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.

 

Healthcare in the U.S. is expensive.

 

In both the political and economic landscapes, healthcare has been heavily featured in the public dialogue, often accompanied with high-flown words, from overtones of governmental incapability to excessive cost inefficiencies, fraud and abuse. For an individual not familiar with the healthcare industry and its intricacies, dipping his or her feet into the ocean can be daunting.

 

What does expensive healthcare mean? How is this gauged? Is higher healthcare spending a problem? What are the implications for the economy? Which steps have already been taken or considered? What are competitive strategies moving forward?

 

To answer these questions, a framework of the industry must be set with an identifiable problem to be solved.

 

The healthcare industry is comprised of various interested parties,

 

These parties include, but are not limited to, healthcare providers, hospitals, suppliers (pharmaceutical and medical device companies), and insurance companies. This framework fits within governmental regulations and provisions. How these key players and other interested parties interact and assign appropriate prices to goods, services and transaction costs contribute to the growing financial obligations that healthcare payers receive and the burden on the economy.

 

The major drivers of higher healthcare spending in the U.S. are prices of labor and goods, including pharmaceuticals and administrative costs. Highlighted in a recent publication in the Journal of the American Medical Association by Irene Papanicolas, Liana R. Woskie and Ashish K. Jha, higher healthcare spending was previously attributed to higher utilization rates. These rates, however, were found to be of the same magnitude as those of other high-income countries.

 

Higher healthcare spending in the U.S. has not translated into improved demographic characteristics.

 

While other comparable, high-income countries typically have their entire population with health insurance coverage (range, 99-100 percent), the U.S. falls short at 90 percent. Health outcomes are also not reflective of higher healthcare spending. The U.S. life expectancy is the lowest among high-income countries at 78.8 years, compared to a mean of 82.0 years. In addition, the JAMA article includes a cross-sectional comparison of high-income countries with regards to spending on health care per capita, health care provider salaries, administrative costs and pharmaceutical costs.

 

There are signs of inefficiency in U.S. healthcare. The administrative costs associated with planning, regulating and managing health systems and services account for 8 percent of the U.S. healthcare spending, compared to 1-3 percent in the other high-income countries. Pharmaceutical spending per capita was $1443 in the U.S. versus a range of $466 to $939 in other countries. Infant mortality rates were significantly higher at 5.8 deaths per 1,000 live births compared to the overall average of 3.9. Table 1.1 includes additional comparative statistics that serve as indicators of healthcare availability, affordability and quality.

 

Table 1.1 Comparative Statistics between the U.S. and other high-income countries.

Data as of 2015 or nearest year from the Organisation for Economic Co-operation and Development (OECD). High-income countries considered (10) include the United Kingdom, Canada, Germany, Australia, Japan, Sweden, France, the Netherlands, Switzerland, and Denmark.

 

Indicator U.S. High-income countries OECD average
Current expenditure on health, % of gross domestic product 17.2 10.74 9.0
Life expectancy, total population at birth 78.8 82.0 80.6
Infant Mortality rate, deaths per 1,000 live births 5.8 3.44 3.9
Out-of-pocket expenditure, per capita, US$ purchasing power parity 1054 796 686
Obese population, measured, % of total population 38.2 20.8 22.6

 

Inefficiency leads to profit opportunities. Amazon, Berkshire Hathaway, and JPMorgan Chase announced in January a partnership to cut healthcare costs and improve services for their employees. A deal of this magnitude serves as a shock to the healthcare industry and incentivizes innovation to remain competitive. Jeff Bezos, Amazon’s CEO, explained the rationale of undertaking such an initiative, commenting that while the healthcare system is complex, “hard as it may be, reducing healthcare’s burden on the economy while improving outcomes for employees and their families would be worth the effort.”

 

Vertical integration is a competitive strategy for health care reform.

