Getting Your Senior Care Facility Licensed in China

For long-time China watchers who have been closely monitoring the country’s ongoing effort to modernize its healthcare system, the role of the government as regulator and payer is critical to understand.  Navigating these waters is especially important for senior care operators who are creating a market almost from scratch, with all the promise and peril this suggests.  The closest analog to what foreign senior care operators should at a minimum be aware of are the experiences foreign investors have had with the nascent efforts on China’s behalf to open private for-profit hospitals.

A Knowledge article from last year made the point that China’s unclear regulatory framework has inhibited many outside investors from being able to deploy capital effectively, even though China’s updated foreign direct investment (FDI) catalog has moved such investments formally into the “encouraged” category.  The article quoted Peter Liu who had first hand experience with a for-profit hospital that did not receive the necessary licenses from the Chinese government.  He shared with Wharton, “Our team has been waiting for five or six years to open our foreign joint venture hospital and we still do not know when we can open.”

In addition, the Wharton article quotes a consultant with knowledge of another similar situation encountered by a group of investors from Arizona (the infamous Beijing International Heart Hospital):  “By the time it could get off the ground, its license had expired … the foreigners involved [in that project] are great examples of what not to do. They oversimplified how things work in China, invested too little and then ran out of money. They raised some more money but it was not enough. The license expired and had to be renewed. When push came to shove, the project took too long and its investors deserted them.”

It can be tempting to argue for how senior care is fundamentally different than the situations Wharton is describing and how reforms since early 2011 have made the relevant path forward easier to pursue, and in that sense the fact that Emeritus has successfully received their license should hold reason to be confident the process in the senior care space is more transparent than that private hospitals must face; however, long-time China experts know that trivializing the role of properly and pre-emptively embracing the necessary regulatory approvals for a senior care facility is not something that should be overlooked.  In this same sense, those familiar with China’s over-arching legal narrative know that what is promulgated from Beijing and what is enacted at the local level can be widely divergent; consequently, navigating the regulatory framework can be a devilishly local endeavor.

With this in mind, I was very eager to speak with , a Shanghai based lawyer with the Co-Effort Law Firm.  For those not familiar with Michael’s work, he publishes a regular newsletter on China’s senior housing and care industry.  What I wanted to explore with Michael were the specific regulations and procedures that guide approvals of foreign owned and operated senior care facilities.

The first point that Michael made is that China’s approval process is different between for-profit and not-for-profit institutions (that has proven to be an important distinction for those in the industry who are familiar with the back story to Cherish Yearn).  A not-for-profit must obtain the approval of the Ministry of Civil Affairs and the local government; however, because few (if any) foreign investors in China’s senior care market are not-for-profit, this is less interesting than an understanding of the for-profit regulations.

Michael shared that as of today a for-profit senior care institution must secure the approval of the Ministry of Civil Affairs, the Ministry of Health, the Administration of Industry and Commerce and the Ministry of Commerce (MOFCOM).  The Ministry of Health will want to explore the nature of the healthcare services being provided in your facility:  if they determine your services are most similar to those offered by a hospital, you will be held to higher standards and the qualification process will be longer and more difficult.  In contrast to this, if you are offering what Michael called “in-house healthcare” then the qualification process for approval of an internal clinic is more straight–forward.  Michael was quick to add that in China, distinctions between nursing homes, independent living, assisted living and CCRC do not yet exist, so foreign operators should be careful in assuming those same classifications will guide the Ministry of Health’s view of what you are offering and what standards you will be held to.  Again, this question of how your facility will be classified is a great example of how regulations can – and will – be widely interpreted on a very regional basis.  Michael said that a foreign operator should plan on 6 months of back-and-forth with the relevant government agencies prior to receiving the necessary approvals.  As the market heats up, whether this time frame will contract or get drawn out is something western companies will want to pay attention to.

I asked Michael what the typical problems were that he has seen thus far and his first comment was the lack of “specific criteria from the government on what is required to open a facility … this is one reason why it takes so long for the Ministry of Health to issue a license.”  Not to beat a dead horse, but Michael then added that even when the Ministry of Health grants the necessary license, the local government may not be sure this is the only approval needed for the doors to open!  In these cases, the best prophylactic is to get engaged early with your local government.  How local?  Michael commented that “it isn’t enough to work with the Shanghai government; if you want to open in Pudong, you need to be talking to the people in Pudong.”  For those unfamiliar with Pudong, one way to think about it would be that Pudong is to Shanghai what Brooklyn is to New York City.  Yes, that is how local you need to be thinking.

Michael helped add some additional context to the question of whether any existing regulations protected foreign operators from frivolous litigation.  In lieu of well-established, government backed assessment protocols, the possibility exists that Chinese could sue foreign operators for outcomes they believe to be inconsistent with promises made.  On that point, western operators have reason to fear being more susceptible to this problem given their reputation for high-quality as well as their supposed “deep pockets.”  Michael acknowledged that “we have seen lawsuits in private nursing homes and the outcome has always been in the favor of the elderly people.”  In his view, this is a manageable risk and one that will diminish over time as both the government and private insurance begins to formalize standards.

One non-regulatory but legal matter we discussed was the idea of counter-party risk, or as Michael described it, the “chemistry between the operator and real estate developer.”  What does he mean by this?  “A lot of foreign businesses get involved in China, but after 5-10 years the foreign investors want to transition into a Wholly Foreign Owned Enterprise (WFOE).”  Michael believes this process can be un-necessarily cumbersome if short and long-term goals are not aligned up front.  Sometimes, these risks are not understood on either side of the table:  the western investor may think such a transition is the natural order of things (or conversely, may genuinely want a long-term partner), while the Chinese real estate developer wants out of the investment within a time frame that leads them to not think long term about sustainability or quality of the proposed development.  In some ways, either a short or long-term time horizon may be palatable and workable, but as Michael pointed out, not getting this identified up-front can be problematic.  More so because, as he put it, “the payback period for the developments we have already seen get built has been much longer than we expected.”

Towards the end of our conversation, Michael shared the four areas he is monitoring to determine how the regulatory framework for China’s senior housing and senior care industries are going to evolve.  They are as follows:  the preferential policy for foreign operators in terms of taxes, subsidies and land grants, the welfare policy for elderly people without adequate savings, the ongoing efforts to develop a more comprehensive insurance policy, and the development of industry standards for healthcare delivery to seniors.  As Michael pointed out to me, each of these are currently immaturely developed in China, and private industry has a unique opportunity to step in and help shape the regulations that will guide the market for decades to come.