The Painful Reality Of Investing In China’s Hospital Sector
China is desperate to draw foreign investment into its healthcare sector in general, and hospitals in particular. But thus far, the country’s need and ability to do so have been poorly aligned, with many observers wondering why it remains so difficult to make investments in China’s healthcare delivery infrastructure. Private equity investors, to name only one interested party, would love to see China’s hospital market fully open to foreign investment. But thus far, foreign approvals have been few and far between, and deal flow has been slower than many anticipated. This has all left industry watchers wondering what to make: why does it remain so hard to deploy capital in China’s hospital sector? Many assumed the process by which the hospital sector opened to foreign investment would follow a similar trajectory as other industries that were previously closed, but then opened to foreign direct investment (FDI). Now, questions are being raised about whether this assumption is accurate; if not, why; and, what a more realistic set of expectations should be about where foreign capital will be allowed to invest in China’s healthcare system.
In 2011, China announced its intentions to revise the country’s FDI catalog to allow for wholly foreign owned entities (WFOE) of hospitals. This move would have relaxed China’s historical stance on FDI into the hospital sector that had previously forced foreign capital into joint-venture agreements with a Chinese counterpart. Investors had long wanted to see China relax limitations on FDI into this part of the country’s healthcare system in particular. Most analysts pointed to this step as the first in a series of changes that would ultimately allow investors to make aggressive moves within China’s burgeoning private hospital space. Coming on the heels of China’s Ministry of Health making it possible for the privatization of public hospitals, it seemed the moment had finally arrived when foreign capital could go to work in the country’s hospital sector.
Overall, most people anticipated the reform trajectory for hospital investments would look a lot like what had occurred with other industries in China: a series of gradual reforms that began by moving hospitals out of the “restricted” FDI category, then allowing Chinese-foreign joint ventures, gradually increasing the equity a foreign company could have, allowing 100% foreign ownership as long as the holding company was from somewhere like Hong Kong, Macao, etc. and then ultimately 100% foreign ownership regardless of country-of-origin. Thus far, the process of gradual opening for the hospital segment has limped along, fostered most recently by the announcement from China’s State Council in mid-October that further relaxed regulations surrounding private investment in Chinese hospitals. The most recent announcement, while reflecting the government’s ongoing aspiration to draw FDI into the market, had little new to say other than allowing greater freedom for privately owned hospitals to set their own prices and that for-profit private hospitals could apply to receive discounted tax rates. Both are helpful adjustments that add further hope to the idea that China is working to make it easier and more attractive for foreigners to invest in the country’s hospital industry.
Yet, it remains incredibly difficult to invest in China’s hospital space. Most people who have been working in the sector for the last several years will express emotions ranging from dismay to anger over how challenging it is to navigate the country’s maze of regulators and approval agencies. What keeps hold on those investors with the stamina to stick it out is the belief that western entrants will bring products, technologies, care plans and service standards that will easily capture meaningful market share, especially in China’s growing middle class. This group also happens to be the demographic cohort the Chinese government would most like to see the private sector play a more significant role helping provide healthcare for. The handful of successful privately-owned entrants in China’s hospital market prove that patience will be rewarded, and that Chinese healthcare consumers understand and value western care; however, the small number of these successful operators also point towards the painful reality that getting deals done in China remains an enormous challenge.
Some of this difficulty has nothing to do with investing specifically in Chinese hospitals, and everything to do with how rules and regulations that allow more foreign investment in any category are interpreted by local authorities. Some municipalities are eager to see foreign investment, while others may be more concerned about political risk. This is not unique to hospitals; it captures a typical frustration on the part of foreigners who do not fully appreciate that in China, “the mountains are high, and the emperor is far away,” a statement the Chinese use to point out how hard it has always been is for any government across China’s history to get local authorities to do what they want. But some of the difficulty foreigners are encountering as they navigate China’s hospital industry is also a reflection of the simple truth that healthcare in China is a politically sensitive area. As such, the government is moving deliberately and slowly, to make sure that it does not destabilize the public hospital system through a series of reforms that, while good in the short-term for private operators and investors, might cause mid-term problems for the government. During a recent conference in Shanghai, I moderated a panel and asked my fellow speakers if there was any analog industry in China that was as politically sensitive that had ultimately gone through a similar process of opening to foreign investment. Every one of the panelists shook their head “no.”
In the aftermath of this summer’s GSK scandal, this point has been made very clear to foreign investors: healthcare in China is going to be an extremely political issue. Yes, healthcare anywhere always has a political dimension to it, as this week’s back-and-forth in Washington DC over the Affordable Care Act makes all too obvious. But healthcare is even more of a touchy issue in China. For years, Chinese have absorbed terrible pollution, tainted food supplies, and contaminated water. They have done this with the knowledge that for many, the result will be cancer and cardiac disease; however, the price was one they were willing to pay. The hope was that all of these costs would be offset with a growing and vibrant economy that, among other benefits, would foster a modern healthcare and pension system. The simple and painful reality that Chinese people are coming to terms with today is that the country’s healthcare system remains badly out of sync with the demands that are already being put on it, not to mention those strains that will soon exponentially increase as China’s demographic dividend comes to an abrupt end, leaving a rapidly growing number of Chinese who need care for long-term chronic diseases.
The Chinese government understands these pressures all too well. They are equally aware, and troubled by, the realization that to-date the bulk of China’s hospital sector has been controlled by the central government. This has an obvious implication: as frustrations mount, the government is going to be the entity that people blame. This realization has no-doubt driven much of the government’s recent policy adjustments that have diligently worked to make it easier to bring FDI into the country’s healthcare delivery system. The painful reality is that China has three factors coming together that are likely to make it more difficult to fundamentally alter the quality of either healthcare outcomes or customer experience. First, the country’s economy is encountering new headwinds that, among other things, threaten to force the central government to take precious resources away from healthcare investments. Second, the government needs to pull two things off pretty much at the same time: increase capacity (as measured by new hospitals, primary care outlets, expanded national insurance coverage, new drugs, devices and diagnostics) and absorb the costs related to a rapidly aging society characterized by long-term chronic diseases. Third, China is opening its healthcare economy to foreign investment relatively late in its economic liberalization and modernization. Consequently, even though the government feels it needs to be very cautious in its approach, it has to address the chorus of voices from foreign operators who want to make investments more smoothly and quickly, alongside the frustrations of average Chinese who want more coverage and better choices now.
The reform and opening process China is engaged with in its hospital sector is not unique. The stages have thus far roughly followed the sequence of what other previously restricted sectors have gone through. What is different is the pace and timing. In the midst of China’s amazing economic successes, it has only now begun to turn its attention towards making the hospital industry more amenable to foreign investment. While China’s concerns about moving too quickly are understandable, the political and social risks attached to moving too slowly are beginning to mount. Of all the sectors China has moved to open for overseas investment, its healthcare economy in general, and hospitals especially, may need to move more quickly than the authorities would like. The balance between control and flexibility has never been easy in China, but country’s healthcare system cries out for the sort of focused, concerted and expedited effort that China has proven capable of in the past, and must be again today.