450 Million Check-ups a Year, and Now Alibaba Is Muscling In — What Kind of Business Is the Health Check-up, Really?

A profit of 44 yuan per visit is no longer enough, so the check-up business has started telling an internet story

The once-a-year check-up runs about the same way everywhere: you get up early, skip breakfast, pick up a check-up form, go from room to room for each assigned test, and a doctor or nurse ticks off the items one by one.

Some items — height, weight, blood pressure, eyesight — give you a result on the spot. The ones that need lab work, like blood counts, urinalysis and chest X-rays, turn up in a report weeks later. A check-up can't catch every problem in advance, but when the time comes each year, you go anyway.

If you work in a first- or second-tier city, chances are your regular check-up happens at one of two private chains: Meinian Onehealth or iKang Healthcare.

The check-up itself is not a very technical business. The samples whose results take weeks to come back are labeled for a partner hospital before you even leave the center, then sent off for testing later.

Private check-up businesses got started around 2008. Meinian Onehealth began with 13 locations in 2011; after dozens of funding rounds and acquisitions, it now has more than 400 locations and a market value of 75 billion yuan.

The giants are moving in too. Alibaba recently bought another check-up chain, iKang Healthcare, for 8.8 billion yuan; iKang had 107 locations at the end of 2017. Insurance giant Ping An has entered the business by linking its Ping An Good Doctor platform to offline check-up centers — in two years, that revenue grew from 154 million yuan to 655 million yuan last year. Ping An Good Doctor listed in Hong Kong this May and is now worth 48 billion yuan.

The check-up business isn't very technical, but the biggest company still makes 44 yuan a visit

At iKang or Meinian, the two big private chains, the average person pays more than 400 yuan, and most people go no more than once a year.

It is not a complicated process. Check-up centers rely mainly on machines rather than highly skilled doctors to assess people's health, and the detailed analysis of what those machines collect is often subcontracted to hospitals.

How many people a center can check is decided by its equipment. Any given center has room for only so many machines, which caps the number of visitors it can handle. Ultrasound is the main constraint on a single location's capacity. A typical 2,000-to-3,000-square-meter center can fit at most 10 ultrasound machines, and a full ultrasound scan takes 8 to 10 minutes per person — which caps one location at roughly 400 visitors a day. Assuming 300 operating days a year, the ceiling for a single location is 120,000 visits. Factor in the slow season around Chinese New Year and the fact that most check-ups require fasting and have to happen in the morning, and a mature location in practice handles at most 80,000 to 90,000 visits a year.

Take Meinian Onehealth. Its average revenue per visit had been growing about 5% a year since 2013, then jumped after it introduced high-end tests such as robotic capsule gastroscopy and ultra-low-dose chest CT scans in 2017, reaching 406 yuan — 75 yuan more than the year before. On an average check-up, Meinian Onehealth clears 44 yuan — about what an airline makes carrying one passenger, except that flying someone a thousand miles is a lot more trouble.

Meinian's pricing power comes from its scale; iKang, with a smaller footprint, is at a disadvantage. Its average revenue per visit hasn't changed much, but listing in the U.S. and using a share-dilution clause drove up exchange and financing costs, and it has been unable to expand fast enough to bring down its overhead ratio. Operating costs rose, losses followed, and its net margin turned negative.

Upstream of the check-up industry are medical device makers, and that market is fairly fragmented — so a check-up center that buys equipment in bulk has real bargaining power over its suppliers. How much equipment it needs depends, of course, on how many customers it can pull in. In that sense, the check-up business is not so different from running a restaurant or a beauty salon.

Downstream, check-up centers have two kinds of customers: companies and individuals. Corporate customers place large orders all at once, but centers have little bargaining power over them, so margins are thin. Winning individual customers comes down to traffic — the biggest private chains all run storefronts on e-commerce platforms and partner with credit card issuers and insurers.

Broadly speaking, in first- and second-tier cities the check-up departments of public hospitals are too small to take on large corporate orders. In third- and fourth-tier cities, private chains have better equipment than grassroots hospitals, and their service is no different from what you would get in a bigger city. Today, corporate orders account for 75% to 80% of check-up centers' revenue.

