By: Damjan DeNoble

Dr. Adam Powell and Dr. Youfa Wang, two of several presenters at this past weekend’s US-China Intercollegiate Healthcare Conference held on Wharton’s campus, exhibited a shared awe of the rapid changes taking place in China’s healthcare profile. Among the many themes and viewpoints presented at the conference, the sense of awe emerged as the common meeting point for all attendees.

“Just look at what China has been able to do,” Dr. Powell gushed while pointing at a chart depicting the staggering rise of insurance coverage in China from 2000 to 2012. The rate of China insurance coverage has reached 95%, according to the latest numbers put forth in this months March 2nd issue of medical journal the Lancet [link no longer exits]. “In ten years [Chinese health planners] have managed to cover a billion people.”

“Every time I visit China, I’m very surprised by the many changes,” Dr. Wang, a Johns Hopkins Medical School Professor and probably the leading expert on nutrition in China, said as he pointed at his own PowerPoint slide earlier in the day, a map depicting all of China’s KFC restaurant locations. The image made the audience of ninety students and health professionals chuckle and wiggle uncomfortably in their seats.

Yet for all the agreement on the pace of change in China, Dr. Shujun Li, the recently retired head of Beijing United Family Hospital’s surgery unit was still greeted with a roomful of approving nods when he pointed out that “the term ‘market’ does not fit to today’s situation” in the sphere of Chinese hospitals and clinics. Similarly, there was a rustling of pencil on paper and a clattering of laptop keys when keystone speaker Sheldon Dorenfest, CEO of the Dorenfest China Healthcare Group, said that in China’s broader healthcare sphere the market is not the private market. Rather, “the market is the public market.”

For some, one or both statements may seem confusing. Beijing United is one of China’s two largest, private for-profit hospital chains and it is foreign owned. Yet here we have one of its medical officers saying that despite all of this, a healthcare market in China is an illusion. The Health Statistics Yearbook 2011,put out by the Chinese Ministry of Health shows that there were 13,850 public hospitals in China in 2010, compared to 7,068 non-public hospitals, hardly numbers suggesting a non-existent private market.

Two key insights make sense of Dr. Li’s statement.

First, for the majority of Chinese, healthcare is only accessible with the aid of public insurance, so there is no private market to which they can turn for alternative, non-profit services. Moreover, the health institutions they can reasonably access are all regulated by the same price control mechanisms so almost all fees will be identical. Because they cannot choose between healthcare providers on the basis of any meaningful entities, they are not really a market consumer and for them there is no market.  There is a strong argument to be made that a market exists when underground practices like red envelope payments are considered but that’s an article for another day.

Second, for those Chinese who can afford to look towards private healthcare providers they don’t really have 7,068 non-public hospitals and clinics from which to choose.  The majority of these non-public healthcare “hospitals” are mom and pop healthcare businesses, like elective procedure providers and check-up centers, and dental offices, that offer little or no clinical services.  For example, Beijing United is successful because no other non-public hospital in Beijing offers what it does: a full range of clinical and preventative services. So,  even in the realm of non-public, i.e. ‘private’ hospitals and clinics, consumers really have no choice and therefore, in a sense, there is no market.

And the insights that explain Dr. Li’s statements are critical for understanding Mr. Dorenfest’s point on the existence of a public market only. The dominance of public entities in the healthcare market who admit patients, dispense drugs and purchase medical equipment, and the small size of the private healthcare market – and, again, the private healthcare market gets very small if you don’t count the mom and pop enterprises with little or no buying power – means that entrepreneurs have to work with public entities or risk failure by betting on a very short list of private market clients.

