Two blocks from the skyscrapers of Lujiazui, construction is underway on Shanghai East Hospital’s massive new building that will house the expansion of both its public hospital and its joint venture international wing, Shanghai East International Medical Center (SEIMC). Opened in 2004, SEIMC is believed to be the first foreign-invested joint venture hospital in Shanghai, the result of a desire to draw international healthcare partners into the rapidly-developing Pudong district to help service the growing international population of Shanghai. SEIMC’s new site, set to open in 2017, will expand its original floor space by more than five times.
Meanwhile, across the river in Shanghai’s Xuhui District, Jiahui International Hospital, a private $500 million dollar facility that will work in collaboration with Boston’s Partners HealthCare International, is also scheduled to open next year.
These projects are occurring amid a broader wave of growth and modernization of China’s healthcare sector that has increasingly been driven by private and foreign-invested hospitals.
In recent years, numerous government policies have emerged to encourage a larger role for private hospitals. Public hospitals in China have long faced overcrowding issues, while a rapidly aging population and increasing chronic and non-communicable disease rates have resulted in more people needing care. While public health insurance has expanded to near-universal coverage, expenditure per head is low compared to Western countries, and the quality of rural healthcare facilities remains poor. Moreover, the rapid expansion of public insurance has created significant budgetary challenges and the government recognizes it needs new means to achieve its healthcare goals. Private and foreign-invested hospitals will play a key role in achieving these goals.
The shifting healthcare landscape
China’s encouragement of private hospitals has been a long and gradual process. According to a Boston Consulting Group (BCG) report, 3,220 private hospitals were operating in China in 2005, or just over 17% of all hospitals. By 2010, this number reached 7,068 – almost 34% of the total. But private hospitals tend to be smaller, and despite this 34% share, accounted for only 11% of total beds. In 2011, when the government released its 12th Five-Year Plan, it set specific targets for increasing the number of private beds, calling for a 20% share in 2015. According to recent government data, this goal was nearly achieved – reaching 19.4% at the end of 2015.
In early 2015, policies favoring privatization continued as a new round of reforms aimed at combobulating the chaotic hospital market emerged. “Within these reforms, there were three main areas that were emphasized: infrastructure development, cost reduction, and expansion of insurance,” says Jin Li Frick, Senior Principal Consultant and Head of Greater China at Clearstate, the Economist Intelligence Unit’s (EIU) healthcare research consultancy. “And within the reforms, privatization was basically earmarked as a key initiative.” By that point, the number of private hospitals had ballooned to over 12,000, or nearly 50% of all hospitals.
While growth of private hospitals has been rapid, challenges facing foreign investors have minimized their role in the hospital market. One key restriction is that foreign-invested hospitals are limited to a 70% ownership joint venture structure, with a domestic partner(s) holding at least 30%. A more significant challenge is that foreign-invested hospitals often cannot use public insurance. At the end of 2011, consultancy BCG estimated there were 8,440 private hospitals in China and of these, the Chinese edition of the New York Times stated that fewer than 100 were foreign-invested. But foreign-invested hospitals are on the rise, and according to an early 2016 EIU report now account for 5% of private hospitals.
Patient base growth
In addition to a supportive policy environment, growing income levels and an expanding middle class are driving demand for more and better services. “The emergence of private hospitals is continuously growing, because there’s an increasing appetite on the part of the Chinese population to have an improved and best-evidenced quality medicine,” says Heather Smith, General Manager of Shanghai United Family Hospital (UFH). “It’s very much being demanded of the general population that there be increased competition and thereby improving service and quality of service to be best practice.” UFH was the first foreign-invested international standard general hospital established in China, with its first location opening in Beijing in 1997. Since then, UFH has expanded to six cities and continues to grow today. “We’re opening two new hospitals and an additional clinic [all in Shanghai] in 2017,” Smith says. “We’re constantly looking to expand our footprint.”
While foreign-invested hospitals such as UFH have been long-established in China, early growth of private hospitals was dominated by domestic players. But more recently, foreign-invested ventures are on the rise and expanding into new localities. Founded in 2008, Nashville-based Chinaco Healthcare Corporation (CHC) has been growing its presence in China through middle-tier cities. CHC’s first hospital, a 70%-30% joint venture arrangement with the local government of Cixi in Zhejiang province, opened in mid-2014. This project converted a 150-bed public hospital into a 500-bed Class III (the highest classification in China’s three-tier hospital registration system) general hospital.
While many private hospitals have emerged to fill smaller, niche markets or are aimed mainly at expatriate communities, CHC is focusing almost entirely on local patients. “That’s one thing that distinguishes us from other foreign-capital invested private hospitals here,” says Ling Guan, Executive Vice President & General Counsel for CHC. “We really play in the mainstream population field.” CHC’s second hospital is under development in Zhenjiang, Jiangsu province, and set to open next year.
