Private Healthcare: A Tough Market to Crack

Foreign investors in China’s healthcare sector must work hard to reach their target clientele—China’s increasingly affluent middle class.

by James Glucksman and Roberta Lipson

The healthcare reforms that the PRC government announced in early 2009 have elicited considerable excitement among potential investors in China’s large and growing healthcare services market. The reforms will boost healthcare spending by ¥850 billion ($124 billion) over 2009-11. Though most of the public funds will be used to build capacity and extend basic healthcare services, the reforms also hint at greater private participation in the sector.

The rising wealth and discernment of China’s middle and upper classes make the country a potentially lucrative market for domestic and foreign private healthcare companies. Expectations of more personal and higher-quality service will likely draw patients to private clinics, where the staff-to-patient ratio permits a level of attention and excellence that is difficult to achieve in a public setting. These segments of the population will desire private clinics that focus on treatments of chronic conditions that require regular patient visits, such as dialysis and chemotherapy, or treatment of insulin-dependent diabetes, and centers that provide conception and pregnancy services, such as in-vitro fertilization.

It is uncertain, however, whether foreign participants will be able to realize opportunities on a grand scale, because prospective entrants into China’s market face considerable regulatory hurdles. Moreover, Chinese consumers generally have entrenched, negative attitudes toward private healthcare—though these attitudes are slowly changing. Even with the potential obstacles to setting up private healthcare facilities in China, the government’s focus on developing grassroots and rural healthcare centers and county-level hospitals may provide foreign and domestic private investors new opportunities to enter the market at the urban premium-care and specialist levels.

Signs the market is warming

As the quality of customer service in other sectors reaches new heights previously unknown in the People’s Republic, some Chinese consumers have begun to question why the country’s healthcare sector does not offer a similar level of customer service. For instance, the prevailing service model at Chinese hospitals and clinics does not allow patients to make appointments. Instead, patients queue to register to see a doctor, with some patients arriving at the hospital in the middle of the night to increase the chance of seeing their preferred doctor. Recently, several government directives have asked public facilities in big cities to institute appointment systems, but implementation has been difficult because of technical difficulties and high demand.

To address the growing demand for patient-focused care, some state-owned hospitals have established VIP wings, sometimes in conjunction with private (including foreign) healthcare companies, where the surroundings and amenities are more pleasant. In most of these wings, however, only the patient’s room is special—offering more privacy, better furnishings, and extra attention from nurses. Once a patient leaves his or her room, the VIP aspect of the experience disappears.

In addition, a small number of private hospitals and clinics have emerged in some of China’s major cities in the past 10 to 15 years (see Box). These facilities range from private dental clinics to multi-city hospital networks. They often operate on a much smaller scale than the average public hospital, allowing them to devote more time to each patient because of a better staff-to-patient ratio and lower patient numbers. The facilities also provide a more pleasant environment because they can devote more resources to their patients and facility maintenance. A few of these facilities have been established with foreign investment, though most are wholly Chinese owned.

Obstacles to investment

Red tape

Healthcare services is a restricted sector in China’s 2007 Catalogue Guiding Foreign Investment in Industry, which limits the speed at which new projects may be approved and increases the red tape associated with launching such projects. According to long-standing PRC requirements on the administration of joint-venture (JV) and joint-partnership medical institutions, foreign entities in healthcare services must have Chinese partners that hold at least 30 percent of total equity. These JVs must have registered capital of at least ¥20 million ($2.9 million) and may not establish branches. Foreign participants that want to have a presence in multiple cities, or at more than one site within a city, must establish separate JVs for each outlet. The approval process is onerous, requiring dual-track approval from China’s healthcare bureaucracy (the PRC Ministry of Health [MOH] and relevant local health bureaus) and commercial government oversight agencies (including the Ministry of Commerce, National Development and Reform Commission, State Administration of Industry and Commerce, and their local branches). Though provincial-level governments—instead of the central government—have provided commercial approvals for healthcare JVs since early 2009, MOH in Beijing still oversees all JV applications for medical licenses. Thus, the central government retains significant control over the process.

Even after a foreign investor establishes a private healthcare institution, the institution must overcome significant obstacles to hire clinicians. For instance, Chinese physicians’ licenses are held by the hospital where the physicians work rather than by the doctor as an individual. Until physicians are legally permitted to work in more than one facility, a development that is expected to occur in some jurisdictions in the next two to three years, physicians who want to work in a private facility must transfer their medical licenses to the private clinic, thus divorcing themselves from the perceived prestige, security, and social services associated with employment at the top academic hospitals. Moonlighting at a second clinic or hospital is technically permissible, but only with the express permission of the doctor’s primary hospital each time the doctor consults at another facility. Some doctors are reluctant to take a second job out of concern that their loyalty will be questioned, out of fear that their extra income will be garnished, or because it is too troublesome.

