The Ironic Surge of Private Healthcare in Communist China

Private Chinese hospitals and healthcare companies are becoming promising investment opportunities, as their profitability and popularity continue to improve. In China, the growing middle and upper classes desire more patient-centered experiences in hospitals. At the same time, government initiatives are redistributing the burden of care on public hospitals. These complementary forces are driving the trend of privatization of medical hospitals and clinics in the country. Despite the paradoxical concept of private healthcare in a communist economy, the reformation of the Chinese medical system will allow private hospitals to attain the upper hand against public hospitals in the healthcare market.

 

According to China’s National Health and Family Planning Commission (NHFPC), the number of Chinese private hospitals has doubled since 2011. Data from 2017 showed that the compound annual growth rate (CAGR) of private hospitals has been 16 percent over the last seven years, while the CAGR of public hospitals has been flat. Business consulting firm Frost & Sullivan believes the revenue of private hospitals in China will triple to $90 billion by 2019 relative to 2016 levels.

 

The rise of private hospitals is rooted in the increasing wealth and living standards of the growing Chinese middle and upper classes. More than ever, patients’ demand for better hospital services exceeds supply. Affluent citizens flock towards top private hospitals and tier-three public hospitals—institutions that provide the best medical care and education and conduct the best research. However, as large tier-three public hospitals are already overcrowded, the government aims to relieve the strain, driving some patients to lower tiered hospitals and even more to private hospitals. Private hospitals in particular provide longer appointments and greater emphasis on preventative care. Laparoscopic surgeon Dr. Fang Zhang explains that since moving from the public Shanghai First People’s Hospital to the private Parkway Health Clinic, he discusses risks and symptoms in detail with his patients, helping them consider issues they may not have thought about previously.

 

Furthermore, the Chinese government is looking to develop the private sector because it will help support the rapidly growing aging population. 35 years of the one-child policy has resulted in an overwhelming number of age related diseases. The New England Journal of Medicine reported that there were already 92 million diabetic patients and 150 million pre-diabetic patients in the country in 2010, compared to 27 million in the U.S.

 

To accommodate the shift towards private health care facilities, public policy has fueled the construction of top-end specialty and general private facilities. Jiao Yahui, an official with the NHFPC said the country’s healthcare authorities have been relaxing certain policy controls. For example, the government now allows physicians to practice at multiple sites so they can work at private hospitals in addition to public ones. Because large public hospitals have more prestige in China, the new legislation makes it easier for private hospitals to recruit high quality physicians. According to the China Daily, the Chinese government also hopes that foreign investors will supplement the current health care system. In the 13th Five Year Plan, the Chinese government authorized foreign entities to own 100 percent of private hospitals, up from the previously required 30 percent Chinese ownership.

 

As the privatization of health care continues, developers in China are increasingly looking for expert training staff, help setting protocols and brand recognition. According to Bloomberg, the high demand for external support leads to high profitability in areas such as hospital management, medical distribution, drug R&D and private health insurance.

 

American businesses stand to gain from entering the Chinese healthcare market. The massive market has already attracted investment from insurance companies, entrepreneurs and public/private infrastructure developers, said McKinsey & Co Senior Partner Axel Bauer. ProMedica, a company running more than a dozen hospitals in the Midwest, is considering numerous deals in China on potentially running hospitals or providing consulting services to outpatient care and community health initiatives.

 

Hospital systems have especially promising prospects abroad in China. According to Melanie Evans of the Wall Street Journal, the domestic model is tough for hospital systems in the US, where populations may be stagnant or declining and cost pressures and competition are shifting medical care outside of hospitals. Compared to other U.S. sectors, the hospital industry has been slow to globalize. For many years, the strong domestic market kept most companies at home. However, now, as the U.S. government and consumers push to cut medical spending, hospital systems are seeking to diversify revenue with cross-border deals. China, given its current developmental state, is in the prime position to offer attractive margins to U.S. hosptials for their expertise.

 

Currently, Brigham Health and Massachusetts General Hospital are helping Chinese partners open new hospitals, while the Cleveland Clinic stated it would be consulting for a Chinese developer, claiming the project was in its very early stages. The Wall Street Journal explains that even though that overseas acquisitions by U.S. health corporations are still small compared to other sectors, they are undeniably on the rise.

 

Of course, the risk has been and still is high for U.S. companies to expand into a foreign country.

Benjamin Shobert of Forbes reports that those who have been working in China’s hospital space for the past several years have encountered difficulty in navigating the country’s maze of regulators and approval agencies. American companies will face unique challenges abroad, including how politically sensitive health care is in China. The Chinese government is moving slowly to prevent the destabilization of public hospitals from their reforms. No other industry of this nature has gone through a similar process of opening up to foreign direct investment. At the same time, the large amount of investment required to partake in the health care industry remains relatively constant. Yet, private-pay hospitals in China could be more profitable than ever before.