 

Vertical integration will lead to competition that necessitates companies at all stages of the healthcare industry to seek competitive pricing through improved cost-efficiency. This competition has both micro and macroeconomics implications as unnecessary costs entailed in healthcare intermediation and administrative costs are driven out of the healthcare industry. Firms forced to offer more affordable and quality care will make budgetary decisions to do so.

 

In healthcare, there is historical precedence for integration in intermediary markets. In April 2012, the Federal Trade Commission (FTC) approved the merger of Express Scripts and Medco, the two largest Pharmacy Benefits Managers, or PBMs, at the time. Healthcare intermediaries can serve as an economic mechanism to counteract growing market power through aggregating demand and leveraging buying power to negotiate and obtain more favorable pricing for health plans, hospitals, physician practices, patients and employers. Despite these conventional efficiency benefits, however, intermediary consolidation can itself lead to competitive concerns, including exclusionary practices and anticompetitive agreements.

 

Unnecessary costs associated with intermediation need to be expunged. As institutions, intermediaries benefit the economy by providing opportunities that would not otherwise be available. Mechanisms can span from providing financial liquidity, more equitable information to navigating services. On the other hand, when intermediation can be offered in a more cost-efficient manner or is unnecessary altogether, the costs associated with these services translate into higher prices over time, and are a burden on the economy as a whole.

 

Vertical integration and portfolio diversification have implications for firms and the larger economy. Though formation of natural monopolies through declining average costs and diseconomies of scale may be of concern in the long run, healthcare firms that capitalize on both economies of scale and scope may lead to external economies including positive externalities that develop the industry and the whole economy. Not only are the individual firms rendered more profitable, but increased entry and resulting efficiency in the market will also alleviate cost burdens on the industry and the U.S. economy.

 

Major players in the healthcare industry have begun to diversify their portfolios, building off a history of long-term contracting and strategic alliances. The long-term contract between Anthem and Express Scripts, a large PBM, expires in 2019 and will not be renewed after Anthem’s accusations of overcharging by billions of dollars. Moving forward, Anthem has reached a five-year agreement with CVS Health Corp. and will set up its own pharmacy benefits management unit, IngenioRx. Wal-Mart, which has large pharmacy and retail clinic presence, has signaled intentions to acquire Humana, the fifth largest health insurance provider. CVS Health is further along with acquiring Aetna, the third largest health insurance provider, and is currently under antitrust review at the U.S. Department of Justice.

 

Higher healthcare spending is not necessarily harmful for an economy if warranted by improved health and patient outcomes. Health care spending in the U.S. significantly exceeds that of other high-income OECD countries. This, however, has not translated into improved health as highlighted by indicators of availability, affordability and quality of health care. Vertical integration is a competitive strategy for health care reform and reducing the proportion of the U.S. gross domestic product spent on health care, which is attributed to high administrative costs and the price of labor and goods.

John Lynch

The Supreme Court’s landmark decision on June 28th of this year solidified the constitutionality of possibly the most controversial pieces of legislation ever passed by the Obama administration. The Patient Protection and Affordable Care Act (PPACA), signed into law on March 23rd, 2010 (NCSL), can be described as a fundamental restructuring of the health insurance system in the United States, one that implements significant changes at the individual, state, and federal levels. But while the questions regarding the constitutionality of PPACA have been definitively resolved, disagreement has arisen over how the law should be implements, especially among groups that previously asserted that the law was wholly unconstitutional.

While the passage of the law means that the 17.1% of Americans that are uninsured must seek coverage or pay a penalty or a tax (Mendes), an even greater responsibility is assigned to the states themselves. By January 1, 2014, all 50 states are required to establish what PPACA describes as a “health insurance exchange,” a virtual marketplace where individuals can shop for different private coverage plans (approved by the federal government) from different companies (NCSL).  The federal government will create federally controlled exchanges in states that fail to meet this deadline. While these exchanges would make it easier for consumers to compare benefits and costs, establishing such a marketplace puts an additional financial burden on state governments already plagued by the financial woes of the continuing economic slump.

