The below is part II of guest posting by Ben Shobert and Damjan DeNoble, partners at Rubicon Strategy Group, LLC, a strategy advisory firm for healthcare companies going into China and Southeast Asia and the co-authors of HealthIntelAsia.com, a website dedicated to Asia and China healthcare business strategy. Ben also has a regular column on Forbes, where he writes about life science issues in Southeast Asia.
Our last post introduced how regulations around foreign investment in China’s hospitals are changing, with the most recent announcement of seven WFOE pilots as evidence of these changes. Experienced China watchers easily recognize what is happening: China has acknowledged that it has a problem which only foreign expertise and capital can fix.
Consequently, it is reforming its Foreign Direct Investment (FDI) Catalog, and associated sector-specific regulations, to accommodate more foreign involvement. This process is hardly unique to hospitals. Every other previously closed sector of the Chinese economy that is now open to FDI has gone through a similar process. Though it helps to be able to compare today’s opening of the hospital sector to efforts in other industries that have opened to foreigners, doing so is misguided in some important ways that impact go-to-market strategies for western hospital operators and investors.
First, while in form WFOEs are now possible for China’s hospital sector, it remains unclear whether as a foreigner you should really try to go it alone. If, as a western hospital provider, you want to take the WFOE path, you need to be very sure you can get the land you need, located in proximity to where your market exists, and that the requisite medical institution licenses you will need are obtainable without a Chinese partner. One need look no further than German hospital operator Artemed, and their July 2014 announcement about their work in the seemingly progressive Shanghai Waigaoqiao Free Trade Zone, to see that even here a foreign operator found they needed a domestic Chinese partner. Simply because a WFOE status within a particular sector has been given the green light by China’s central government doesn’t mean as a foreigner you still aren’t going to need a domestic Chinese JV partner.
Second, be very clear eyed about where profit resides in China’s healthcare economy. In late 2013, we worked with CN Healthcare on a study of how much capital had been invested into China’s private hospital sector and why. The answer was telling: of the roughly $1.7 billion in capital that had been invested in China’s hospitals, almost all of it came from domestic Chinese players, and almost all was driven by pharmaceutical companies and distributors who viewed purchasing a Chinese hospital as a way to protect their profit margins in the wake of growing price pressures on pharmaceuticals sold via the hospital. For those reading this unfamiliar with China’s hospitals, keep in mind that historically one of the most important sources of revenue for Chinese hospitals has been the sale of pharmaceuticals. As China has developed more sophisticated reimbursement strategies such as those embodied in the Essential Drug List (EDL), hospitals have struggled to replace lost revenue from lower prices on pharmaceuticals with pricing models that emphasize services. This is hardly news; McKinsey China’s 2012 analysis of the Chinese healthcare consumer emphasized the challenges facing private healthcare operators given the resistance by Chinese consumers to pay for healthcare services. In other words, don’t assume the value of your services is going to be immediately clear to the Chinese consumer. In fact, the Chinese consumer is wary about private healthcare in general, and private hospitals in particular.
Third, be extremely cautious about the public-to-private option with Chinese hospitals. Running in tandem with the gradual relaxation on foreign ownership of Chinese hospitals has been a set of policies from the Ministry of Health (MOH) that allows for formerly public hospitals to be privatized. In theory, foreigners now have at least three go-to-market options: greenfield (build an entirely new WFOE hospital from the ground up), public brownfield (buy and privatize a formerly public hospital), and private brownfield (buy a formerly Chinese privately run hospital and transfer ownership). Let’s just say that if you are looking at a hospital in China that is for sale – whether public or private – it’s safe to assume there is a really good reason the hospital is for sale in the first place. You need to quickly get to the bottom of why the hospital is for sale, as well as the rights you have as a foreigner purchasing these assets (hint: hospital ownership and management laws are about as developed as company law was in China in 1985, which is to say, not very).
Fourth, have a bias towards a healthcare delivery model that is extremely easy to articulate to the Chinese consumer. What do I mean by that? Too many westerners bring ideas about what they want to do in China based on how healthcare is consumed and paid for in the west. China’s healthcare needs are so overwhelming, and the potential market is so large, that it can be easy to assume whatever capacity you build out will be successful. If we look at the revenue growth and profitability of three publicly held healthcare operators in China – iKang, Concord Medical, and Chindex – we can see very different revenue and profitability trajectories. Specifically, iKang and Concord are growing at very high growth rates (iKang’s 2011 revenue was 68.23 million USD, by last year they had achieved $202.3 million USD in revenue; Concord’s 2011 revenue was $372.05 million USD, by last year Concord had grown to $980.63 million USD). Chindex’s revenue growth and profitability has been sufficiently uneven that, as we pointed out yesterday, they are being taken private later this month. There are a couple of ways to interpret this, but one important narrative is that iKang and Concord have a very specific set of treatments and interventions they market to the Chinese middle class consumer versus Chindex’s United Family Hospitals that are more general and perceived by the consumer to be less specialized in the care they offer.
The last component that should reinforce anyone looking to make an investment in China’s hospitals is an awareness that healthcare in China is a political hot potato. While today FDI policies in the hospital sector are perceived as “friendly” to foreign capital and expertise, we need look no further back than last summer at the GSK scandal to recognize that China’s government faces a fundamental challenge to its legitimacy as a consequence to decades of under-investment in the country’s healthcare system, and that it will use tactics of public trial and blame to distract Chinese families from problems that are entirely of the government’s own making. Yes, be positive about what China is doing in the hospital sector but also never lose sight that foreign involvement in this part of the country faces some of the most unique political pressures of any sector that has opened to foreign investment in the last decade.