As for choosing locations, Guan offers several reasons for their decisions. One is that most tier-one cities already have plenty of Class III hospitals, and CHC’s size and local patient focus makes lower tier cities more attractive. Additionally, local governments are often eager to draw in foreign capital to improve their healthcare infrastructure and can offer incentives, such as more flexibility when using public insurance at private facilities. “Foreign-owned hospital clinics in Shanghai are not included in yibao [government insurance],” Guan says, “For our scale, we’re not going to survive without government pay, because we’re serving so much more, and our volume is so much higher. Just having expats is not going to fill our hospitals, and that’s not our goal.”
This surge of foreign-invested hospitals has attracted European interest as well. Germany’s Artemed Group is currently developing a 200-bed, Class II general hospital in Shanghai’s Free Trade Zone, where they plan to bring their orthopedic expertise to China as a key component of the hospital. “The middle income groups in China are starting to demand better and better services,” says Ellon Xu, Chief Executive Officer of Shanghai Artemed Hospital Limited. “So therefore, for a player like us that really focuses on efficiency and quality, we do believe that the market in China provides a very big opportunity for us to make our contribution.”
While favorable government policies and attractive economic conditions can drive investment decisions in the private hospital market, obstacles remain. Two of the most significant involve the problems of hiring doctors and the lack of a developed private insurance system.
Trapped in the iron rice bowl
Typically doctors at public hospitals have not been allowed to seek work outside the hospital that employs them. This poses a significant barrier to private hospitals’ ability to acquire talent. In August, 2014, Beijing became the first municipality to eliminate this restriction, and relaxation of this policy has since spread. But several challenges remain for private hospitals when hiring doctors.
Doctors in the public sector still benefit from “the iron rice bowl” – the safety net provided by the government for many occupations that guarantees benefits such as lifelong employment, a steady income and a state pension. Additionally, public hospitals offer intangible advantages, such as prestige and better opportunity for career advancement. CHC’s Guan says this is among the most significant difficulties private hospitals face. “Right now private hospitals cannot compete for talent, because you can’t offer what the government offers,” Guan says. “Government conceptually from the central level is trying to get rid of this. They know this is blocking private hospitals from developing, because it doesn’t matter how good their infrastructure is, if they don’t have the skilled physicians it means nothing.” Further complicating the issue, public hospitals fear losing talent to private hospitals so where possible seek additional ways to prevent such shifts. “It’ll take time,” Guan adds, “but the trend has to be that, there’s no other direction.”
Private insurance –the missing link
According to the World Bank, in the five years following the launch of its current three-tiered system of public health insurance in 2003 (the New Rural Cooperative Medical Scheme, Urban Employees Basic Medical Insurance, and Urban Residents Basic Medical Insurance), coverage in China jumped from 23% to 87% of the population. Since reforms aimed at further increasing coverage were launched in 2009, various estimates now put it at 95-97%. The government is now seeking to improve the quality of coverage, but faces funding issues in doing so. Private insurance has been growing rapidly and can help bridge this divide, but it too faces many obstacles.
Ernst & Young estimates that the private health insurance market grew from RMB1.5 trillion in 2014 to RMB2.4 trillion in 2015, and that total medical insurance premiums saw growth rates of 41% and 52.5% over the past two years. Despite this impressive increase, a 2016 BCG report found that only about one in 20 people in China have supplemental private insurance.
This lack of private coverage constrains private hospitals. On the one hand, the government is encouraging these hospitals to expand – particularly into rural and underserved areas – but on the other hand, these are the areas where the general population cannot afford private hospitals. Affordable private insurance could increase rural citizens’ access to quality care, while also incentivizing the expansion of private hospitals into such areas. CHC’s Guan wants to see something closer to a 50% commercial insurance, 50% government pay mix, and considers this a key element in successfully developing private hospitals. “Only when there’s a private insurance company coming in can we set a fair price and can negotiate,” Guan says. “Then as long as we’re the best hospital in town, we have the power. But right now we have no such negotiation power with the government. Private hospitals are never going to develop until private insurance comes in to be the payment source.” Guan remains optimistic that things are heading in the right direction regarding private insurance, but adds “that will take some time.”
The future of healthcare privatization
Today, private hospitals and insurance companies are redrawing the lines of how much privatization is acceptable in the healthcare industry. While the results won’t be seen for some time, the large increase in private hospitals and rapid growth of private insurance demonstrates that these lines are shifting. “The government is pursuing provision of universal care to all its population,” says EIU’s Frick. “They recognize they can’t do it alone, without the support of the private sector, without the investment of the private sector.” China’s massive population and rapid economic growth has long drawn interest from foreign investors, yet investment in hospitals has so far been minimal. Now, with the emergence of an increasingly favorable policy environment, it appears more and more investors are choosing to act.