New Hampshire today faces the challenge of PPACA to create a health insurance exchange in under 2 years. But is it in the best interest of the state to go forward with the construction of its own exchange? This difficult question must take into account the unique demographics of New Hampshire, as well as a comprehensive cost-benefit analysis between the possible courses of action.

The Options

New Hampshire, as well as the other 49 states, can choose one of two possible courses of action in response to PPACA’s mandate to create a health insurance exchange:

–        Create and fund a state controlled exchange by the mandated deadline;

–        Do nothing until the deadline and allow the national government to step in and create a federally controlled exchange.

Here, it is important to realize that no matter the course of action taken, some form of a health insurance exchange will be established in New Hampshire under PPACA. The choice that must be made is whether that exchange will be controlled by the state or federal government.

Given that every state has a unique political, economic, and social climate, the best course of action will vary between states. Recent controversy in the New York Senate over health care exchanges demonstrates the link between political and ideological support for the bill: NY Senate Democrats ardently support the establishment of a statewide health insurance exchange, touting the possibilities of universal access and lower costs. Senate Republicans have taking the opposing view, pointing out the unnecessary and inefficient government intrusions in a large section of the private sector (Campbell). Elsewhere, the populous and liberal leaning state of California had already begun establishing a health care exchange even before the June Supreme Court ruling (Wood). In contrast, the sparsely populated and more conservative state of Alaska has opted to simply wait until the deadline and allow the federal government to establish its own exchange in this state (Rosen).

Thus, we must consider all major demographic factors in order to make a sound judgment as to which course of action New Hampshire should pursue.

Evaluating the New Hampshire Health Insurance Exchange

The benefits touted by the Obama administration in favor of health insurance exchanges are primarily economic. Such an exchange fosters competition and grants greater accessibility to health care for individuals, and presumably covers costs incurred by patients without insurance. In addition, plans sold on the health insurance exchanges are purchasable by all people, even those with pre-existing conditions. Ultimately, the promised result of establishing health insurance exchanges is that the price of coverage and indeed overall health care goes down.

In a time of economic uncertainty, such a financial incentive would be a boon to not only individuals, but businesses that provide health care to their employees. The less money that people have to spend on health care, the more their disposable income will grow, effectively creating a stimulant for the national economy. In addition, these exchanges would bring us closer to universal coverage of Americans, which would allow for a healthier society.

While the establishment of health care exchanges has these amazing benefits attached, one major question mark of creating an exchange of course is that these benefits are not guaranteed. It is extremely difficult to estimate the projected savings from establishing an exchange, given that few states have actually completed the creation of an exchange. Also, the magnitude of these savings depends on the statewide demand for health insurance, the number of insurance companies in the state, and what the national government deems as qualifying insurance plans. Equally difficult is assessing the cost of establishing these exchanges within the time frame allotted by the federal government and the cost of keeping these exchanges operational for the same reasons stated above.

Fortunately, we can look to the state of Massachusetts for an example of a relatively successful health insurance exchange and draw inferences about the possible benefits of establishing a state run exchange in New Hampshire. Created in 2006, the Massachusetts health insurance exchange succeeded in bringing the number of uninsured people down to a mere 2% of the 6.6 million residents, from 10% before the law was implemented (Romney). However, the cost of maintaining this exchange has rise to $32 billion in 2011 (Kliff), resulting in over $9,000 in health care spending per capita (compared to $6,800 nationwide) (Kaiser Health). New Hampshire has a population of only 1.3 million, with 10% uninsured as well, and 10% living in poverty (compared to poverty rates of 15% in Massachusetts and 21% nationwide).

Because a substantial portion of health insurance exchanges involve fixed administrative costs (State of Delaware), New Hampshire’s lower population may not translate to a proportionally lower cost than Massachusetts’s exchange expenses. In addition, Massachusetts’s program was aimed primarily at those with lower income, but New Hampshire’s lower poverty rate diminishes the impact of this provision.

