Focus: Healthcare

Investing in China's Hospitals

China is considering ways to revamp its healthcare system

by Roberta Lipson

Of all the challenges facing the PRC government, few are as important—or daunting—as fixing the national healthcare system. Not only do the health and welfare of the nation's 1.3 billion people depend on it, but in very real and direct ways, the rest of the world's health depends on it too. Last year's struggle against severe acute respiratory syndrome (SARS) and China's effort to rein in human immunodeficiency virus (HIV) and acquired immunodeficiency syndrome (AIDS) infection rates provide ample proof that the rest of the world has a vital stake in China's healthcare system.

Foreign business is also learning crucial lessons about the importance of the Chinese healthcare system. The 2003 SARS outbreak caused an estimated ¥300 billion ($36.3 billion) in direct economic losses in China and untold disruption of the operations and supply chains of foreign firms. In the wake of the SARS crisis, the Chinese government committed hundreds of millions of dollars to improving the public health infrastructure, in part by increasing investment in and scope of China's regional centers for disease control, building more infectious disease hospitals, and raising infection-control awareness through training and publicity. Of course, foreign business is eager to participate in these efforts. Foreign interest in investment in China's healthcare services is rising, as are the country's medical equipment imports, which now stand at around $2 billion annually.

Identifying problems—and solutions

With admirable openness and frankness, Chinese policymakers have acknowledged the shortcomings of the current healthcare system and the acute challenges they face in improving it. In the Ministry of Health (MOH) and in other departments of the PRC government, there is widespread agreement on the need for reform and forthright acknowledgement of problems in medical services that include inefficiency, high costs, corruption, lack of a complete and fully implemented quality standard, and poor service. There is also broad consensus among these officials that private investment—both domestic and foreign—can play a key role in solving these problems. But officials have not yet reached consensus on how to implement a privatization process without abandoning China's public healthcare obligations under its socialist system.

Chinese policymakers have acknowledged the shortcomings of the current healthcare system and the acute challenges they face in improving it.

"We are striving for a balance between the government's responsibilities and the market mechanism," Wu Mingjiang, the MOH director of Medical Administration, told a forum in Beijing in August. Striking such a balance will be difficult and will require vast improvements in China's regulatory framework. It will also likely require a unique blending of the many varied approaches now under consideration.

Existing state-owned hospitals may, for example, be permitted to enter into public-private partnerships in which they outsource varying levels of management. Some hospitals might even be allowed to contract out all of their management services. For instance, in Suzhou, Jiangsu, the city issued tenders this year for the management of most of its public hospitals while retaining ownership. Existing hospitals are also increasingly allowed to transform their ownership structure by taking on private capital, most of which has been domestic to date. More private investment is also being used for the construction of new hospitals. In the Zhejiang-Jiangsu area, several public hospitals have been sold to private investors, and the local governments have aggressively tried to attract private capital to build new hospitals. In this region, which has been aggressively working to attract foreign investment in hospitals, investments worth ¥500 million ($60.4 million) have already been contracted. Developments in other parts of the country have been much slower, as the attitudes of the central government and local governments are more conservative.

These new approaches would allow the state to divest itself of inefficient and low-quality assets in the healthcare system. The pressure of market competition, meanwhile, should compel remaining public hospitals to improve their own standards of service and efficiency. Such a system would also allow an expansion of the range and levels of services to an ever-more diverse public. For instance, a growing number of well-to-do Chinese want international-standard healthcare—and are prepared to pay handsomely for it.

Will China let private capital flow?

As PRC policymakers are well aware, plenty of private capital is poised to flow into the healthcare sector, and the notion of for-profit hospitals is no longer entirely taboo. At the same time, many officials are wary of a wholesale privatization of healthcare and insist that public hospitals be able to guarantee the basic health needs of China's hundreds of millions of rural and urban poor. Still others argue that privatization is no panacea at all, pointing to the high cost of medical services in countries with private healthcare systems.

While the debate intensifies, regulations have, for the most part, yet to change. Given such an environment, where the ability to make an adequate return is unproven, and where implementing regulations lack clarity, the relatively small number of newly opened hospitals and clinics should come as no surprise.

