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Analysis: Don’t expect a slow down in healthcare investment in China

Jiadi Yu, principal investment officer at the IFC in Hong Kong, explains why China’s reforms make sure that there will be no slow down in healthcare investment.

China has the fastest-growing health care market in the world, with expenditure increasing from US$91 billion in 2004 to US$590 billion in 2014 – a ten-year compound annual growth rate of 21%. Moreover, the number of private hospitals has caught up with the public hospitals, although only 12% of patients receive treatment in private facilities. While such a growth trajectory should make China a giant honey pot for investors, it has proved surprisingly tricky for some, especially foreign ones, to adapt their business models successfully to the Chinese market.

But times are changing. The Chinese government is in the middle of a radical overhaul of how its citizens get their health care and is strongly encouraging private sector involvement. By transitioning to a so-called tiered healthcare delivery system, the government aims to reduce system inefficiencies and divvy up public funds more evenly between urban and rural areas, between major and minor cities. The goal is for the new system to be in place by 2020.

One part of the reform aims to upend a long-held preference that Chinese people have in healthcare – one that may surprise outsiders. Let me explain: Imagine you are feeling feverish and worry that you are coming down with a cold or flu. Do you go to your local clinic to consult your family doctor? Or do you head to a big hospital in a large city?

Most Westerners’ first port of call would be their local clinic. Chinese people, however, have a deeply ingrained distrust for community clinics and so tend to head straight for large public hospitals, even for minor ailments. One reason is that the best doctors are mostly at large public hospitals. Another reason is that, in contrast to most Western countries where patients have a local general practitioner, this tradition has yet to take root in China. GPs comprise just 5% of all physicians in China.

Many Class III (the highest patient capacity) hospitals in Beijing and Shanghai receive more than 10,000 outpatients daily. At least 50% of them could have obtained treatment in lower tier hospitals or community centres. The reforms aim to redirect patient flows from large hospitals to smaller ones or community clinics. The government is constructing attractive-looking, well-equipped primary care clinics and is increasing the rate of public reimbursement for treatment provided at these clinics. It also is spearheading a drive to train more GPs.

Some foreign investors, such as Singapore-based Parkway and UK-based Bupa, anticipating the impending shift in how the market operates, have been busy establishing primary care and specialty clinics. But investors face a major obstacle: the absence of insurance coverage. They are finding it near impossible to get covered by the social insurance system because they tend to charge higher prices than public facilities, rendering them ineligible for public reimbursement. So their patients pay out-of-pocket or through commercial (private) insurance.

The problem is that hardly any Chinese people have commercial health insurance – the penetration rate is just 2%, compared with the 96% of the population that are covered by social insurance. The government is trying to remedy this low take-up of commercial insurance. For example, it allows employers who buy private insurance for their workers to deduct the cost for tax purposes.

Another obstacle investors are facing is access to the good doctors in the public system. In China, a physician’s license is linked to the facility where they practice, which restricts their mobility. Moreover, doctors’ social security benefits, including housing funds, malpractice insurance, and pensions, are non-transferable if they switch employers.

The reforms aim to change public hospitals' semi-government status and gradually eliminate guaranteed employment status for public hospital doctors, which would incentivise doctors to pursue independent practice. Interesting initiatives are emerging such as the formulation of the doctor groups like Dr. Smile Medical Group, which provides an independent platform for expert doctors to practice at contracted private clinics and hospitals. Some doctor groups also plan to set up their own ambulatory surgery centers. 

Over the past decade, foreign investors in China have faced a steep learning curve, whether when embarking on a large hospital project or setting up primary care clinics, partly because the regulatory environment was not conducive. The ongoing reforms, in seeking to create a more business-friendly environment, are presenting new opportunities, especially in the subsectors of primary care clinics, specialty hospitals, rehab centres, and diagnostic laboratories.

But before investors dive into Chinese waters, they should first learn how to navigate them. If they don’t, they may end up treading water financially or, worse still, sinking.

Posted on: 06/02/2017 UTC+08:00


News

Diversified conglomerate Mexter Technology is raising M$14.3 million (US$3.2 million) via a private placement to fund its expansion into healthcare services. It is selling up to 20% of its share capital. M&A Securities is handling the deal.
Harmonicare Medical, the largest private obstetrics and gynaecology specialty hospital group in China, has reported a 9.9% decline in profits for 2016 to Rmb95.7 million (US$13.9 million). At the same time, revenues slipped 5.5% to Rmb859.7 million.
Medical device manufacturer Vincent Medical has reported a 48.2% slump in annual profits to HK$37.1 million (US$4.8 million). At the same time, revenues for the year were up 4.3% to HK$467.3 million.
Chinese medical products conglomerate Shandong Weigao Group Medical Polymer has reported a 17.6% rise in profits for 2016 to Rmb1.3 billion (US$188.9 million) on revenues that were up 13.7% to Rmb6.7 billion.
Anand Kumar has been appointed a non-independent non-executive director of SGX-listed healthcare provider Healthway Medical Corporation (HMC). This follows the news last week that HMC had been thrown a lifeline after agreeing to a revised convertible notes deal with Singapore and Dubai based private equity firm Gateway Partners.
SGX-listed healthcare provider Healthway Medical Corporation (HMC) has been thrown a lifeline after agreeing to a revised convertible notes deal with Singapore and Dubai based private equity firm Gateway Partners.
The Australian Competition and Consumer Commission has decided not to oppose the acquisition of private hospital operator Pulse Health by Healthe Care, Australia’s third largest hospital operator.
Guangdong Kanghua Healthcare, the operator of the largest private hospital in China, has reported a 22.5% rise in profits for 2016 to Rmb145.7 million (US$21.2 million). At the same time, revenues rose 16.6% to Rmb1.2 billion.



Analysis

The takeover of Australian private hospital operator Pulse Health by Healthe Care, Australia’s third largest hospital operator has been put on hold for two months. Yesterday Pulse applied to the Supreme Court of New South Wales to delay a scheme meeting planned for Wednesday this week to approve its takeover, until 1 May.
The renounceable non-underwritten 11-for-200 rights issue for SGX-listed private healthcare provider Health Management International (HMI) has received strong interest from investors. It had a 145.7% subscription rate, raising gross proceeds of S$18.5 million (US$13.1 million).
Timothy Low, chief executive officer of Farrer Park Hospital in Singapore, explains how high end medical treatment can find its niche as belts around the region are tightened.
Michael Custer, analyst at Solidiance in Shanghai, explains that healthcare service providers will come out on top from China’s healthcare reforms.
Asia is no longer the benign liability environment that it once was. Michael Griffiths, regional director of healthcare at Aon Singapore, explains why.
Rhenu Bhuller, partner at Frost & Sullivan, examines the evolving implications of the Trump election on the healthcare industry in Asia.
Healthcare Partners has increased its hostile takeover bid for NZX-listed specialist medical investment firm Abano Healthcare Group. It is now offering NZ$10.16 per share (US$7.34) per share, up from NZ$10.00 per share. The increased offer takes into account the dividend that Abano paid last month.
Real estate group OUE has made a S$62.9 million (US$44.4 million) takeover bid for financially troubled International Healthway Corporation (IHC), a Singapore-listed integrated healthcare services and facilities provider.

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