China’s changing demographics offer immense opportunities for foreign senior care providers, but a lack of clear government guidelines may hinder some investment plans.The senior care market in China represents a great example of the peril and promise of doing business in China. If senior care issues in China are not addressed, the sheer number of Chinese who grow older without caregiving options could become both an insurmountable economic drain as well as a potential source of social instability. However, the senior care market in China is also a promising opportunity. If scalable and profitable business models emerge, the country could quickly become one of the world’s most lucrative markets for senior care companies.

China’s demographic shift

In mid-January, China’s National Bureau of Statistics announced that China now has roughly 185 million people over the age of 60. A 2007 study by the United Nations estimated that in 2005 there were 16 retired people in China to every 100 workers. The study projected that this ratio will reach 64 elderly for every 100 workers by 2025. Compare this to the United States, which currently has approximately 20 retirees for every 100 workers and is projected to have 33 retirees for every 100 workers by 2050. Even in developed economies, this would be a challenge to deal with properly.

The PRC government is acutely aware and deeply concerned about these demographics. Today, government funding only covers 1.6 percent of seniors in need of care, who cannot otherwise pay for their own care. The World Bank’s standard for developed nations is 8 percent coverage. As Li Jianguo, vice chairman and general secretary of the Standing Committee of the National People’s Congress, stated last year, this translates to a need for an additional 3.4 million hospital and nursing home beds dedicated to senior care over the next five years alone.

In addition, China’s massive rural to urban migration has left in its wake elderly parents and grandparents whose geographic distance from their children means China’s traditional cross-generational housing model will no longer be an option. Even for those family units that have managed to stay together during this period, the one-child policy has created what is being called the “4:2:1” problem. Namely, there are now four grandparents and two parents for every one working Chinese. While most—if not all—of China’s working-age family members would be willing to honor the Confucian ideal of filial piety towards their elders, the combination of relocation, and the number of family members in need of care, make doing so no longer feasible.

Challenges of providing senior care in China

The China market is hungry for a solution to this problem and foreign senior care operators are eager to prove they can export their approaches to China. However, there are numerous challenges that will need to be addressed before this can happen.

Perceived value

A successful elder care model in China will need to be perceived by both those paying for the care, as well as those receiving it, to meet the cultural expectations of how seniors are to be honored and taken care of in their old age. Researchers that have studied expatriate Chinese communities in Hong Kong, Vancouver, and Toronto found that secondary care-giving is not the preferred option of those paying for or receiving the care, but that both parties are beginning to understand that secondary care may be necessary if it rises to meet the expectations of cross-generational care. The simplest way this can be achieved by foreign operators is to stress the quality of the services provided, if not the outright luxury, of the senior care experience as some early entrants are attempting to do.

Government involvement

The question of what role—if any—the PRC government should play in shaping the elder care market remains unanswered. China lacks regulations covering quality standards for caregivers as well as a government-sponsored accreditation processes that would allow consumers to judge reputable facility-based care from those that should not be trusted. In the United States, nursing home operators and in-home caregivers are governed by a variety of federal and state regulations in addition to third parties that advocate for patients’ rights.

The most pressing question the PRC government must answer is how to expand its reimbursement for senior care. The government’s clear preference today is to reimburse for in-home care versus residential-based care, largely because the former is believed to be a more cost-effective mechanism for providing care. While this remains the central government’s primary policy-orientation, it is also looking into how it can best offer incentives to real estate developers to get them to build the sort of entry-level residential senior care the country will ultimately need. Zhanlian Fang, an assistant professor at Brown University, noted in his 2011 study of China’s nursing homes that the government remained “largely uninvolved in financing the sector’s growth spurt.” Successful operators in China will be quick to engage local government, in particular the ministries of Civil Affairs and Health to establish a relationship and begin working towards reimbursement schemes that align with the central government’s senior care agenda. As with other policy agendas driven by the central government, local and provincial leadership will have wide latitude to implement new approaches.

Licensing

Another challenge for foreign senior care operators who want to enter China is obtaining a license to do so. As American and European hospital entrepreneurs have discovered, getting a license to open and operate a private hospital in China is an extremely complicated and drawn-out process that varies widely across provinces. The process for opening a privately licensed senior care facility in China will be similarly difficult. This is why the September 2011 announcement by Seattle-based Cascade Healthcare Services LLC that it had been licensed by the PRC government to open the country’s first for-profit senior care facility was so significant. Because licensing is an opaque process in China, foreign firms will need to find local legal representation that has experience working with the national-level ministries of Civil Affairs and Health, ideally a firm that has experience navigating the confusing approval process to open a private general care hospital in China.

