The furore over the death of mainland college student Wei Zexi (魏則西), who received ineffective treatment for cancer after following a link from the Baidu search engine, has sent the shares of several listed medical companies plummeting.
It has exposed loopholes in Baidu’s advertising business and the chaotic state of the medical industry in China.
Beijing’s push for healthcare reform in recent years has failed to solve the longstanding problem of overcharging for low-quality service by highly profitable companies.
Businesses linked to life and death are always lucrative.
It’s widely known that there is rampant overcharging in medical fees.
Because the government has set limits on specific fees, hospitals usually require patients to take unnecessary tests, so as to increase revenue, or even charge patients for tests that were never done.
One male patient reportedly found a uterus test fee on his medical bill.
Patients do not receive service worth the high prices they pay.
There is no guarantee of the quality of medical services in mainland China, because of the lack of competent regulation.
Some patients pay large sums of money but receive the wrong treatment; some even die as a result.
And it has got worse after the mainland opened up the medical sector to private investors.
The “Putian system” involved in the Wei’s death operates more than 10,000 private hospitals across China, with annual revenues of more than 100 billion yuan (US$15.4 billion).
These private hospitals rely on advertising to draw patients.
The Putian system reportedly spent more than 10 billion yuan on advertisements on Baidu alone.
Its advertising spending is even more stunning if other media outlets are taken into account.
Eventually, the cost of advertising will be passed on to patients.
The average gross profit margin of A-share companies in the medical and healthcare sector is 46.19 percent.
The pharmaceutical sector has an average gross profit margin of 54.18 percent.
Sino-Kor Plastic and Aesthetic Hospital Holding Co. Ltd. (430335.CH), a company that belongs to the Putian system, reported a gross profit margin of 62.28 percent last year.
Apart from having to spend massive amounts on advertising mainland hospitals face the possibility of lawsuits or having to pay compensation if medical mistakes occur, so their earnings are quite volatile.
Sales revenue at Harmonicare Medical Holdings Ltd. (01509.HK), a company affiliated with the Putian system, fell 2.83 percent last year, while net profit rose 2.7 percent.
Hua Xia Healthcare Holdings Ltd. (08143.HK) reported a drop of 16.5 percent in sales revenue and a loss of HK$20.7 million (US$2.67 million) for the nine months to December 31, 2015.
Healthcare products vendor Wanjia Group Holdings Ltd. (00401.HK) reported that its revenue slumped 24 percent to HK$310 million, leading to a loss of HK$6.24 million.
While mainland pharmaceutical and medical companies seem to enjoy high profit margins, they have many hidden problems.
The No. 2 Hospital of the Beijing Armed Police Corps linked with Wei’s death will be shutting down.
Investors should be very careful when investing in the stocks of mainland private hospital.
This article appeared in the Hong Kong Economic Journal on May 6.
Translation by Julie Zhu
[Chinese version 中文版]
– Contact us at [email protected]