As a side note, I am not seriously positing that there is an absence of a healthcare market in China, per se. “The public market is the market,” to be sure, is not equivalent to “there is no market.” There are many things that can be done to operate profitably in a public market, and a public market is a form of market. A combination of pharma sales and hong bao are presently being used to circumvent price controls. Also, even though pricing may be fixed, hospitals may compete with each other to some extent for volume or case-mix (some procedures may be more desirable to perform than others). Further expounding on this point, if Beijing United is really the only hospital in its class as it claims, that does not mean there is no private market in Beijing – it means that Beijing United has a monopoly (a market with one dominant player). Beijing United likely monopolizes a small high-end niche market. Other Beijingers must make the choice between going to a myriad of specialty hospitals, TCM hospitals, village and county clinics, etc. Demand at these various places is determined by the choices of the Beijingers – a market exists.

Getting back to the point, however, the big lesson, which brings together both the points on dynamic change and public market dominance, is that investment in China’s healthcare market is a task which should not be taken lightly. Not only does the gravity of issues implicate — as conference presenter Michael Zakkour principal of Technomic Asia put it — “the future of China.” The complexity of the situation also demands of potential entrepreneurs in the area a sophisticated plan of action and not a ‘shortcut’ strategy which looks to cut out the complicated labyrinth of public institutions and ministries controlling the healthcare space.  Mr. Dorenfest summed it all up with the last few words in his closing address, “Even though I was a very seasoned entrepreneur in the West, I was in preschool in doing business in China and had to learn more to be successful…[I]f I bought hospitals in China with what I knew about doing business in China I would be making bad investments be pouring money down the drain.”

What is looking to be a top-flight China healthcare conference is going to be held on Saturday, March 24, at The University of Pennsylvania’s Wharton School, in Philadelphia. The conference is the 2012 Intercollegiate US-China Healthcare Conference,  an all day event offering a panel of expert speakers and panelists and opportunities for discussion and networking. The theme will be “Transforming the Face of Chinese Healthcare.”

I am writing about this conference because I know two of the panelists very well.  Michael Zakkour of Technomic Asia will be on the Health Policy and Investment Panel. I have worked on a number of matters with Michael and I can vouch for his knowledge of China’s health care industry. Damjan DeNoble will be on the same panel with Michael and he will also moderate the Senior Care Delivery Panel. Damjan is one of the driving forces behind the Asia Health Care Blog, where he describes himself as follows:

Damjan co-founded Asia Healthcare Blog with James Flanagan, in 2009. He is currently a JD/MA dual-degree candidate, in Law and Chinese Studies, at The University of Michigan Law School. Last summer he clerked at the offices of Harris Bricken, a boutique international law firm widely admired for its China Law Blog.  He graduated from Duke University in 2007, with a B.A. in Public Policy, concentration in health policy.

If you have an interest in China healthcare, this would seem to be the conference to attend.  If you go, please report back on how it went.

As regular readers of this blog know, my favorite five industries for foreign investment in China are education, healthcare, food, cleantech/greentech, and software. Healthcare just got even better.

The Chinese government has made clear for some time that it seeks to improve healthcare in China and it recently took another step in that direction by announcing that foreign companies may now own private hospitals in China outright. In other words, foreign companies need no longer partner via joint ventures in their ownership of healthcare facilities in China; they can now own them on their own as Wholly Foreign Owned Entities (WFOEs or WOFEs).

These foreign-owned private hospitals will be able to formulate their own pricing for services (so long as they do so pursuant to the government’s medical pricing policies), be eligible to participate in China’s medical insurance system and also be eligible for the same tax exemptions as Chinese private hospitals during the first three years of their operations.

A couple years ago, I was on a panel at Northwestern’s Kellogg School of Business that was asked what we saw as the best opportunities for foreign businesses involved with China. We all agreed on the following five, in no particular order:

  1. Healthcare 
  2. Education
  3. Cleantech/Greentech
  4. Food
  5. Software/High Tech

Nothing shocking or earth shattering, obviously, but as time has gone on I have become even more convinced these are the top five. Last month I gave out this same top five list while interviewed on public radio and my interviewer expressed a bit of surprise at education.   

