Last week, according to an announcement by the Ministry of Health (MoH) the Chinese Central Government now “explicitly would allow investment into a public hospital.” I will have more soon on this general topic based on an interview with at PriceWaterhouseCoopers in Shanghai, one of the leading experts in the field of China’s hospitals; but for now, want to explore what we should make (if anything) of last week’s announcement.
Obviously, the MoH is eager to see private investments into China’s hospital market get started. The MoH is more than likely eager to see this not only because private investment acts to supplement the investment the Central Government will need to make, but also because the MoH is eager to see Western models and best practices get deployed into China. Readers may remember my interview with who commented on why he has been reluctant to make investments in the hospital sector in China, largely because if he was able to prove he had built a profitable and scalable model, it was highly probable he would turn around and find his newest competitor was a very thankful MoH.
Regardless of these concerns, this current spate of announcements should probably be seen as their second bite at the apple in this regard. The first was about ten years ago when the MoH put almost 500 rural hospitals on the market for private investors to take over. These hospitals were, as one well-placed source told me in Beijing a couple of weeks ago, “total dogs.” They were losing money, facing personnel problems, and delivering sub-par outcomes. But, the MoH was willing to make great deals in order to get rid of them – in some cases offering them at no charge to private investors!
Privatization was limited to these approximately 500 hospitals, and it came with some major strings attached. Most important was that the private investors had limitations imposed on them relative to compensation schemes, pension plans and pricing that had previously been in place. One insider I have spoken with has described these as hard and fast obligations that had to be maintained, while another equally well placed has suggested that these are negotiable and that the real problem is that you inherit a group of public employees who are not eager to live under the new expectations of a for-profit management scheme. While somewhat different in the formal boundaries you have to live within, both opinions point to the difficulties inherent in taking a public hospital private. You do not have to be someone with lots of experience in hospital P&L management to understand that you can get as great of a deal on the purchase of a hospital as is humanly possible, but if you inherent a set of liabilities and operating parameters that cannot be changed, then you are unlikely to be able to turn the corner and make a profit on this investment.
The question now seems to be whether the MoH has simply opened the whole of China’s public hospitals – in theory at least – to private investment but kept expectations around compensation, pensions and pricing fixed, or whether the MoH is now willing to allow private investors to make changes in these three critical areas. The Sohu article notes that the government is encouraging what it calls “pilot” investments, and pointed to a couple such pilots that are being pursued in Kunming, Yunnan. As important as this question is, the most important question you are probably asking is why a potential investor would elect to take a public hospital private versus simply building a Greenfield for-profit hospital? Stay tuned, as I will have more on this question in a forthcoming post on investments into China’s hospital sector.
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