This week I had the pleasure of speaking with Zhanlian Feng, an Assistant Professor of Health Services, Policy and Practice at Brown University. Several of his published articles, specifically and “An Industry in the Making: The Emergence of Institutional Elder Care in Urban China” are highly recommended reading for people eager to learn more about the changing landscape of senior care in China.
Western operators in particular have a number of major strategic questions they are wrestling with as they move towards making investments in China’s senior care market; however, none of them is perhaps of greater importance than understanding how the country’s regulatory environment is going to evolve with respect to quality control standards. As Zhanlian pointed out, even in the United States where these have been developed and in place for some time, examples of abuse do occur (and, it is worth pointing out, when the was passed in the United States to address these problems, the American senior care market and the country as a whole were certainly much more evolved than China is currently). This makes the challenge of evolving an appropriate regulatory environment in China that much more complex. Their need for senior care is going to come a lot sooner than it came in the West, which poses some unique challenges for a nascent industry in a largely unregulated sandbox.
Zhanlian pointed out that the balance which needs to be struck is for the Central Government (the Ministry of Civil Affairs, in conjunction with several other related agencies) to be specific enough to put in place regulations which outline expectations in terms of the quality of care, without being so complex in their regulatory framework that they drive away potential investors. The government is eager to prevent stories like one he references in one of his articles where an elderly Chinese man in a privately run facility was forced to drink his own urine by a night watchman. As western operators, seeing the Chinese government develop policies that work to prevent this from happening (with the acknowledgement that even in the United States, perfection has not been attainable) is in our best interests. After all, nothing could damage the brand of senior care more seriously or quickly than a mounting tide of problems related to quality in this area. As Zhanlian put it, “because there is literally almost no regulation at all in place, all the money that is going in (and for all the right reasons), could get into trouble.” The point is worth dwelling on: a lot of big money from private equity, investment bankers and well-funded industry insiders is eager to see the senior care market open in China. But one of the major risks is that the industry lacks structure (the role of government as a payer), and regulation (who establishes standards for safety and quality of care). Certainly the early entrants will be able to shape this to some extent, but the entire absence of regulations and structure has to be understood as a risk that will need to be managed.
Zhanlian was quick to point out that even as this regulatory framework comes into focus, the question will be how it is implemented at the local level. This cannot be said enough: regardless of whether we are talking about the approvals for private hospitals, questions of intellectual property for consumer products, or regulation of senior care, in China the devil is in the details, and the details are very local. What the central government promulgates from the Ministry of Civil Affairs or the Ministry of Health is one thing; how the provinces and municipalities interpret and enforce these standards can be another thing entirely. A very current example of this, as I have written about here, is the divergent models pharma is encountering between the Anhui and Shanghai reimbursement schemes. One elevates price above all else, where the other takes a more holistic and balanced approach to cost, quality and outcomes. The same divergent interpretations and implementations are to be expected in China’s senior care market as well.
Zhanlian’s published article makes the following statement: “incentives [such] as preferential treatments in land leasing, tax breaks, and financial inducements for bed construction” are all being deployed by the central government in an attempt to build out the necessary capacity to deal with China’s burgeoning demographic crisis. Obviously, developers want land incentives and preferential treatment (on this point, the recent Landesa report on land reform in China is worth reading), while operators are keener to see the government offer inducements for adding and operating beds. This is another group of questions that will ultimately be resolved on a very city-by-city, province-by-province basis. One particular province might have a number of developments that are empty and need to be re-tasked for senior care; consequently, they may not be as aggressive with property incentives as another province where the real estate market is still hot and developers need incentives to think about senior housing as an opportunity. On this point, Zhanlian shared that in his research he has found that most of the current facilities in China are existing, not new, buildings. In other words, the government has been able to repurpose existing facilities for senior care as opposed to offering custom incentives to get developers to build senior care facilities. In addition, as Zhanlian shared, “For many private sector developers, it is certainly difficult to secure a land deal for new construction – increasingly so in the current real estate boom across Chinese cities. However, if the government decides to construct and run its own senior care facilities, the process can be a lot easier – after all, the land belongs to the state which enjoys the power to cut deals between government agencies.”
Upon reflection, several points jumped out to me after this conversation with Zhanlian. First, the Central Government, probably the Ministry of Civil Affairs specifically, could benefit from the American and European industry engaging it at a very high level. Whether this is something that could be fostered by an existing NGO, industry association, or informal group of industry experts is I think less important than seeing the Western eldercare operators get more serious about a top-level strategic dialogue with Beijing’s policy makers. Take a lesson from the difficulties other industries have faced in getting Beijing to modernize its intellectual property framework and get in front of this issue (China’s regulatory framework for senior care) sooner rather than later.
Second, beware the froth. This is a market with a lot of potential and a lot of entrants – both those at the high end and mid-market – that are going to crash and burn until a viable model presents itself. I’ve said this before, but some of the mistakes this industry might be on the verge of making are ones that other similarly sophisticated industries made earlier in China’s history (it’s an oldie but a goodie – pick up as a great casual introduction into this phenomenon). Yes, it’s a big and compelling market opportunity; but given the unknowns, starting small, thinking very locally, and being extremely patient is the right approach.
Third, as an individual operator, if you don’t have the interest or resources to engage Beijing at the top, then at least get serious about a tight relationship with your local officials. Zhanlian made the interesting comment that some of the few policies Beijing has put out related to senior care seem to run at cross purposes with the “go it slow” approach I am an advocate for. As he sees it, many times size is a factor in what the government is willing to approve. They want big facilities built out, but for a western operator who wants to go at things slowly, this might be precisely the wrong approach. Resolution of this is possible, but is more likely to happen at the local level. Regardless, the connection between you and your local officials will be an important intangible – as it always is in China – while you build your operation.
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