Plenty of private capital is poised to flow into the healthcare sector, and the notion of for-profit hospitals is no longer entirely taboo.

Of the 12,599 general hospitals in China, only 8 percent are run for profit and, according to MOH statistics, they handled a mere 3 percent of China's patient load in 2003.

Would-be foreign investors in the sector face additional hurdles, and indeed the regulations do more to deter foreign investment than to encourage it. Wholly foreign-owned investments are prohibited, and in joint-venture healthcare facilities foreign investors are limited to a maximum stake of 70 percent. Regulations also call for a minimum ¥20 million ($2.4 million) investment and require all services and activities to be domiciled at the same licensed facilities. Branch hospitals or clinics are thus prohibited. China has also discontinued duty exemptions for foreign-invested healthcare facilities that import medical equipment. In addition, foreign-invested healthcare facilities are excluded from some preferential tax treatment plans aimed at encouraging foreign investment. And foreign medical professionals are officially limited to being the minority employees at any foreign-invested enterprise, with 6-to-12-month limits on how long they may work in China, though in practice contracts are often renewed for longer periods.

Given these hurdles, it is not surprising that of the 29,000 medical facilities of all types registered in China in 2003, only 45 have foreign investment and another 15 have investment from Hong Kong, Taiwan, and Macao. The vast majority of these are classified as primary care and dental clinics, emergency evacuation centers, and research facilities. Only several would qualify as hospitals.

Reason for caution

Despite the clear gains that would result from the increased use of private capital in the healthcare sector, China has ample reason to move cautiously. Severe weaknesses exist in the regulatory environment, and these need to be fixed if privatization on any substantial scale is to stand a chance of succeeding.

As in other sectors in China, a transition toward privatization could obscure ownership and risk misappropriation of government assets. Other challenges unique to the medical sector include the lack of experience in independent hospital governance among hospital administrators and boards of directors, the fact that the system does not require independent governance, and the poorly developed state of China's hospital accreditation process.

Higher standards

China desperately needs to move away from its old system of evaluating and rating hospitals, which was based primarily on an institution's physical plant and hardware, toward a quality-based accreditation system that takes into account all the "software" that makes a fully equipped hospital run well. To China's credit, it has signaled a move in this direction with new, experimental standards.

Numerous international standards already exist, including those of the Joint Commission International, the international arm of the most widely accepted US hospital accreditation and quality rating body. By referencing and adapting such internationally accepted benchmarks in its own development of hospital standards, China could not only eliminate false starts and wasted efforts, but also gain a common language with the global healthcare community.

China desperately needs to move away from its old system of rating hospitals, which was based primarily on physical plant and hardware, toward a quality-based accreditation system that takes into account all the "software" that makes a fully equipped hospital run well.

Chinese hospitals currently may not apply for accreditation under this standard because the government has yet to clarify regulations that define and authorize healthcare accreditation agencies. Quite apart from the definition of the standards themselves, success will also hinge on the fidelity and absolute integrity of the accreditation process and the bodies that implement it. These reforms are especially vital as a prelude to any privatization effort, so that potential investors and patients can evaluate hospitals, regardless of their ownership or structure, according to reliable and uniform standards. In addition, the widespread implementation of such a quality standard would enhance healthcare quality throughout the system.

Challenges for private investors

Even if the necessary regulatory reforms take place, private investors in Chinese healthcare services will face their own fair share of challenges. Again, some of these issues are common to all sectors of the PRC economy, such as the burdens of bloated staffs and huge pension obligations that plague many Chinese state-owned enterprises. Investors will also need to untangle decades worth of reporting and accounting histories in order to produce reliable financial statements.

More specific to the medical sector will be the need to overcome China's deeply ingrained service style, in which patient-centered care is a new and alien concept. Investors will have to cope with the shortage of hospital administration expertise as they look for managers capable of integrating modern management methods with existing institutional cultures. In many of China's hospitals, top administrators are senior physicians who, despite their distinguished and accomplished careers, lack the necessary management training to run modern hospitals.