A business hospitals don't do well is where private capital in Chinese healthcare got its start

China's check-up providers include hospitals, township health centers, community health stations, maternal and child health centers, and private check-up centers. Of these, dedicated private operators are recent arrivals: they began to appear only after 2001, when the government proposed opening up the healthcare market and encouraging private medical institutions.

In 2003, the SARS crisis hit. That disaster gave rise to a number of new industries and companies — e-commerce, logistics and check-ups among them. By 2005, per capita medical spending among urban Chinese had nearly doubled from five years earlier, from 318 yuan to 601 yuan.

Shanghai Guobin, Beijing Ciming and Shanghai Tianyi all got their start in this period. The year after SARS, Han Xiaohong, a former attending physician in the oncology department of the PLA General Hospital, founded Ciming Checkup; Zhang Ligang founded iKang.com; and Yu Rong founded Shanghai Tianyi, later renamed Meinian Health Industry.

iKang.com and Shanghai Guobin Health Checkup then merged in 2007 to form iKang Healthcare, with Zhang Ligang as chairman and CEO.

Meinian Health Industry merged with Shenyang Dahealth in 2011 to become Meinian Dahealth.

The check-up market these new companies faced was almost entirely in the hands of public hospitals — not only because hospitals carried more authority, but because they really did have more standardized services and equipment. Buying new check-up equipment, though, was a tangled process for a public hospital: large medical devices had to be filed step by step for review by the provincial health department, along with a breakdown of equipment costs, treatment fees and a cost-benefit analysis, and a procurement license came only after the department signed off.

A private check-up center, by contrast, needed only approval from the health and family planning commission and an environmental review. Since this January, even the licensing requirement for large medical equipment at privately run medical institutions has been abolished.

On top of that, the check-up department is one of a hospital's lower-earning units, so hospitals have little reason to grow it.

The Chinese government, meanwhile, has been steadily encouraging private capital to run hospitals. In March 2009, the State Council issued the "Opinions on Deepening the Reform of the Healthcare System," calling for the active development of non-public medical institutions and a system with diverse sources and methods of investment. A year later came the "Several Opinions on Encouraging and Guiding the Healthy Development of Private Investment," which called for supporting private medical institutions in taking on public health services, basic medical services and designated medical-insurance services. That November, another document, the "Opinions on Further Encouraging and Guiding Private Capital to Run Medical Institutions," called for loosening entry requirements for private capital in medical institutions and encouraging private money into healthcare services.

Private hospitals grew slowly, held back by how hard it is in practice for doctors to practice at more than one location. But check-ups are not limited by the supply of doctors, and they don't have to handle diagnosis or drug distribution, so they grew fast.

According to the China Health and Family Planning Statistical Yearbook, the number of check-ups nationwide grew to 456 million visits in 2017, about a third of the national population.

Private providers account for roughly 10% of that market. The largest is Meinian Onehealth, which handled 21.6 million visits in 2017, about 4.7% of the national check-up market. Second is iKang Healthcare, with 5.49 million visits, about 1.2%.

Private check-up centers still hold a small share of the whole market, but they are growing fast — nearly fourfold over the past five years. And they charge more: both of the top two companies take in more than 400 yuan a visit, against a national average of just 290 yuan.

Next to developed markets, China's check-up coverage is still thin. Both the United States and Japan are above 70%, and Germany reaches 96.9%. Spending tells the same story: China's average check-up costs 290 yuan, or 1.2% of per capita disposable income, while a check-up in the U.S. or Hong Kong runs about 2%. A rough calculation from penetration rates and the share of disposable income spent suggests China's check-up market has room to at least double.

Growth comes almost entirely from opening new locations, and capital sets a check-up company's pace of expansion

Unconstrained by doctors or drug sales, a check-up company grows mainly by opening more centers and installing more sophisticated machines.

Opening a 2,000-to-3,000-square-meter check-up center costs roughly 20 million to 25 million yuan. Radiological diagnostic equipment (MRI, bone density, CT and so on), ultrasound, endoscopy, ENT exams, infrared imaging and other machines account for about half of that, or 10 million to 12 million yuan; the rest goes to labor, renovation and rent.

Compared with hospitals, clinics and other medical service providers, check-up centers don't have to obtain medical institution credentials, which makes opening locations, buying equipment and hiring staff considerably easier.