Whereas three years ago, the above five “industries” clearly made up less than fifty percent of my law firm’s China-related work, I now estimate that these five now make up well over 75 percent and it is in those five where I continue to see the most growth.

But I’m not the only one.  

Financial Times’ Beyond Brics Blog just did a post, entitled, “Chinese health care: big opportunities,” on a recent McKinsey & Company article, entitled, “Identifying private-sector opportunities in Chinese health care.” Quoting from the McKinsey article, the post notes how Beijing’s plans to “stimulate China’s health care market and create opportunities for private payers, providers, and IT vendors,” will make health care growth in China exceed China GDP growth:

If China’s health care spending simply keeps pace with projected GDP growth, it will increase to $480 billion by 2018. We, however, believe that it is likely to rise faster than GDP, as a result of better insurance coverage, improved access to high-quality care, and rising demand (tied to aging, urbanization, and lifestyle shifts). If health care spending hits 6.5 percent of GDP by 2018, the market could increase by an additional $150 billion.

McKinsey goes on to note that “private insurance could become cheaper and more accessible” in China, creating a $90 billion market by 2020 and that “regulatory reforms are making it easier for private hospitals to provide publicly-funded care.” McKinsey sees better health care requiring better IT as well. China is “set to overtake Germany to become the world’s third-biggest pharmaceutical market – with growth of 25-27 per cent next year, compared to an emerging market average of 15-17 per cent.” 

The New York Times did a story today on the booming foreign education business for Chinese students, entitled, the China Boom.  The story talks of how the number of Chinese undergraduate students coming to the United States to study has tripled in just the past few years. This increase in Chinese students attending college in the United States has led to a concomitant increase in the need for schools and tutoring both in China and in the United States to help these students prepare for their United States college experience.  

I have always seen education and health care as being somewhat similar as they both become very important to people once they get past day-to-day survival mode. And as millions and millions of new Chinese hit the ranks of the middle class, I continue to see both growing faster than China’s GDP as a whole and I continue to see a whole host of opportunities for foreign companies.  

What do you think?

On Wednesday, September 8, 2010, The China Business Network will be putting on a China Event at the Cira Center in Philadelphia, entitled, “Put China in Your Business Future.” It is shaping up as a great event, and I urge you all to attend. I am going to be on one of the panels so if you are interested in going and wish a discount, please email me.

The day is going to begin with CEO panels on China Health/Biotech and China Clean Tech/Green Tech.

The CEO Health panel will consist of the following:

  • Martyn Greenacre, Chairman, BMP Sunstone
  • Dr. Mike Butler, CEO, Xceleron
  • Dr. Ian Hau, CEO, Orchestrall

Dr. Jun Huangpu, of the Mainline Chinese Culture Center, will be moderating.

The CEO Clean Tech and Green Tech CEO Panel will consist of the following:

This session will be moderated by Terry Cooke, CEO, GC3 Strategy

I am on the next panel, which is going to focus on China Capital and Operations, and consist of the following:

  • Mark Ellenbogen, Assurance Partner, BDO Seidman
  • Wil Block, Relationship Manager, HSBC
  • Dan Harris, Founder, Harris Bricken LLP


This panel will be moderated by Janet Carmosky, CEO, The China Business Network

In the afternoon, Janet Carmosky speaking on “Get the Mindset & Map for China Market Access” and on “The Lay of the Land: A Framework for Seeing and Dealing with China.” It will also include a “Market Access Case Study” focusing on “How Judge Group Got Started in China. This session will be with Martin E. Judge Jr., CEO, The Judge Group and Alex Van Gorden, General Manager, Orchestrall.

It will then wrap up with a Q & A session, scheduled to run from 4:30 to 5:00.  This event is being sponsored by Continental Airlines, HSBC, BDO Seidman, Orchestrall, and White & Williams LLP.

Hope to see you all there. To register, go here.