Who will pay?

Finally, for private investment to succeed, China will need to reform its payment system for medical services. Other reforms and even privatization will do little good unless the basic economics change, and for that to happen, reimbursement levels must be raised to cover actual costs. At present, reimbursement levels from the government are unrealistically low for many services. If the government remains the only source of insurance, it will be hard-pressed to support the healthcare system at a higher level. What the government can do, however, is encourage the development of private insurance options, especially those that allow patients to combine social health insurance with private supplemental insurance so they can access more expensive services (see Keeping China Healthy). Private hospitals would then be able to operate profitably, which in turn would allow them to hire hospital management experts and ultimately raise their quality and efficiency.

Healthy competition

China could speed such improvements by leveling the playing field for foreign investors. With fewer restrictions on off-site branch development for qualified foreign providers, on ownership stakes for foreign investors, and on the hiring of foreign physicians, China would gain access to valuable new sources of both medical and management expertise. And all of China's healthcare facilities would benefit from a healthy dose of competitive stimulus.

Chindex in China

Despite the uncertainties surrounding the future of healthcare reform in China, some foreign investors have already entered the field. Pioneering foreign players have been investing and operating in the health services sector since the early 1990s. As the handful of tombstone projects scattered around the suburbs of Beijing illustrate, not all have managed to navigate the pitfalls—but some have.

In China's largest cities, several small, foreign-invested clinics are successfully serving a mixed customer base of expatriate and local patients and several foreign-invested hospitals have opened. The United Family Hospitals Group (UFH), a division of Chindex International, Inc., opened its flagship hospital, Beijing United Family Hospital, in Beijing in 1997. With Shanghai United Family Hospital, which opened its doors this October, and hospitals in Xiamen, Fujian; and Guangzhou to follow, UFH has become one of the top foreign healthcare service providers in China. In accordance with PRC regulations, each of these sites are separately approved and registered, but contract certain of their management functions to the United Family Hospitals Group. UFH offers a full range of inpatient and outpatient services that include medicine, surgery, dentistry, pediatrics, and obstetrics and gynecology. The Beijing hospital pioneered practices in China such as family-centered birthing services, family medicine, and an integrated women's health center. Although the hospital is the prime provider to the international community, almost one-third of its patients are Chinese.

UFH did not attain such success overnight, however. Official approvals alone took 18 months for Beijing United Family Hospital, and the timeline from application to opening ran for more than five years. Shanghai United needed some 150 official chops (official seals), and the hospital needed late-stage redesigns and re-approvals to comply with new infection control considerations in the wake of the severe acute respiratory syndrome outbreak. Transforming China's healthcare services will take time, patience, creativity, and flexibility on the part of investors.

Across China, business, government, and consumer cultures differ in important ways (see the CBR, September-October 2004, p.53). Some are obvious, and others are subtle. But just as Chindex, the foreign partner and driving force behind UFH, has had to cope with these differences to build its nationwide health services network, so too will systemic healthcare reform need to take regional differences into account. For a full decade before initiating its first hospital project, Chindex got to know the Chinese healthcare system by importing and servicing high-end medical equipment for hospitals at all levels across the country. With this vast experience in helping Chinese hospitals absorb and successfully use the best medical hardware that the West had to offer, Chindex was uniquely positioned to take the next step: finding ways to adapt western business models and management techniques and integrate them into China's own healthcare system. Chindex's long experience in China before setting up a venture has obviously contributed to the company's success. Other investors considering entering China's healthcare sector would do well to follow its lead and familiarize themselves with the sector before jumping in.

—Roberta Lipson

Roberta Lipson is CEO and chair, Chindex International, Inc., and chair of United Family Hospitals and Clinics, the first foreign-invested and controlled hospital group in China.