Foreign clinicians may practice in China, but each jurisdiction has its own regulations regarding the licensing of foreign practitioners. (In contrast, China has standardized licensing procedures for Chinese clinicians.) Some jurisdictions simply issue a local license after the doctor submits an application and the original license from his or her home country. Other jurisdictions, such as Beijing, require each doctor to take a board-level examination before issuing a license. Though Beijing’s exam is currently offered in English and Chinese, many facilities that employ foreign doctors are concerned that the English-language exam will be eliminated so that only fluent Chinese speakers would be able to practice medicine in Beijing. Foreign nurses who come to any jurisdiction in China and who have a foreign nursing degree must take a licensing exam that is administered only in Chinese. Individuals cannot submit license applications; only fully licensed medical facilities as future employers of the applicants may submit the applications.

Though foreign physicians need to take the licensing exam only once while working in their jurisdiction, they must apply to renew their license each year. (Licenses issued to Chinese physicians are valid for as long as the doctor works for the institution.) These temporary licenses for foreign clinicians are renewable, but hospitals that employ foreign physicians worry that this may change. Once a foreign physician reaches the age of 60, the health bureau will no longer renew the doctor’s work visa unless he or she qualifies as a “foreign expert”. To qualify, the doctor must prove that he or she has rare skills that are difficult to replace and will benefit China. This application process is difficult, and the approval rate is low.

Finally, until recently, private and foreign-invested hospitals were ineligible for the permanent preferential value-added tax and business tax treatments that the PRC Ministry of Finance announced for many types of JVs over the last year. In November 2009, the State Council issued a circular that includes private healthcare institutions in the exemption.

Difficulty attracting patients

Once a private clinic is established, it must attract patients—a challenging task for many reasons.

Restrictions on advertising  In response to a wave of misleading or even false advertisements placed by some private clinics, most jurisdictions have clamped down on content and type of healthcare facilities’ advertising. Though the restrictions help deter false advertising, they also hamper facilities’ ability to communicate with potential patients. To reach potential clients without violating advertising restrictions, some facilities conduct extensive outreach activities, such as blood drives and on-site health checks, to acquaint potential patients with their services.
Distrust of private clinics  Many Chinese patients are reluctant to seek medical treatment at private facilities. This reluctance may be a legacy of China’s centrally planned economy, or it could derive from the unethical behavior of some early private healthcare providers. Whatever the reason, many Chinese citizens believe that medical treatment, along with certain other social services, are the natural preserve of the government and come to them as a right. As private facilities proliferate and begin to earn the trust of a broader spectrum of Chinese society, this traditional reticence is likely to fade, especially as busy Chinese families begin to value the convenience and personal nature of private facilities more. A segment of the population, consisting largely of Chinese citizens who have returned to China after years of working or studying abroad and other relatively affluent people, already gravitates toward private facilities. These patients value the convenience of being able to make appointments instead of queuing to see a doctor. If private healthcare facilities are allowed to accept China’s social health insurance (yibao) as partial payment of their fees, such facilities will likely grow faster at the high end of the market. (Currently, the government will review only those facilities that set their pricing at or below the pricing level of public hospitals for approval to accept yibao.)
Inability to reach critical mass  In recent years, a few private hospitals that aim to deliver care at public hospital rates while offering more convenient services have opened. To break even or earn a return on their investment, these hospitals must operate on a fairly large scale. In many cases, however, these facilities have found it difficult to attract sufficient clinical talent to serve patients on this scale, mostly because clinicians are reluctant to leave academic institutions for untried, new providers.
Bias against lesser-known doctors  Chinese patients tend to prefer seeking medical attention from tertiary or teaching institutions, often searching out the most famous doctors to take on their cases. This is partially due to the patients’ desire to see top practitioners, but it is also because some Chinese patients lack faith in doctors whose credentials are not well-known. China lacks a mechanism to verify a doctor’s license or examine his or her educational background, malpractice history, or other criteria that might inform a decision on which doctor to choose. Chinese patients have recently begun using Internet chat rooms to choose practitioners, but in general, they believe that doctors who are not practicing in large, state-owned hospitals are less qualified or experienced than those who do. To tackle this issue, successful private clinics have hired the most famous doctors from large hospitals as full-time employees or regular consultants.

Dearth of private health insurance

The widespread adoption of private healthcare is predicated on the willingness and ability of Chinese patients to pay for it. Though China has a sizeable population of wealthy patients for whom out-of-pocket cash payments are not an obstacle, most private healthcare facilities need to attract a much larger segment of China’s population—the middle class—to stay afloat. One potential stumbling block to investment in private facilities is the relatively small scale of private medical insurance in China.

