s healthcare system.
For example, Chunyu Yisheng, established in 2011, planned to offer consultations online and then later in offline clinics. DXY.cn, a forum for health care professionals, Guahao.com, a health information site, and Ping An Good Doctor are also working on online-to-offline consultations and treatment. They are all struggling in this. Consultations and treatments remain overwhelmingly in SOE hospitals (and in some private hospitals). There is some adoption but it has been a hard slog. And definitely not the rapid adoption rates we see in most other mobile apps in China.
China’s system of mostly small public hospitals is the biggest part of this problem. These small SOEs have largely sat out the modernization of China. They don’t have advanced IT systems. Their economics are problematic. If you want to know what China was like in 1990, walk into a local hospital.
Plus the idea of online consultation, let alone treatment, remains a questionable clinical practice in China (and elsewhere else). This is something that doctors and hospitals know and worry about but the internet companies seem to gloss over.
Problem 2: No online drugs yet.
Pharmacy e-commerce was supposed to be another big revenue-producing area. Online sales and emerging online-to-offline models are definitely attractive, not just for prescriptions but also for over-the-counter medicines and health and wellness products.
However, these e-pharmacy dreams are mostly stalled. Ali Health exited their pharmaceutical supply chain program early in 2016. The online sale of pharmaceuticals remains mostly restricted by regulation. And prescriptions and pharmaceutical sales are still slowly moving out of hospitals. It is worth remembering that while SOE hospitals are public, only 10% of their revenue comes directly from government funding, with much of the rest coming from government insurance, patients and (very importantly) pharmacy sales. They have not been giving up this revenue source without a fight.
As funding becomes more difficult to obtain, many mobile health startups are scrambling for new business models and sources of revenue. DXY.cn has launched a healthcare headhunting service. Xing Shulin is selling services that help doctors do research and manage patient data. Others are looking to partner with insurance companies (which is a whole other bucket of problems in China).
There is also talk of mobile app companies building or operating their own private clinics or hospitals. Chunyu Yisheng, DXY, Alibaba and Tencent have all announced (at some point) plans to build hospitals or partner with existing private hospitals. Chunyu Yisheng has even announced plans to work with property developers to build clinics attached to senior living homes. All of these plans likely overestimate the returns of these types of businesses – and underestimate the time required to set up them up and get them to profitability.
In my opinion, absent big, immediate changes in the core structure of SOE hospitals and government insurance, the best target for Chinese health apps is consumers and consumer-facing businesses. They should essentially bypass the core hospital system and go direct to consumers. Focus on ancillary services such as dentistry, medical tourism, optometry, beauty and aesthetics, and health and wellness. Do e-commerce for OTC products – and for prescription products when that becomes allowed. Basically, sell directly to Chinese consumers who have money and smartphones and want better healthcare now.
Looking at the big picture, it is clear that Chinese healthcare is in fact modernizing. And the changes that have been happening have been quite dramatic. But this is modernization under government direction and with a mix of business, political and social objectives. So the speed of China’s healthcare modernization is slow and step-by-step. And this has created a mismatch with the rapid pace expected by mobile health app startups and their venture capital investors. This difference in pace is the fundamental problem for these apps. And it will probably not end well for many of these startups.
Thanks for reading, jeff
Originally published by Nikkei Asian Review (article found here)
I write and speak about “how rising Chinese consumers are disrupting global markets – with a special focus on digital China”.
- Photo by Robert Nelson, Creative Commons License with link here.