Subscribe/Renew CBR Archives Advertise in CBR Print Advertising Online Advertising Request Media Kit Business Directory Online Store Links Departments China Conference Calendar Sponsored by: China Business USCBC Bulletin US & PRC Contacts Travel Savvy NEW! Business Resources Short Takes Critical Eye Commentary Interview Company Profile Opportunities Reviews Last Page Join the CBR mailing list to receive updates and announcements. Timely, relevant publications on the Chinese business climate	Home About Us Contact Staff Join Our Team For Contributors For Journalists FAQ
	Focus: Healthcare Investing in China's Hospitals China is considering ways to revamp its healthcare system by Roberta Lipson Of all the challenges facing the PRC government, few are as important—or daunting—as fixing the national healthcare system. Not only do the health and welfare of the nation's 1.3 billion people depend on it, but in very real and direct ways, the rest of the world's health depends on it too. Last year's struggle against severe acute respiratory syndrome (SARS) and China's effort to rein in human immunodeficiency virus (HIV) and acquired immunodeficiency syndrome (AIDS) infection rates provide ample proof that the rest of the world has a vital stake in China's healthcare system. Foreign business is also learning crucial lessons about the importance of the Chinese healthcare system. The 2003 SARS outbreak caused an estimated ¥300 billion ($36.3 billion) in direct economic losses in China and untold disruption of the operations and supply chains of foreign firms. In the wake of the SARS crisis, the Chinese government committed hundreds of millions of dollars to improving the public health infrastructure, in part by increasing investment in and scope of China's regional centers for disease control, building more infectious disease hospitals, and raising infection-control awareness through training and publicity. Of course, foreign business is eager to participate in these efforts. Foreign interest in investment in China's healthcare services is rising, as are the country's medical equipment imports, which now stand at around $2 billion annually. Identifying problems—and solutions With admirable openness and frankness, Chinese policymakers have acknowledged the shortcomings of the current healthcare system and the acute challenges they face in improving it. In the Ministry of Health (MOH) and in other departments of the PRC government, there is widespread agreement on the need for reform and forthright acknowledgement of problems in medical services that include inefficiency, high costs, corruption, lack of a complete and fully implemented quality standard, and poor service. There is also broad consensus among these officials that private investment—both domestic and foreign—can play a key role in solving these problems. But officials have not yet reached consensus on how to implement a privatization process without abandoning China's public healthcare obligations under its socialist system. Chinese policymakers have acknowledged the shortcomings of the current healthcare system and the acute challenges they face in improving it. "We are striving for a balance between the government's responsibilities and the market mechanism," Wu Mingjiang, the MOH director of Medical Administration, told a forum in Beijing in August. Striking such a balance will be difficult and will require vast improvements in China's regulatory framework. It will also likely require a unique blending of the many varied approaches now under consideration. Existing state-owned hospitals may, for example, be permitted to enter into public-private partnerships in which they outsource varying levels of management. Some hospitals might even be allowed to contract out all of their management services. For instance, in Suzhou, Jiangsu, the city issued tenders this year for the management of most of its public hospitals while retaining ownership. Existing hospitals are also increasingly allowed to transform their ownership structure by taking on private capital, most of which has been domestic to date. More private investment is also being used for the construction of new hospitals. In the Zhejiang-Jiangsu area, several public hospitals have been sold to private investors, and the local governments have aggressively tried to attract private capital to build new hospitals. In this region, which has been aggressively working to attract foreign investment in hospitals, investments worth ¥500 million ($60.4 million) have already been contracted. Developments in other parts of the country have been much slower, as the attitudes of the central government and local governments are more conservative. These new approaches would allow the state to divest itself of inefficient and low-quality assets in the healthcare system. The pressure of market competition, meanwhile, should compel remaining public hospitals to improve their own standards of service and efficiency. Such a system would also allow an expansion of the range and levels of services to an ever-more diverse public. For instance, a growing number of well-to-do Chinese want international-standard healthcare—and are prepared to pay handsomely for it. Will China let private capital flow? As PRC policymakers are well aware, plenty of private capital is poised to flow into the healthcare sector, and the notion of for-profit hospitals is no longer entirely taboo. At the same time, many officials are wary of a wholesale privatization of healthcare and insist that public hospitals be able to guarantee the basic