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.

“Steal a little and they throw you in jail. Steal a lot and they make you king.”

Bob Dylan
Guanxi either retires or goes to jail.

Rich Brubaker
Just read an absolutely fantastic china/dvide post, written by Damjan DeNoble. The post is entitled, “Kro’s Nest, End of Days” and is it in on how a very well known Beijing expat, “Kro” of Kro’s Nest restaurant fame had his restaurant mini-empire “taken” from him by his Chinese “partner” (the words “taken” and “partner” are in quotes to show a lack of any real legal meaning). For some more background on Damjan’s relationship (in better times) with the Kro’s Nest, check out this post, “Getting All Personal About Doing Business In China.
I don’t know Kro and I don’t have a clue what went on with him and his Chinese “partner,” beyond what I have read in this article. But I (like just about every other lawyer who represents businesses) have a ton of experience with partnership disputes (broadly defined) and I am guessing that if I had gathered up the facts and written the article, it would have been very different. My article would have focused on one thing and one thing only –and it would have admittedly been way less interesting than Damjan’s article for having done so.
My article (like this post) would have focused on how what appears to have happened here has happened so many other times that lawyers do not even like talking about it. What happened here was a bunch of oral agreements by two people who never got around to legally formalizing their relationship. And then things changed (as they always do) and the partner with greater power took the business from the “partner” with less power. In this case, the Chinese national is ending up with the business because the business is on his “turf.”
Again, this sort of thing happens ALL THE TIME ALL OVER THE WORLD. Ask any lawyer who does business law about this sort of thing and then watch them roll their eyes. If they have been practicing a few years, they will almost certainly have their own emotional story to tell. If they have been practicing longer, they will probably just walk away. Too many stories to tell, none all that different. None all that surprising. And too commonplace even to get all emotional about.
Here is where we lawyers differ from the rest of the world.
We lawyers believe every single deal may end up going bad and we want to draft agreements/contracts to deal with that eventuality. Real people believe their friendship/common business interests will carry the day and that the goodwill that has started the business will be there next year and next decade.
I had a great talk the other day on this topic with a Michigan lawyer with whom I am working on a China matter. He told me of his having formed a domestic company in which the two owners insisted everything be done by consensus. The owners refused every lawyer entreaty to put anything in their agreements about how to resolve ownership disputes. The two owners spent millions on the business, and then, unbelievably quickly, they started disagreeing on virtually everything. The business stagnated and without any mechanisms in place for dealing with disagreements, they ended up selling out for pennies on the dollar.
I told this lawyer my recent story of a very prosperous U.S. company that had been formed maybe 15 years ago by an American and a Russian. It started small with no written agreements between them and then it grew really big and really international (Russia, Korea, China, Japan, Vietnam), but still with no written agreements between them. Then disputes arose between the two owners and then the Russian sued the American for millions of dollars and then the case took three years and then my firm won the case at trial and then the Russian appealed and we are now waiting for the appellate court’s decision. You can read more about that case here and you can listen to the appellate oral argument here.
Not that long ago, I had a guy in my conference room break down and cry because his business in China had been “taken” from him in a situation not all that different from that described in Damjan’s Kro’s Nest article. This person said that in addition to having lost nearly all his money, what really got to him was the realization that he had wasted the last five years of his life killing himself to build up a business he loved and now it was gone, right when it had “really started to take off.” I didn’t have the heart to tell him that these sorts of things always happen right when the business has just taken off. The sad reality (again, which we lawyers know all too well) is that people fight way more often over a valuable business than a failing one. With failing businesses, disputes among the owners often just lead to one or both of them walking away.
Anyway, I urge you to read Damjan’s post as a classic cautionary tale. And on behalf of lawyers everywhere, please do consider listening the next time you feel your lawyer is being too cautious.
For similar examples, check out the following:
Take A Time Out On Foreign Publishing In China
That’s China and It Ain’t Always Pretty
That’s China And It Still Ain’t Pretty, But Now It’s Better Explained
UPDATE: Just learned from the Adam Daniel Mezei blog that Beijing Boyce also did a nice piece on the Kro’s troubles and two excellent points:

While I have not talked to all of the players in this situation, I would make two general points. One, in a city where it seems like half of the foreigners I know want to open a bar, cafe, or restaurant, this is yet another case that shows the importance of getting your legal house in order from the start. Two, while this is a conflict between an expatriate and a Chinese, I have seen problems arise between Chinese partners and between expatriate ones. In other words, problems can arise regardless of nationality when money is involved. Both of these points sound obvious, but…

UPDATE: In a post entitled, “Kro’s Nest roundup,” the Heart of Beijing blog nicely summarizes the various articles/posts on this issue,