Reflecting on Investments into China’s Hospitals

Last Saturday, was kind enough to spend time with me in Beijing sharing his experiences working in China’s hospital space.  David is currently the President & Senior Partner at The ChinaCare Group, one of China’s leading hospital consulting companies.  Prior to his time at ChinaCare, David served as the Managing Director of PriceWaterhouseCoopers’ Hong Kong and China Healthcare practice, the President and CEO of New Century International Children’s Hospital in Beijing and the CEO of Beijing United Family Hospital.  Beyond his China-experience, David has worked in Lahore, Pakistan and Western Africa setting up hospitals, which gives him a very unique perspective on how to translate western hospital practices into emerging economies in general, but within China specifically.

Amid the general excitement that is building in the United States over China’s opening of the hospital sector to private investment, David’s voice of experience was much needed and added a lot of context to my understanding of what to make of this opportunity.  While David agrees that the opportunity in China is compelling, he also was quick to point out that getting up and running in China’s hospital market remains a bedeviling process.  Perhaps most importantly, while last year’s announcement that private ownership of hospitals was now permitted by the central government, this has done little to remedy the mammoth problems that remain for western investors to get the necessary local approvals to do so.  As David pointed out, you still need to secure some 175 chops in order to get the right licenses, something that can take years.  David commented that with respect to outside investors, “there is certainly plenty of capital eager to invest in China’s hospital sector, but the problem remains the local bureaucracy.”

David also shared that the exact guidelines that allow outside investment in China’s hospitals are poorly understood.  According to him, “the ‘policy’ on 100% foreign ownership and where it would be allowed and encouraged is very unofficial at this point.  It would probably be better to describe it as a preference based on limited statements by the government.”  Given the nature of what investors know, thus far the actual investments that have been made seem to reflect a preference for hospitals, “only in western China, with a preference first to Taiwanese investors, and it is worth pointing out that so far I don’t know of one that has been approved since the announcement.”  David shared that this preference for Taiwanese investments was not necessarily new.  He observed “the preference for Taiwanese investors predates the announcement and there are a couple of small 100% Taiwanese projects in southern China which were approved prior to the new policy.”  David was quick to add that “this is a big country and I wouldn’t want to say emphatically that there aren’t any others.”  While we were talking, David’s first-person experience in China led him to circle back to how the hospital market in China is currently structured, something he clearly believes must be understood for outsiders eager to make investments within the country.  David shared that, as just one example, “Beijing has 10 facilities over 1,000 beds and 9 in the 750-1,000 bed size.  There are others over 1,000 in the sub-acute category.  Together, they run the local healthcare for the city.”

Investors need to appreciate that in China, by rule the boards are composed “entirely of subordinates of the CEO.”  Consequently, a hospital CEO has a very tight grip on the board.  It should be no surprise that cronies populate the boards of many of these hospitals.  As western investors look at existing Chinese hospitals whether to make investments in, or as models for what (or what not) to do, these relationships are important to understand.  David shared a couple of stories where outside investors in a JV thought that by having the authority to appoint the CEO they could exert the necessary fiduciary controls, only to find that the Chinese partner’s control over the CFO became much more important (and catastrophically so in one of the examples we discussed).

None of this is to cast a pall on the opportunity of making an investment in China’s hospital market.  If anything, what David’s comments reinforced in my mind is the general theme of what I have been writing about relative to China’s senior care market:  patient capital with a long-term business plan will be rewarded.  Impatient capital – in particular private equity money that wants to get in and out of an investment in 3-5 years – is going to get badly burned.  Yes, the opportunity to make money in China’s healthcare system is enormous, but it is not a short or mid-term opportunity.  Starting small, refining your model and gradually scaling up within your first target city are all keys to ultimately building a large and profitable hospital in the Chinese space.

This idea of starting small dovetails nicely with one point David made that is worth considering:  he believes the biggest profit opportunity in China is related to improving healthcare delivery.  He sees a growing Chinese middle class who is crying for better healthcare.  David shared that their research shows “between 75-80% of the Chinese middle class are dissatisfied with the service element of how they receive healthcare … our research also shows that they would pay between 5-7 times more for this and that interestingly enough, there is no correlation between willingness and ability to pay for these improved services.”  He went on, “it doesn’t matter if you are middle class or a millionaire … 60 years of fixed pricing that began with the CCP’s reorganization of the healthcare system in the 50s after they gained power in China has resulted in no perceived value because the pricing plans developed by the Chinese government have no correlation to cost.”  Wow.  That is a pretty big statement that has implications to whether western providers are going to be able to raise the fees charged to Chinese consumers in exchange for improved services.  If you are thinking about how this applies to China’s senior care market, you are not alone, and David was quick to agree that this has an obvious implication to how much Chinese are going to be willing to pay for eldercare.

I deeply appreciated David’s willingness to share his experiences and I know readers here will also.  In the midst of everyone’s general excitement about the opportunity to access China’s healthcare market, I think it is more important than ever to stop and get perspective on the challenges that remain to be dealt with before good money follows bad.  This is a sector that while compelling is also prone to froth, and it will be patient investors that ultimately benefit as the healthcare market in China further evolves.