health needs of China's hundreds of millions of rural and urban poor. Still others argue that privatization is no panacea at all, pointing to the high cost of medical services in countries with private healthcare systems. While the debate intensifies, regulations have, for the most part, yet to change. Given such an environment, where the ability to make an adequate return is unproven, and where implementing regulations lack clarity, the relatively small number of newly opened hospitals and clinics should come as no surprise. Plenty of private capital is poised to flow into the healthcare sector, and the notion of for-profit hospitals is no longer entirely taboo. Of the 12,599 general hospitals in China, only 8 percent are run for profit and, according to MOH statistics, they handled a mere 3 percent of China's patient load in 2003. Would-be foreign investors in the sector face additional hurdles, and indeed the regulations do more to deter foreign investment than to encourage it. Wholly foreign-owned investments are prohibited, and in joint-venture healthcare facilities foreign investors are limited to a maximum stake of 70 percent. Regulations also call for a minimum ¥20 million ($2.4 million) investment and require all services and activities to be domiciled at the same licensed facilities. Branch hospitals or clinics are thus prohibited. China has also discontinued duty exemptions for foreign-invested healthcare facilities that import medical equipment. In addition, foreign-invested healthcare facilities are excluded from some preferential tax treatment plans aimed at encouraging foreign investment. And foreign medical professionals are officially limited to being the minority employees at any foreign-invested enterprise, with 6-to-12-month limits on how long they may work in China, though in practice contracts are often renewed for longer periods. Given these hurdles, it is not surprising that of the 29,000 medical facilities of all types registered in China in 2003, only 45 have foreign investment and another 15 have investment from Hong Kong, Taiwan, and Macao. The vast majority of these are classified as primary care and dental clinics, emergency evacuation centers, and research facilities. Only several would qualify as hospitals. Reason for caution Despite the clear gains that would result from the increased use of private capital in the healthcare sector, China has ample reason to move cautiously. Severe weaknesses exist in the regulatory environment, and these need to be fixed if privatization on any substantial scale is to stand a chance of succeeding. As in other sectors in China, a transition toward privatization could obscure ownership and risk misappropriation of government assets. Other challenges unique to the medical sector include the lack of experience in independent hospital governance among hospital administrators and boards of directors, the fact that the system does not require independent governance, and the poorly developed state of China's hospital accreditation process. Higher standards China desperately needs to move away from its old system of evaluating and rating hospitals, which was based primarily on an institution's physical plant and hardware, toward a quality-based accreditation system that takes into account all the "software" that makes a fully equipped hospital run well. To China's credit, it has signaled a move in this direction with new, experimental standards. Numerous international standards already exist, including those of the Joint Commission International, the international arm of the most widely accepted US hospital accreditation and quality rating body. By referencing and adapting such internationally accepted benchmarks in its own development of hospital standards, China could not only eliminate false starts and wasted efforts, but also gain a common language with the global healthcare community. China desperately needs to move away from its old system of rating hospitals, which was based primarily on physical plant and hardware, toward a quality-based accreditation system that takes into account all the "software" that makes a fully equipped hospital run well. Chinese hospitals currently may not apply for accreditation under this standard because the government has yet to clarify regulations that define and authorize healthcare accreditation agencies. Quite apart from the definition of the standards themselves, success will also hinge on the fidelity and absolute integrity of the accreditation process and the bodies that implement it. These reforms are especially vital as a prelude to any privatization effort, so that potential investors and patients can evaluate hospitals, regardless of their ownership or structure, according to reliable and uniform standards. In addition, the widespread implementation of such a quality standard would enhance healthcare quality throughout the system. Challenges for private investors Even if the necessary regulatory reforms take place, private investors in Chinese healthcare services will face their own fair share of challenges. Again, some of these issues are common to all sectors of the PRC economy, such as the burdens of bloated staffs and huge pension obligations that plague many Chinese state-owned enterprises. Investors will also need to untangle decades worth of reporting and accounting histories in order to produce reliable financial statements. More specific to the medical sector will be the need to overcome China's deeply ingrained service style, in which patient-centered care is a new and alien concept. Investors