Finally, with a budget deficit of close to $3 billion (Sunshine Review), New Hampshire can hardly afford to make wayward investments in an expensive program whose benefits are far from guaranteed.  It would appear that the cost of a New Hampshire health insurance exchange definitively outweighs the benefits, and that this option may not be the best course of action.

Letting the deadline pass

As of now, this is the option that the New Hampshire government has chosen to take. On June 18 of this year, Governor John Lynch signed HB 1297 into law (Kaiser Health), prohibiting a state sponsored a health insurance exchange, instead opting to allow the federal government to step in and create its own exchange. Politically this was the favorable choice: opposition from members of the executive council and the citizenry (a plurality of which oppose PPACA) made creation of a state run health insurance exchange politically unwise, if not altogether impossible.

Establishment of a federally controlled health insurance exchange carries much of the same benefits as a state controlled one. Individuals will still be able to shop and compare different plans from different insurance companies at competitive prices. Nobody will be excluded because of pre-existing conditions, and everyone will have access to health care.  The major benefit of course is that New Hampshire does not need to spend its own resources to create this exchange. Passing the PPACA deadline means that the national government assumes total responsibility.

No doubt Uncle Sam does not provide free lunch.  It is difficult to estimate the potential savings from deferring responsibility from the government.  Also, federal control comes with its own set of drawbacks and limitations. For example, the plans sold on the exchange would be determined by the federal government, which has few if any incentives to cater specifically to the health care needs of New Hampshire residents. This situation could result in a New Hampshire health care exchange that attracts few consumers, ultimately defeating the original purpose of these exchanges.

But taking into account the small size of New Hampshire and the fact that most residents are already covered, it is perhaps logical to let the federal government handle the establishment of an exchange and have the state government focus on other legislative issues.  The federal government intrusion will likely not sit well with the right-leaning populace, 49% of which opposed the original PPACA legislation in its entirety, while only 38% fully supported it (Smith). Nevertheless, given that New Hampshire’s health care market is smaller relatively to other states, intrusion from the federal government is less likely to have a dramatic impact than in a larger state such a California, which has over 10 times the number of health care providers and obviously a much larger population in need of health care (Kaiser Health).

Conclusion

Given the political, economic, and demographic situation of New Hampshire, Governor Lynch has made the expedient decision in deferring the responsibility of creating a health care exchange to the federal government. Although he initially supported creating a state run exchange, the political atmosphere in Manchester led him to the inevitable about face.  Although the precise dollar amounts are impossible to predict, economically, the costs for the state appear to outweigh the benefits.  Indeed, New Hampshire stands favorably to the national average both in terms of the percentage in poverty and uninsured. There is no pressing incentive for the state to establish a health insurance exchange compliant with PPACA deadline.   Only time will tell how the inevitable bureaucracy from Washington DC will affect the granite state in a federally run system.

Khoo Teck Puat Hospital, Singapore. Source: http://www.flickr.com/photos/jui-media/6701517533/

In America, the discussion over healthcare often bifurcates between advocates of government and market-based healthcare. Empirically, European-style government healthcare systems, as well as Medicare, are more equitable, cost-efficient, and sustainable than our own, presumably “free market” health insurers (Fox Health). However, America’s healthcare system is actually anything but free market. American government expends more than 56% of total healthcare costs through Medicare, Medicaid, the VA, and other programs (Selden and Sing). The American government healthcare system actually spends more per person than any other, and so in some sense is the most socialist (Council on Foreign Relations).  The nominally “private” health insurance industry, which lobbies vituperatively against government healthcare, is subsidized by $300 billion in tax deductions, three times larger than any other deduction (Tax Policy Center). The for-profit health insurance industry emerged in response to these deductions in the 1960’s; it was not produced by, and does not compete in, natural market conditions. Is there an actual, broadly market alternative?