Human resources

Once a foreign operator is properly licensed, they must staff their facility. Because geriatric care in general is not a well-developed competency in China’s medical, nursing, or vocational schools, foreign senior care operators must plan on making identification, training, and retention of qualified caregivers a top priority. This will be an issue both for skilled workers like doctors, facility managers, nurses, and physical therapists as well as non-skilled workers like bedside assistants. Several foreign operators have made it a priority to find partners in China who have ready access to pools of Chinese vocational labor, regardless of whether these workers are focused on healthcare or not. Rather, these foreign operators believe they must first find someone in China who knows how to structure a training program that imparts industry-specific technician level knowledge to the average Chinese worker and then build a healthcare-centric training model in conjunction with their partner. Foreign operators will want to carefully think about whether this is a core competency they can translate to China from headquarters or whether they will need to identify a partner already in China. Ideal partners can include vocational schools as well as a small but growing group of China-based healthcare companies that offer training programs that an operator can incorporate into their expansion.

China’s senior care industry lacks structure, so companies must anticipate and deal with quality control issues. Foreign companies in China across all industry sectors already know they must guard their company’s reputation and services. Because a developed senior care industry does not yet exist in the country, bad experiences—such as abuse, poor living conditions, or perceived inadequate value for the money—could all derail the industry in its infancy. Now, foreign operators in China are focused on training and overseeing quality of service, a particularly acute problem faced by in-home care providers who must manage their offerings outside of a facility under their direct supervision.

Marketing

Once regulatory and infrastructure issues are resolved, foreign senior care operators must effectively market their services. Chinese understand outsourced senior care at two extremes: either they know about it and think it is of extremely low quality, or they are not aware that in-home or residential-based caregiving are options. In China, many people do not know that there are rehabilitation services for an elderly parent who has had a stroke and needs physical or speech therapy. To educate the average Chinese family on their options, Western operators are studying the hospital discharge process to see if they can somehow interject themselves and educate the family on their options.

Opportunities

Keeping these challenges in mind, senior care providers that invest in China with a residential business model are deliberately focusing on the high-end of the market. To date, foreign-funded and -operated elder care facilities in China have all been designed to deliver a luxury product. These facilities are self-described as “five-star resorts” and offer the amenities one would expect of the most luxurious hotel or apartment. This approach solves multiple business challenges. First, because these senior care facilities focus on the luxury market, family members perceive the service as worth the money. Second, a luxury senior care experience addresses the problem of whether Chinese perceive value in the services they receive for their elderly parents. Finally, by focusing on the needs of the rich, the PRC government’s role as funder disappears from the equation entirely.

Not everyone agrees that this high-end model will work. Questions remain about whether a large enough market of wealthy Chinese exists to support the number of developers and operators who have focused on delivering a luxury product. Even if a large enough market exists, it is unclear whether wealthy Chinese will prefer to see their elderly parents taken care of in a residential home or have highend in-home care provided instead. Providing residential care could be especially problematic because many wealthy Chinese became wealthy only after they left their hometown. Because many of their parents have stayed behind, relocation—even if to a luxury senior care facility—to a city far away is likely to be difficult.

For the PRC government, the emphasis foreign operators are putting on the high-end of the market is distressing. The greatest need and opportunity for senior care is in the mid- to low-end of the market that has so far been largely overlooked. So far, the government has offered land incentives to developers to build senior care facilities targeted for the low-end and middle markets. To address the lack of investment in the mid- to low-end of the market, the PRC government could offer additional incentives for foreign operators to make focused investments in senior care facilities that offer unique services not currently available but desperately needed. Examples of this would include incentives for rehabilitation hospitals and hospice care facilities. In addition, the PRC government’s approach since 2005 has been to offer additional land incentives, tax rebates, and fast track approvals to developers. Beyond this, the PRC government will likely continue to expand its reimbursement scheme for in-home elder care service providers.

There is an enormous need for a successful elder care business model in China to emerge. The most lucrative market opportunity—serving members of China’s newly minted middle class as they seek to cost-effectively honor their parents and grandparents by providing customized care—remains the most underserved market segment. But before this can happen, the PRC government must clarify its role as both regulator and funder, two steps that have hindered other healthcare opportunities in China where the need has been just as great but problems have been allowed to fester.

Residential care operators should not wait for regulators to work out these issues. As the healthcare market in China evolves, foreign companies in sectors ranging from pharmaceutical to medical device to senior care need to engage local and national regulators to shape reimbursement policies. As the pharmaceutical industry has seen with the slow, province-by-province adoption of a pricing model that has dramatically lowered drug prices and dramatically decreased profits for pharmaceutical companies in China, it is up to foreign operators to engage, early and aggressively, local and national officials as reimbursement schemes and regulatory programs evolve.

[author] Benjamin Shobert ([email protected]) is the founder and managing director of Rubicon Strategy Group. He is based in Seattle, Washington. [/author]

Posted by Christina Nelson