will have to cope with the shortage of hospital administration expertise as they look for managers capable of integrating modern management methods with existing institutional cultures. In many of China's hospitals, top administrators are senior physicians who, despite their distinguished and accomplished careers, lack the necessary management training to run modern hospitals. Who will pay? Finally, for private investment to succeed, China will need to reform its payment system for medical services. Other reforms and even privatization will do little good unless the basic economics change, and for that to happen, reimbursement levels must be raised to cover actual costs. At present, reimbursement levels from the government are unrealistically low for many services. If the government remains the only source of insurance, it will be hard-pressed to support the healthcare system at a higher level. What the government can do, however, is encourage the development of private insurance options, especially those that allow patients to combine social health insurance with private supplemental insurance so they can access more expensive services (see Keeping China Healthy). Private hospitals would then be able to operate profitably, which in turn would allow them to hire hospital management experts and ultimately raise their quality and efficiency. Healthy competition China could speed such improvements by leveling the playing field for foreign investors. With fewer restrictions on off-site branch development for qualified foreign providers, on ownership stakes for foreign investors, and on the hiring of foreign physicians, China would gain access to valuable new sources of both medical and management expertise. And all of China's healthcare facilities would benefit from a healthy dose of competitive stimulus. Chindex in China Despite the uncertainties surrounding the future of healthcare reform in China, some foreign investors have already entered the field. Pioneering foreign players have been investing and operating in the health services sector since the early 1990s. As the handful of tombstone projects scattered around the suburbs of Beijing illustrate, not all have managed to navigate the pitfalls—but some have. In China's largest cities, several small, foreign-invested clinics are successfully serving a mixed customer base of expatriate and local patients and several foreign-invested hospitals have opened. The United Family Hospitals Group (UFH), a division of Chindex International, Inc., opened its flagship hospital, Beijing United Family Hospital, in Beijing in 1997. With Shanghai United Family Hospital, which opened its doors this October, and hospitals in Xiamen, Fujian; and Guangzhou to follow, UFH has become one of the top foreign healthcare service providers in China. In accordance with PRC regulations, each of these sites are separately approved and registered, but contract certain of their management functions to the United Family Hospitals Group. UFH offers a full range of inpatient and outpatient services that include medicine, surgery, dentistry, pediatrics, and obstetrics and gynecology. The Beijing hospital pioneered practices in China such as family-centered birthing services, family medicine, and an integrated women's health center. Although the hospital is the prime provider to the international community, almost one-third of its patients are Chinese. UFH did not attain such success overnight, however. Official approvals alone took 18 months for Beijing United Family Hospital, and the timeline from application to opening ran for more than five years. Shanghai United needed some 150 official chops (official seals), and the hospital needed late-stage redesigns and re-approvals to comply with new infection control considerations in the wake of the severe acute respiratory syndrome outbreak. Transforming China's healthcare services will take time, patience, creativity, and flexibility on the part of investors. Across China, business, government, and consumer cultures differ in important ways (see the CBR, September-October 2004, p.53). Some are obvious, and others are subtle. But just as Chindex, the foreign partner and driving force behind UFH, has had to cope with these differences to build its nationwide health services network, so too will systemic healthcare reform need to take regional differences into account. For a full decade before initiating its first hospital project, Chindex got to know the Chinese healthcare system by importing and servicing high-end medical equipment for hospitals at all levels across the country. With this vast experience in helping Chinese hospitals absorb and successfully use the best medical hardware that the West had to offer, Chindex was uniquely positioned to take the next step: finding ways to adapt western business models and management techniques and integrate them into China's own healthcare system. Chindex's long experience in China before setting up a venture has obviously contributed to the company's success. Other investors considering entering China's healthcare sector would do well to follow its lead and familiarize themselves with the sector before jumping in. —Roberta Lipson Roberta Lipson is CEO and chair, Chindex International, Inc., and chair of United Family Hospitals and Clinics, the first foreign-invested and controlled hospital group in China. Top of Page Table of Contents
	Permissions Copyright Information Privacy Policy The US-China Business Council © 1997-2008 by the US-China Business Council. All rights reserved.

Departments