Over the last year, the opportunity to make investments in China’s hospitals has significantly changed for the better. The late 2011 announcement that the FDI catalog would be changed so 100% foreign ownership of hospitals was possible and that investments into the hospital space had been moved from the “restricted” to “encouraged” category green lit the investment opportunity for public hospitals to be privatized. We have shared the analysis of at PriceWaterhouseCoopers here and the McKinsey team here, with my own thoughts here; however, against the backdrop of the larger opportunity there remain many questions that are still unresolved. Legacy questions about what can be changed in terms of personnel, pensions and whether government reimbursement will continue are still unresolved, and may remain open to interpretation by local Chinese officials for some time. As with many opportunities in China, what and how the central government aspires to see a problem resolved or an opportunity pursued may be widely different from what happens locally. With that in mind, I was particularly fortunate this week to spend time speaking with , the Chief Strategy Officer for CHC Healthcare.
CHC is the brainchild of Dr. Thomas Frist, co-founder of Hospital Corporation of America (HCA), and his son-in-law Mr. Charles Elcan. In 2013, CHC will be opening their first replacement hospital in Cixi City just south of Shanghai. It will have general practitioners but will also offer specialties in particular areas including cardiology and oncology. The Cixi facility will have 500 beds initially but has plenty of room to expand given the site’s total of 30 acres available for development. The process of getting the Cixi facility open goes back to 2009, a testament to the patience and belief in how important the China healthcare market will become. Bryan was quick to point out that the reasons for CHC to open in China are both business and a desire to have a positive impact on the state of China’s healthcare system. CHC is an exciting entrant to China’s hospital market for a couple of reasons, one of which I am most interested in: they are taking a blended approach of both privatizing public hospitals while also building green-field and replacement facilities.
Their reasoning for pursuing acquisitions, as well as green-fields, is rooted in the simple fact that it takes time to get a green-field hospital designed, built, and opened. On top of that, recruiting good doctors and nurses to a new facility can be troublesome, as they tend to flock to the large Tier 3 government run facilities. On the other hand, the benefit of green-field opportunities is that every thing is built anew from the workflow to the facilities themselves. Regardless of the opportunity, CHC is committed to forming joint ventures with strong local partners. Bryan commented that with respect to the MoH’s hospital reforms allowing 100% WFOE healthcare entities, “the reforms from the MOH haven’t trickled down yet and a lot of these sorts of investments haven’t been made. Each city in each province is a little different and many local health bureaus are wary to take the first step.” Consequently, the public-to-private transaction, at which CHC is taking aim, offers the ability to get to scale much faster. The risks, as Bryan would be first to admit, are different, but the speed with which an operator can get to critical mass today appears to be greater when utilizing the public-to-private mechanism.
One question I wanted to pursue with Bryan was whom they viewed as their target market. His answer was “we will certainly accept VIP patients in order to have a viable business model; however, our overarching vision is to cater to the general public, the bulk of which is the growing middle class. We believe this is the only scalable model and the only model that will cause a societal shift in the standard of care delivered to the mainstream Chinese population.” This is an additional factor that makes CHC’s strategy worth watching: they view the VIP market as a small but necessary part of a business that will primarily treat the middle class. This is markedly different from many other foreign players who focus primarily on the expats and super-rich. By focusing on this market segment, CHC can also emphasize Tier 2 and 3 cities, which lowers the ROI requirements because they are operating in less competitive markets from a real estate valuation point of view. Bryan added that in meetings with MoH officials, they have suggested they want to decrease the government’s involvement with VIP beds capping them at 10-15% of the available beds in a public hospital in most cities. “In Shanghai,” Bryan said, “the health bureau has publicly stated that they want to do away with government VIP beds entirely, leaving a huge opportunity for foreign players in this market.” This is a point worth spending a bit of time discussing, as Bryan and I did Tuesday. We both agreed that this goal has political undertones.
My question is whether the MoH can really make this sort of change given the way reimbursement in general, and funding for hospitals specifically, is changing. While China’s Ministry of Finance (MoF) is responding to the central government’s mandate to increase funding to hospitals via the expanded national insurance plan, the MoH is at the same time putting policies in place that will dramatically reduce where hospitals can generate revenue (moving away from drug prescriptions, device mark-ups and un-necessary diagnostics). It bears reminding that the MoH aspires to noble national healthcare ideals, but that it has limits imposed on it because ultimately the MoF writes the checks. So on one hand the breadth of reimbursement is widening, but existing “reliable” sources of revenue are dramatically decreasing (or, so the MoH is working to make happen). My sense is that what will shake out relative to the VIP hospitals is they will come to be viewed as essential initially in the short-term and then probably longer-term given the enormous financial pressures China’s hospitals are going to be under for years.
As a variety of investors and existing hospital operating companies pursue China’s hospital market, it is worth reflecting on this thought: you would be hard pressed to find a savvier, more experienced or better capitalized hospital company in the world than CHC. Their leaders understand exactly what it takes to open and operate hospitals, and they know what it feels like to shape an industry that is fragmented and in need of consolidation. In other words, these are operators who know the sort of bumps in the road to anticipate. Yet CHC’s original opening date, as shared by Mr. Elcan in this interview with a Nashville newspaper, was 2011 while the actual opening is now scheduled for 2013. “We certainly want to open as soon as possible, but we aren’t too worried about the delays,” Bryan said in our interview, “Just as our family has been with HCA over the past forty-five years, we are committed, long term, to China and our vision is much larger than just this first hospital. The market is still in its infancy and we believe that quality, not speed, is the most important ingredient in our own success, especially at these early stages.” I find this a humbling realization that a company so experienced has encountered so many surprises, twists and turns in getting their first facility open in China. It bears repeating: patient capital will be rewarded in China’s healthcare space. Those unwilling or unable to do so may well find other emerging economies more suitable to their business model. Regardless, the ability to have a solid management team on the ground and investors willing to let the business model adapt to the realities of executing in China are requirements for success in China’s healthcare space.
By: Benjamin Shobert, , .
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