by Asia Perspective

Healthcare in China: Lack of Substantive Change But Increasing Opportunities for Foreign Investments

October 24, 2014

The Chinese healthcare sector continues to develop at an extraordinary pace, with health care spending expected to top $1 trillion USD in 2020.

China remains one of the most attractive healthcare markets today. During the implementation of the 12th Five-Year Plan, China demonstrated its serious commitment to improve the healthcare industry by investing about $124 billion and extending coverage to nearly 95% of its population between 2009 and 2011. Due to favorable demographic trends, urbanization, a healthy expansion of the economy, a growing income level, and a strong focus from the government help to fuel and maintain the momentum of China’s healthcare industry.

Current demographic trends indicate that demand for health care will remain strong.  According to the McKinsey Global Institute, the population of those aged 65 and older is expected to increase greatly, to almost 223 million by 2030.  To cope with the colossal aging population, the Chinese Ministry of Health identified key reform areas to include information system, pricing and payment structure, drug quality supervision, primary care, and public hospital reform. The disease profile of the Chinese demographic shows that the healthcare spending has been somewhat effective as it reflects surprisingly similar to that of a developed country (see Exhibit 1 below).

healthcare

Along with the positive outlook on the demand of healthcare provision, the steady growing middle class in China allows for patients to afford more extensive insurance and expensive drugs.  Almost 75% of urban households are expected to become a part of the middle class population by 2020(the urban middle class is defined as those with an annual disposable income of around $7,000 to $27,000 according to the McKinsey Global Institute).  With no lack for demand, an improving ability to afford better care, and a government that has committed to make health care a central political agenda, China’s health care market indeed has a very bright future ahead.

Despite China’s commitment to improving its health care, problems with the inefficiencies of administrative oversight and an overwhelmingly disadvantageous relationship, which heavily favors the healthcare providers over its users, still continues to pervasively plague its system.   A survey released by the Horizon Research Group last year revealed how little these healthcare reforms have actually impacted the general population, with about 90% of respondents reporting that doctor fees are too high and 87.4% reporting that doctor fees are more expensive than they were about 4 years ago.  The Chinese leadership has begun to undertake the second phase of its health care reform by focusing its efforts on strengthening the national health care network, improving the essential drug system, and promoting the reform of public hospitals.

The difficulty that comes with providing quality health care centers on what is known as the “Iron Triangle”, a term referring to the basic tenets of health care comprising of accessibility, cost, and quality.  China has found it extremely challenging to find a balance between these three aspects of health care, specifically improving access and controlling the cost.

The problem of balancing accessibility, cost, and quality is especially acute in rural areas of China. Despite having increased health coverage in rural areas of China, rural provision of care is abhorrently poor especially compared to the care provision found in urban hospitals.  Rural hospitals face a shortage of competent doctors, and the means to financially incentivize these physicians to actually practice in rural areas.  In an attempt to address this issue earlier this year, the State Council has announced that it will raise the percentage of shares that foreigners may own in medical joint ventures and improve welfare for rural doctors.

There are very few indicators that this disparity between rural and urban medical centers will stabilize.  The fact that the central government recognizes this disparity and has committed to improving rural and lower tier hospital infrastructure and medical equipment leaves room for optimism. However, siimply injecting money into rural medical care will not address the complexity of the problem. Urban medical centers face a constant deluge of patients (one that is increasing at a rapid rate, especially if and when urban city begins to extend improved coverage to its migrant residents).  The patient flow of rural medical centers does not compare in quantity or quality to urban medical centers, making the government’s strategy extremely unlikely to succeed.  Aside from the patient flow of hospitals, the status disparity between doctors who works in rural medical centers in comparison to the urban medical centers won’t be fixed by simply investing money into these rural areas.  These issues make effective rural medical care extremely difficult and will be an issue that will take a very long time for the government to address; the increasing reliance away from public institutions to private hospitals offer foreign investors a chance to lead the market that is in much need for innovative ideas.

There is still much room for the Chinese health care system to improve, and it is very far from perfect. China will be challenged in deciding how to manage the ever-complex chain of various health care actors with multiple sets of relationship among policy makers, users, providers and insurers.  Despite all that is lacking with quality health care available in China, much of it due to the accepted corrupt practices of almost all health care actors, it is still a valuable market with plenty of opportunity for foreign investors.

The State Council has announced that it will give allowance for foreign investments in medical joint ventures and collaborations.  Hong Kong, Taiwan, and Macau investors can now set up wholly-owned medical centers, and the number of locations are increasing under new policies.  In areas like the Shanghai free trade zone, oversea investors are forming their own establishments; with big name groups as the Singapore-based Raffles Medical Group and US-based Chindex International beginning their own operations in China.  Companies do have to work with the strict anti-corruption campaign the government has undertaken, which often leads to debarment from government contracting and heavy damage to companies’ reputation.

Chindex, the Chinese arm of US-based United Healthcare, established itself as one of the top models for foreign companies in China. Aside from its high-end hospitals in China’s main cities, they are also involved in managing sourcing and equipment needs. Its Beijing-based company reported a 16.3% increase in revenue from healthcare services in 2013, proving that private companies can succeed in the harsh Chinese regulatory environment. Despite having made such impressive headways, Chindex announced earlier in February that Fosun Pharma and TPG had acquired it through a merger. Chindex offers a valuable lesson for any foreign investors; the Chinese health care market is brutal. The hospitals that were managed by Chindex were certainly well managed but could acquire only a Class 1 license. Thus, Chindex was limited to primary care medical practice. Aside from basic surgery procedures, Chindex was required by Chinese law to refer out surgery cases. The strain placed on Chindex’s expected payouts from international health insurers is certainly heavy due to such regulations.

Chinese health care outlook is very bright but uncertain.  Public hospitals are not operating in the most cost-effective manner, and are often underfunded and poorly managed. Foreign investment into the health care market will lead the way for most of the needed improvements in China. Foreign companies can bring in the necessary funding and, more importantly, expertise in many of the health care areas growing today (i.e. pharmaceuticals and biotechnology). A government that acknowledges the need for foreign investors further assists the already favorable market. This is reflected by recent a policy that opens up for higher percentage shares for foreigners to invest. Fundamental problems of affordability and access continue to plague China’s healthcare reform. Investors will need to increase their investments across the value chain, stepping up core capabilities while exploring creative ways of dealing with customer segments through the right partnerships. Investors who can navigate and tough out China’s harsh health care market will certainly find that the future is very bright indeed.

Wailim Ng, Asia Perspective

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