Yes. While government always plays a role in healthcare, in Singapore, a tiny, wealthy city-state in Southeast Asia, Government purchases less than 40% of healthcare (WHO). The plurality of healthcare spending comes from private medical savings accounts rather than either government or subsidized insurance, indicating a primary healthcare market mechanism. This system is radically more cost-efficient even than European Social-Democratic Systems or Medicare, while also providing universal care. In Singapore, a minuscule 3.9% of GDP is spent on healthcare, about a third of the European average, and less than a quarter of America’s. Government healthcare spending is a little more than 1.5% of GDP (Ibid). If America could reproduce this cost-efficiency, the US government would spend less than $240 billion a year on healthcare, or around a fifth of its current spending. Still, in Singapore everyone is covered and life expectancy is seven years longer than in America.

How does Singapore’s market-model healthcare system work?

In addition to a system of government subsidized public hospitals and government cost-oversight, Singapore’s healthcare model rests on the “three M’s” – Medisave, Medishield, and Medifund. Medishield is universal national catastrophic government insurance. Medifund, funded solely by dividends from a government seed investment, provides care for the needy and destitute. Medisave is a mandated system of private Medical Savings Accounts that is a part of Singapore’s Central Provident Fund. The Central Provident Fund is a government-run mandated savings system in which Singaporeans set aside approximately one third of their yearly income (CPF Board).

“Medisave,” between 6.5% and 9% of a citizen’s income, is devoted solely to medical expenses. In Singapore, private households purchase most healthcare services out of pocket from these accounts, which is the key to the market system.

Without government welfare guarantees, households must save a large percentage of their income in anticipation of potential adversity. The Central Provident Fund, including Medisave, forces households to secure these savings. Interestingly, mandated savings is therefore not a market distortion, but a means to preserve pre-Government market conditions without abandoning Government welfare guarantees that are needed in a modern society.

The Medisave System then restores a normal supply-demand market that drags down costs, and is the Singapore market-model’s key component.

Although this may seem callous at first, in a private market, “supply” or cost of services cannot exceed the “demand,” or amount of money private customers are willing and able to spend on those services. Governments and Health Insurance Companies have exponentially more money than private households paying out of pocket. In a hand-to-hand market, doctors and hospitals can only charge private households so much before households run out of money. This places a natural limit on healthcare costs in a normal market. In Singapore, prices have dropped accordingly. Singapore’s healthcare services are so low that the city-state has become one of the world’s leading Medical Tourism destinations (Chanel News Asia).

Fortunately, Singapore’s government provides “patches” that also guarantee that no one slips through the cracks in the Medisave system, as noted through Medishield and Medifund. It also ensures price transparency by mandating its health vendors post their actual, pre-insurance, prices in order to receive licenses. Singapore’s government carefully monitors for fraud and abuse of the system, and then imposes draconian punishments for infractions.

What would America have to do to replicate Singapore’s market-model healthcare system? First, like Singapore, we would have to mandate national savings in a variation of a Government-run Central Provident Fund that includes mandated Medical Savings Accounts. Second, we would have to remove the government tax deductions that create and sustain the parastatal health insurance industry. Third, the government would have to systematically subsidize and monitor hospitals so they function more like Singapore’s inexpensive public hospitals. Fourth, American government insurance – Medicare, Medicaid, FEHB, and such – would have to be re-organized into versions of Singapore’s “Medishield” and “Medifund.”

America’s government healthcare is now primarily means-tested, either by age or income (US Department of Health and Human Services). American versions of “Medishield” and “Medifund” would provide everyone with coverage, but this coverage would only kick in once normal market mechanisms were exhausted. This would re-capture a normal supply-demand market while ensuring no one “slipped through the cracks.”

An American market-model healthcare system like Singapore’s may seem Utopian at the moment, but this Utopianism stems from Political Opposition from inefficient rent-seekers rather than the infeasibility of the project itself. Our current system’s cost-trajectory is Utopian; it is unsustainable unless we fix it. American businesses should seriously consider advocating for a Singapore-style market-system, which would radically reduce their costs and improve their ease of doing business. Those interested in an effective market-model healthcare system should stop defending our broken, government-created system, and start carefully examining what actually works