The below is a guest post 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.

 

How much is a policy in China worth before it is implemented?

That is the question at the heart of the recent pilot pilot project announcement allowing for seven wholly foreign owned (WFOE) hospitals in three cities (Beijing, Tianjin and Shanghai) and four provinces (Jiangsu, Fujian, Guangdong and Hainan). On their face, these projects are going to create hospitals entirely owned by foreign investors.

Beyond the formal language of the pilot, however, what kind of system infrastructure is in place to support WFOE hospital structures?

China has a long history of instilling misplaced optimism regarding foreign investment into its health care sector, going all the way back to 1989, when the first liberalization of physician rights to practice outside of public hospital settings were tested, and the first calls for joint venture and cooperative joint venture hospital projects were sent out. To make a long story short, the optimism has for the most part been largely unfounded.

At the end of 2011 there were less than 100 foreign invested hospitals in China and, of these, these hospitals, less than 3% (2 hospitals total) are classified as general hospitals, compared to 61% of Chinese-owned hospitals being classified as the same. Moreover, more than half of the hospitals had investments of less than USD 2 million, while those with investments of more than USD 10 million accounted for only around 10% of the total. See China healthcare joint venture and WFOE policies and regulations where we wrote about how in 2012 widespread optimism about an opening up to foreign healthcare investment had been quashed.

China currently allows foreign investors from Macao, Hong Kong and Taiwan to wholly own a China hospital but the results of that partial opening up have been inconsequential. Until recently the only foreign hospital WFOE was Landseed International Hospital, a Shanghai 100 bed facility set up by Taiwan’s Landseed International Group, about which its superintendent admitted had managed to “roughly” break even and that due to high investment costs and low returns, Landseed is still the only Taiwanese company to set up a fully owned hospital in China since 2011.

You may at this point be asking, why is a developed legal structure to develop WFOE hospitals is important given that despite the virtual lack of governing principles in the past, foreign investors were still able to set up close to 100 hospitals that didn’t close down within a short time of their establishment? Furthermore, even though these hospitals are only covering costs or being mildly profitable in the short term, isn’t China always being sold as a long term play by sophisticated China commentators?

Foreign joint venture companies generally face similar difficulties. Even Chindex, probably the best known and most respected foreign investor in Chinese hospitals, recently cited the following reasons for deciding to sell the company:

  • The risk of relying on Company forecasts given the Company’s track record on failure to achieve projections.
  • The uncertainty of the legal, regulatory and business environments for healthcare service companies in China.
  • The risk of not being able to obtain financing for expansion plans.
  • The company’s prospects in the absence of being able to move forward with its expansion plans.

The uncertain “legal, regulatory and business environments” to which Chindex referred likely include the fact that foreign invested hospitals typically operate in a tangled, undefined network of competing central level government organs and ministries and local and provincial government bodies.

With all the difficulties foreign hospitals face in China, foreign investors have been and will continue to be reluctant to invest sufficient funds to make foreign hospitals competitive in China, notwithstanding the recent announcement regarding WFOE ownership of China hospitals.

In part II we will discuss prudent strategies for Western companies looking to make a healthcare play in China, including the benefits of entering China’s healthcare market now, as opposed to waiting “until things get better” later.

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Photo of Dan Harris Dan Harris

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network.  His work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

He was named as one of only three Washington State Amazing Lawyers in International Law, is AV rated by Martindale-Hubbell Law Directory (its highest rating), is rated 10.0 by AVVO.com (also its highest rating), and is a recognized SuperLawyer.

Dan is a frequent writer and public speaker on doing business in Asia and constantly travels between the United States and Asia. He most commonly speaks on China law issues and is the lead writer of the award winning China Law Blog. Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed Dan regarding various aspects of his international law practice.

Dan is licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at his firm, Dan focuses on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.