Benefiting from China’s Healthcare Reforms

The healthcare industry in China is facing what may be a once in a generation opportunity to shape, and benefit from, the country’s enormous appetite for improvements in this arena.  The Central Government’s rationale here is two fold:  first, vast inequalities in the current healthcare system are grounds for social discontent.  Second, if China is to avoid getting caught in the classic “middle income trap”, it must transition China into a consumer economy, something that will require a lower savings rate.  The current savings rate in China is so high in large part because most day-to-day healthcare expenses are paid out of pocket.  The 12^th Five Year Plan reflects these insights, and regardless of what happens in China’s domestic economy during the period this plan covers, expect to see healthcare continue to be one of the sectors that benefits from domestic investment (both by government and private actors).

Recently I had the pleasure of speaking at length with , the Vice President for Medical Affairs at United Family Healthcare (UFH) in Beijing, China.  Dr. Rutstein was formerly the Acting Deputy Surgeon General for the U.S. Public Health Service.   In addition to a long and distinguished career in the U.S. Government, Dr. Rutstein was a practicing physician in Micronesia for over 12 years.  For those unfamiliar with UFH, their parent company Chindex is a publicly traded company under the ticker “” on the NASDAQ exchange.  UFH operates 3 hospitals plus 10 clinics in 5 cities around China.  As the first and today the largest private healthcare system operator in China, UFH has been in the country for 15 years.  Their experience, and Dr. Rutstein’s insights specifically, offer important lessons for how private companies might benefit from China’s healthcare investments.

As part of the 12^th Five Year Plan, the Central Government has clearly marked off certain expectations on what it will have to do on its own, and what it hopes private industry will choose to pursue.  Dr. Rutstein commented, “The enunciation first and foremost from key leaders with the Central Government about the role of the private sector in healthcare – the niche they envision the private sector will fill in terms of providing higher level care and more choices so that the public sector efforts can focus on providing primary care to the masses … The goal for the number of beds that should be filled by the private sector is 20% … that is up from about 11% right now.”  He was quick to note, “That is a very ambitious goal, and will require that between now and 2015 some 400,000 new private hospital beds will have to be built.”

In order to make this happen, the Central Government is trying to get out of the way at the same time it incentivizes outside investment (as will become clear, I use the word “trying” intentionally).  On this point, Dr. Rutstein shared, “in order to achieve this goal, there have to be incentives … we are seeing the JV requirement for private healthcare concerns that had previously maxed out foreign investment at 70% being effectively removed, starting first with private JVs from Taiwan, Hong Kong and Macao, but eventually we anticipate all external limitations will be removed.”  Beyond this, Dr. Rutstein pointed towards major investments by the Central Government in the country’s primary care system, as well as attempts to broaden the coverage offered by the social insurance system.

UFH is particularly excited about the opportunities created for them as China’s insurance market becomes more mature and sophisticated.  As he shared with me, “You will start to see a natural evolution of patients who choose to go to the private sector for care.”  Initially, this choice will be limited to those Chinese who are either wealthy or whose MNC employers offer better coverage as part of their benefits.  UFH focuses on the top 5% of the wage earners in China that are “out right affluent or they have jobs that provide them with international commercial healthcare insurance.”

One concern I brought up to Dr. Rutstein was whether if UFH proves that a successful and profitable hospital model can be built, what prevents the Chinese government from copying it?  He is not terribly concerned about this, adding, “The disparities between rural and urban healthcare is really stark.  China really needs to invest huge amounts to establish basic healthcare for the masses; if it can stimulate the private sector to take care of the upper tier, then it is one less burden they have to deal with.”  Even where copying of UFH’s model does exist, they see it as not necessarily bad; in one way it serves to expand consciousness by Chinese consumers on what is possible, and in another it grows the size of the pie everyone can access.  As he said, “For us, this is a good thing because the more viable, successful and credible private venture entities exist, the more this is seen as a viable option for patients.  We are working in a virtually limitless supply of patients.  Unlike in other countries, this is a vast country that is growing so fast economically which means every year a new crop of people enter the middle class … there are so many of these patients, I think there are more than enough to go around.”

One of the topics our conversation ended on was the linkage (or at times, lack of) that exists between what the Central Government promulgates and what is executed at the local level.  Dr. Rutstein commented, “There is a lot of talk and very public support, but the rules on how these new policies will be implemented remains less clear.  Lots of pronouncements at the Central and provincial government levels, but the implementation declarations take a lot of time to filter down to the county or municipal levels.  Consequently, a lot of the policies that have been enunciated are still promised reforms that have not yet really been implemented.  This makes anyone in healthcare as an investor nervous … this all requires ongoing relationships with government officials, and many investors under-estimate this difficulty.  It also means the return on investment (ROI) is not quick.  You need to take a long view.”

Several points jump out to me upon further reflection.  First, whatever your area of interest in China – diagnostics, devices, pharma, senior care – understanding both what is being promulgated at the level of the Central Government and how that is being interpreted and acted upon at the local level is essential.  Take a lesson from what pharma has learned the hard way because of the Anhui model, just engaging the Ministry of Health is not enough – you have to be thinking and acting locally as well.  Second, the upper class is an important bridging strategy as China’s healthcare system continues to evolve.  Beachheads like the ex-pat community that UFH initially took care of are important to establish, but only if they serve as a foundation for expanding into broader segments of the market (some of that may require moving down-stream, but some may also require the market to evolve and bring new consumers into the equation).  Third, technologies, products, and even business models that address the many profound gaps within China’s primary care system are badly needed.  Thus far in my research, it is not clear whether private actors have an opportunity today to build primary care systems in China profitably (more on that later), but I am more convinced that technology companies, especially tele-medicine providers, could benefit even if primary care investments are predominantly led by the Chinese government.  Cumulatively, whatever challenges exist within China’s healthcare system, few other markets offer the sort of exciting growth opportunities that China will continue to offer over the next decade.

Benjamin A. Shobert

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