So the path to profit is shorter and more predictable: a new check-up center generally starts making money after one to two years. Once a chain has scale, rolling out higher-priced services lifts profitability further.

In the end, how fast a company can raise capital sets how fast it can grow. That is what has reshaped today's market.

Between 2011 and 2014, the private check-up chain market took shape after a series of mergers. It was fragmented, with three sizable players: Ciming Checkup, iKang Healthcare and Meinian Onehealth. All three grabbed share through a mix of building new locations and buying existing ones.

Because economic development is uneven across China's regions and medical institutions are administered locally, chain medical operators — check-up companies like Meinian and iKang, and specialty players like Aier Eye Hospital and Tongce Medical alike — all expand on a "hub city plus tiered locations" model.

Anchoring a hub location and radiating out into the surrounding region lets residents of an area get roughly standardized service, while giving the company a growing scale advantage and lifting revenue per location.

The gap in market value between the top two check-up companies is eightfold — the result of several rounds of capital warfare

Generally, a new check-up center in a city where the company already operates can turn a profit in its second year, drawing on an existing customer base and local reputation. A center in a new city runs losses at first: the business needs time to develop, and usually breaks even after about two years.

In an industry like this, the pace of growth is set by the ability to raise money and to execute and absorb acquisitions.

Ciming Checkup was the first to make a run at an IPO, choosing China's A-share market. After five rounds of investment from CDH Investments, Ping An and Tiantu Capital, it filed its prospectus in March 2012 and won approval from the CSRC's issuance review committee in July. Its timing was terrible. The stock market fell hard in 2012, and just as Ciming was preparing to list, the CSRC abruptly suspended new share issuance.

Because a company preparing to go public cannot raise new funding or change its ownership structure, Ciming was cut off from new capital, and its performance fell by more than 30% in 2013. Only the Beijing branch stayed profitable; the branches in Guangzhou, Shanghai, Shenzhen and Tianjin all lost money.

In January 2014, the CSRC restarted IPOs and Ciming applied again. This time its underwriter, Haitong Securities, put information in its roadshow materials that went beyond what the prospectus disclosed, in breach of the newly issued "Measures on Strengthening Oversight of New Share Issuance," and the listing failed again.

In other words, from 2012 to 2014 Ciming Checkup could not raise a cent. Over the same stretch, its rival Meinian Onehealth raised six rounds from Shiji Changhe, Carlyle, Huajin Investment, Ping An, Hetu, Gaoyi Consulting and Fenxiang Investment, among others.

The balance flipped in an instant. In 2012, Meinian had 31 locations to Ciming's 33; by the end of 2014, Meinian had 94 to Ciming's 42.

iKang Healthcare, the other big private check-up company, chose to list in the U.S. instead. It went public on Nasdaq in 2014, the first listed company in China's health check-up industry.

Meinian Onehealth later took the A-share market through a reverse merger, and moved to acquire Ciming Checkup, which had by then failed at an IPO twice. The moment the acquisition proposal came out, iKang Healthcare reported it to regulators for suspected monopolistic conduct, and the CSRC temporarily halted its review of the deal.

In August 2015, seeing Meinian command a higher valuation on the A-share market, iKang chairman Zhang Ligang teamed up with private equity firm FountainVest Partners, preparing to take iKang — listed on Nasdaq for all of 17 months — private and bring it back to the domestic capital market.

At that point Meinian Onehealth fired off a series of privatization offers for iKang, pushing the price from $22 a share to $25, valuing the company at roughly 10.5 billion yuan. Meinian wanted to buy out its last and biggest rival.

iKang was in no mood to sell, and deployed a "poison pill" — a dilution clause letting existing shareholders buy large amounts of stock cheaply. But that also drove up the cost of iKang's own eventual privatization.

More important, iKang kept its independence but lost its window to delist and relist on the A-share market. Policy intervened again: the wave of U.S.-listed Chinese companies coming home was interrupted by the 2015 market crash, and the gate did not reopen until Qihoo 360's return at the end of 2017. And because the poison pill had heavily diluted its equity, selling more stock would have threatened control of the company, so iKang couldn't raise money in the U.S. either. It had landed in the same financing trap that once caught Ciming Checkup.

