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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


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