Summary of Key Points
This article discusses the impact of healthcare payment system reforms on China's hospital market, highlighting three major challenges that hospitals face as a result of the changes:
1. The need to balance hospital cost control with patients' demand for expensive medical treatments (a common issue);
2. The contradiction between the increasing medical needs due to population aging and the limitations on healthcare spending imposed by the reform (also a common issue);
3. The conflict between rising vacancy rates in higher-level hospitals and the promotion of tiered healthcare systems (a problem specific to China).
The reforms have also led to a reshaping of the hospital market structure, with larger hospitals (tertiary level) gaining an advantage and smaller hospitals (primary and secondary levels) facing increased pressure, resulting in a slowdown in overall expansion.
Detailed Analysis
1. The Dilemma of Using Expensive Medical Treatments
After the healthcare reform, the role of medical expenses in hospital profitability has reversed—whereas they were once a source of profit, they have now become a cost burden. Policies such as DRG (Disease-Related Grouping) and centralized procurement have made hospitals more cautious about using expensive treatments. For example, if a surgery requires the use of costly innovative drugs or supplies, the hospital must cover the difference out of its own pocket. However, patients desire better treatment outcomes, which often means using more expensive medications.
Policies attempt to address this by providing additional subsidies for truly groundbreaking innovations (such as in the UK and Germany, where there are extra payments for high-cost procedures), but they set prices for “me-too” products based on existing market rates. Despite these efforts, hospitals remain concerned about their profits, leaving patients to bear the cost of expensive treatments out of pocket. Data shows that after the implementation of DRG, the proportion of hospital revenue from drug sales has decreased, while income from examinations and services has increased, indicating that hospitals are adjusting their revenue structures to reduce expenses related to medical treatments.
2. More People Needing Medical Care Due to Aging, but Hospitals Struggling to Expand
Population aging means more people seeking medical treatment, yet healthcare budgets are tightening due to a decrease in the number of young contributors and an increase in the cost-consuming elderly population. To ensure sustainability, healthcare policies focus on controlling both the average cost per treatment and the total amount spent:
- Average Cost Control: Centralized procurement and DRG systems aim to reduce the cost of medical treatments and limit the cost per hospitalization.
- Total Amount Control: A “point system” is used, where hospitals earn more points for providing more services, but the total budget is fixed, leading to a decrease in the value of each point over time, thus preventing overspending.
This has led to slower expansion of hospitals. In 2024, the growth rate of hospital numbers nationwide declined, with both primary and secondary hospitals seeing declines, while the growth rate for private hospitals slowed from double digits to 1.4%. The growth rate of hospital beds also slowed to below 2%, with some primary and secondary hospitals even experiencing a reduction in bed capacity. Only tertiary hospitals have been able to maintain growth, albeit at a slower pace than before.
3. Larger Hospitals Filling Vacant Beds by Competing for Patients from Lower-Level Facilities
DRG reforms have improved hospital efficiency, resulting in shorter patient stays. As a result, vacancy rates in larger hospitals have increased. To fill these vacant beds, larger hospitals are competing with lower-level facilities for patients, who are drawn to the better medical resources and equipment available at larger hospitals. Data shows that in the first three quarters of 2025, only tertiary hospitals experienced a 10% increase in patient discharges, while primary and secondary hospitals saw double-digit declines.
This contradicts the policy goal of tiered healthcare systems, which aim to direct patients with minor illnesses to community clinics and more serious cases to larger hospitals. As medical demand enters a “stagnant period,” larger hospitals are relying on attracting patients from lower-level facilities to maintain their scale, making it even harder for these smaller hospitals to survive.
4. The Changing Hospital Market: Larger Hospitals Strengthening, Smaller Hospitals Struggling
The healthcare reform is reshaping the market structure, with a trend of the stronger hospitals becoming even stronger and the weaker ones struggling:
- Change in Number: The number of public hospitals continues to decrease, while the growth rate of private hospitals has slowed significantly (1.4% in 2024), potentially leading to an overall decline in the total number of hospitals.
- Differentiation by Level: The number of tertiary hospitals is increasing, while primary and secondary hospitals are decreasing. Some secondary hospitals are being upgraded to tertiary status, but the overall total is still declining.
- Bed Capacity Adjustment: Tertiary hospitals are maintaining or increasing their bed capacity, while primary and secondary hospitals are seeing reductions in bed numbers. This indicates that hospitals are no longer expanding blindly but are focusing on cost control.
In summary, healthcare payment reforms have acted as a catalyst for changes in the hospital market, leading to increased efficiency but also introducing new challenges. Future policies need to find a more precise balance between controlling costs and meeting patient needs, as well as addressing the disparities between larger and smaller hospitals, to ensure the sustainable development of the healthcare system. For patients, this may mean having to pay out of pocket for necessary treatments and seeing a decrease in the number of small hospitals available. However, the service quality at larger hospitals is likely to improve as a result of these reforms.