In July 2017, at a meeting of the CSRC's mergers and acquisitions review committee, Meinian Onehealth's purchase of Ciming Checkup was approved without conditions. By then it had four times as many locations as iKang.

Efficient capital maneuvering made Meinian the industry's number one. But a bigger rival was on the way.

Alibaba's acquisition of iKang reshaped the market, and monetizing check-up data comes up more and more

Now the industry has the attention of the internet giants.

This March, Alibaba Group and Jack Ma's Yunfeng Capital jointly proposed to buy iKang and take it private. iKang's board has since accepted the offer; the two sides settled on $20.6 a share, valuing the privatization at 8.8 billion yuan — about a ninth of Meinian's current 75-billion-yuan market value, and 20% below Meinian's own offer three years earlier.

The check-up industry expands fast, leans on machines rather than doctors, and makes money a few years after a new location opens, which makes it the medical service business most easily grown by acquisition.

But for years the only story the industry has had to tell is scaling up by opening more locations.

The revenue is decent, but it isn't fundamentally different from the restaurant business.

New approaches have been tried. In 2015, iKang announced a partnership with Dajia Yilian, saying that patients whose check-ups turned up a condition would enjoy "green-channel access to authoritative specialist consultations, multidisciplinary consultations, private doctors, and medical referrals and surgery arrangements at top-tier hospitals in Beijing, Shanghai and Guangzhou."

Private dental and eye clinics already run that model of diagnosis followed by treatment, but it is harder for a check-up center to pull off. Medical care is expensive, and where a patient goes for treatment usually comes down to insurance coverage and their sense of which hospital is best at treating their particular condition. iKang's partnership eventually came to nothing.

As bigger capital moves in, the story the check-up business wants to tell is about what happens after the check-up.

Yunfeng Capital founder Yu Feng said: "As a gateway to preventive care, iKang can work with a great many companies we have already invested in or are about to invest in, and help the upstream and downstream of the industry chain develop together. Healthcare is a trillion-yuan market, and we still hope to improve consolidation in the industry, help companies grow bigger, and push the whole industry forward."

This April, Alibaba Health announced that it would combine its check-up, online consultation and drug-purchasing services into an online "Alibaba Clinic," offering corporate clients a one-stop health solution. For now, Alibaba Clinic centers on its "Alibaba Check-up" function, and both iKang Healthcare and Meinian Dahealth are among its first batch of check-up providers.

Alibaba Health today is a pharmaceutical e-commerce business, selling mainly its own health products; its three self-run stores — Alibaba Health Pharmacy, the Alibaba Health Hai flagship store and the overseas flagship store — sold 2.149 billion yuan of drugs and supplements in 2017, a 39% share of the online pharmaceutical market. Check-up data could make those drug sales more precisely targeted.

Insurance giant Ping An has taken a similar route into the check-up industry, through its Ping An Good Doctor and Ping An Healthcare Technology units.

Ping An Good Doctor's services cover nearly every corner of health management. Users download the app for an online clinic visit, then can order medicine or supplements, or book check-ups and other health services, on the Ping An Mall. For now it looks as though Ping An's other businesses are feeding the check-up business rather than the other way around. Revenue from Ping An Good Doctor's health check-up and genetic testing packages for individuals and companies grew from 154 million yuan in 2015 to 655 million yuan in 2017, or 44.72% of the platform's total revenue.

Meinian, for its part, announced this year partnerships with Novartis and various doctor-referral platforms in specialties such as orthopedics and ophthalmology, though nothing more concrete has emerged. The company had already begun applying for insurance and payment licenses.

With check-ups currently reaching only 35% of China's population, and most of those happening at public hospitals, the business still has plenty of room to grow on its own terms. But the companies in it are no longer satisfied with simple testing — all of them have their eye on using check-up data to connect to medical e-commerce, insurance, and diagnosis and treatment.

Monetizing medical data raises obvious privacy problems. Google's earlier use of British health service data for artificial intelligence was halted and switched to anonymized data, and the Chinese National Health and Family Planning Commission's Provisions on the Administration of Medical Records at Medical Institutions also restrict commercial use of patients' medical data. But there is no sign that the commercialization of check-up data is slowing down.

Cover image: Pixabay