Though China’s healthcare reforms include a provision to expand the role of insurance in the healthcare system, the country currently has a limited market for private insurance. Because most Chinese citizens do not fully understand the supplementary private insurance option and have a hard time finding appropriate products, they generally pay for their uncovered medical bills out of pocket. China’s healthcare reform plan includes provisions to provide basic medical insurance to 90 percent of the population by 2011, but the level of care that will be covered is unclear. Because public insurance plans currently cover only 40 percent of costs, some observers believe that the new plans may cover roughly 40 percent of total in-patient healthcare expenditure too.

In many countries with basic national health insurance, consumers may purchase supplementary private insurance to cover services that the national plan does not cover. One day, this option may also exist in China, and a number of local insurance companies have already signaled their intent to offer this service. Currently, some insurance companies offer innovative products—for instance, some private insurance includes disease-specific policies that provide a fixed payment in the event that the insured contracts certain diseases, such as cancer or heart disease, regardless of the actual medical bills incurred.

Opportunities for those who can clear the hurdles

The market for private healthcare services in China is still in the early stages of development, and it must leap significant hurdles before it can emerge as a viable alternative to the public healthcare system. But the scale of the potential opportunity and the likely appetite of the population for patient-centered medical services will remain a tempting target for international healthcare companies. Yet only those with the patience to tread carefully through the regulatory and legislative hurdles, and with the financial resources to devote to such a challenging enterprise, are likely to achieve a successful and profitable outcome.

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Selected Private Hospitals in China

China has permitted foreign private investment in hospitals and clinics since the 1990s. Since then, several private and foreign-invested hospitals have appeared across the country.

BenQ Hospital

The BenQ Hospital, which opened in 2008, is a modern, 3,000-bed facility located in Nanjing, Jiangsu. BenQ Group, a Taiwan company with its core business in information technology and manufacturing, owns 70 percent of the hospital. The Nanjing Traditional Chinese Medicine Hospital and the Nanjing State-Owned Asset Investment and Management Holdings Group own 10 percent and 20 percent of the hospital, respectively. The hospital, which targets the general public, provides outpatient and inpatient services at general public-hospital rates and has been approved to accept social health insurance (yibao). BenQ is constructing a new hospital in Suzhou, Jiangsu.

Clifford Hospital

Opened in late 2001, Clifford Hospital is a 600-bed facility in Panyu, Guangdong, (a satellite city of Guangzhou) that received Joint Commission International (JCI) accreditation in 2003 and was re-accredited in 2006. Clifford is noted for combining traditional Chinese, Western, and alternative medicine in a hotel-like environment. Established by the Clifford Group, a Hong Kong-based company with its core business in real estate, Clifford Hospital provides full-scope outpatient and inpatient services at general public-hospital rates and accepts yibao.

Phoenix Hospital Group

Founded in 1988, local company Phoenix Hospital Group operates two major hospitals in Beijing: the 500-bed Beijing Jiangong Hospital and the 670-bed Beijing Yanhua Hospital. Though Jiangong is run for profit and Yanhua is run as a nonprofit, both are large hospitals that provide the full scope of outpatient and inpatient services at public-hospital rates. These two hospitals accept yibao, and because they focus on the same population group and charge about the same prices as public hospitals, they compete with public hospitals for patients.

United Family Healthcare

United Family Healthcare (UFH), which opened its first facility in Beijing in 1997, is currently the only private or international healthcare provider with a presence in multiple Chinese cities. UFH operates comprehensive, JCI-accredited, premium-care inpatient and clinic facilities in Beijing and Shanghai. It also runs outpatient clinics in Beijing; Guangzhou, Guangdong; and Shanghai and manages a clinic in Wuxi, Jiangsu. UFH plans to open clinics or hospitals in several other cities in the coming years. Though UFH’s patient base was initially heavily expatriate, its Chinese patient numbers have steadily increased, and its newest facilities are being established with the Chinese market in mind. UFH’s hospitals are all contractual joint ventures (JVs)—solely managed by the Chindex United Family Healthcare Group. Chindex International, Inc., which has majority ownership in the JVs, partners with the Chinese Academy of Medical Science in Beijing and the Changning Central Hospital, on whose campus the hospital resides, in Shanghai.

—James Glucksman and Roberta Lipson
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[author] James Glucksman ([email protected]) is vice president of Human Resources and Special Projects and Investor Relations at United Family Hospitals and Clinics. Roberta Lipson ([email protected]) is chair of United Family Hospital and Clinics, CEO of Chindex International, Inc., and a director of the board of the US-China Business Council. They are based in Beijing. [/author]