A rational approach to tapping China’s growing digital health trend

What companies need to consider in deciding whether and how to bring digital health products to China: a guest commentary

As digital health gains momentum in China, foreign companies looking to bring digital health products to the country need to think carefully about the most viable business model. They cannot assume that what works abroad will work in China, as the region has unique legal and regulatory considerations. The best bet is to conduct a multidisciplinary analysis that factors in these considerations while assessing their likelihood of changing in the near future.

Digital health is a rapidly growing area in China attracting a great deal of attention from the industry and the regulators. With the development of AI technologies and the Chinese government’s pledge to establish an “internet plus” economy, both local and multinational companies are attempting to provide various digital health offerings to customers in China either as value-added services or as novel therapeutic products.

But successfully navigating the regulatory and reimbursement ecosystem in the country requires applying a China lens to a company’s business plan, while keeping abreast of important changes to policy and regulation, as they are likely to continue to evolve in 2023.

The major issues companies need to assess fall into three categories: identifying the appropriate regulatory pathway for a product, understanding China’s data protections and privacy laws, and securing reimbursement.

Medical service or medical product?

Digital health initiatives in their various forms and technologies fall under the ambit of multiple regulations in China, but specific technologies or solutions can essentially be categorized as either medical services or medical products. These fall under the jurisdiction of two separate Chinese regulatory authorities: the public health authority, the National Health Commission (NHC), and China’s food and drug administration, the National Medical Products Administration (NMPA).

Understanding this distinction is step one in creating a China business plan, and it’s not uncommon for companies to be confused about which category their products fall into.

The key distinction is essentially the intended use of a specific product or technology.

For those that are considered medical services, the current “bricks-and-mortar” NHC regulations for medical institutions and medical practice apply, and the customers of such services would likely be those holding a medical practice license granted by the NHC.

For digital health technologies considered medical products, the NMPA has developed guidelines for the regulatory approval of software as a medical device (SaMD). This particularly applies to AI-incorporated SaMD. In general, the NMPA considers the intended use and the nature of data processed by a piece of software to be fundamental criteria in determining whether a product should be classified as a medical device. The maturity of the underlying algorithm will also determine whether the digital health technology is classified as an SaMD.

Importation & data protection

The SaMD categorization brings challenges to the existing bricks-and-mortar regulatory framework established by the NMPA, which covers the importing, manufacturing and distributing of medical devices. For example, in the case of cross-border licensing transactions, an important question is to what extent an SaMD will be considered locally manufactured or whether what is licensed by the foreign licensor has to remain categorized as imported.

Operations of digital health services in China are also subject to regulations covering telecommunication services, human genetic resources, network security, and personal information protections.

For example, digital health products or services involving online data processing functions may be considered telecommunication services and therefore subject to additional licenses issued by the Ministry of Industry and Information Technology (MIIT).

Traditionally, foreign investments are subject to more restrictions in this area. The NMPA also requires that important data, personal information, and human generic data collected and generated in China by SaMDs should in principle be stored in China and subject to a security review in the case of cross-border data transfer. The same local storage and security review requirements apply to digital health services that collect and process similar information and data in China.

Gaining a solid understanding of this complex regulatory landscape and how a specific product fits into it is key to creating a successful China strategy.

Attaining reimbursement

Another key question companies need to address is how an SaMD product can be reimbursed under the current medical device reimbursement policies of China, and in particular whether public hospitals would be willing to procure SaMD products given their already tight budgets or if the products would need to remain within retail channels. 

There currently is no special pathway for reimbursement of digital health products in China. In general, the reimbursement of such products would have to follow the same procedures as applicable to medical devices, where products can be reimbursed either as medical consumables or as a part of the medical treatment expenses. Companies need to do their homework accordingly.

With China’s digital health sector on the rise, 2023 should provide important learnings about whether and how digital health products can successfully navigate these pathways.

Chen Yang serves as Senior Counsel at Sidley Austin, where she leads the firm’s China life sciences practice and specializes in regulatory matters, corporate and commercial transactions in the field of food, drugs, medical devices, and animal health products.  

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