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China's Health Care Challenge

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Benjamin Shobert, founder of Rubicon Strategy Group, writes on health care FDI in China

Every year across China, over 10,000 doctors are assaulted either by a patient they are caring for, or a family member responsible for the health care of a loved one. These eruptions reflect a simple and unfortunate reality: as China modernized its economy, the country overlooked basic investments in public health care. As a result, China's public health care expenditure stands at 5.2 percent of 2012 GDP, well short of WHO standards. China's economic miracle has many positive impacts, but improvement in basic health care services leaves a lot to be desired.

In 2009, amid growing concerns over access and affordability of China's health care system, the central government announced a massive stimulus of RMB 1.13 trillion ($185 billion). Part of that stimulus was directed towards an expansion of the country's healthcare insurance. As a result, now over 95 percent of the country's population has some basic level of government-provided health care insurance. With the release of the Twelfth Five Year Plan, China made public its plans to spend an additional RMB 4.4 trillion ($720 billion) beyond what had already been allocated for the sector. China released two health care investment plans in 2009 and 2011 with different focuses: the 2009 plan expanded what procedures and pharmaceuticals would be covered by the national insurance plan, while the 2011 investment created new primary care and hospital capacity. If successful, the latter investment will fund 150,000 new primary care physicians, add 2,000 new county-level hospitals, create 29,000 new township hospitals and clinics and upgrade 5,000 existing township health facilities.

These are all important changes to the country's health care infrastructure, but given China's proclivity toward spending on infrastructure rather than on services, questions remain about how impactful this new funding will be at the ground level. This concern has driven government officials to set in motion a handful of carefully selected policies that, if successful, would draw domestic and foreign capital into the country's insufficient health care system.

One of the key policies is China's "20 percent by 2015" initiative. In early 2012, Chen Zhu, China's then minister of health, stated the government's goal to see 20 percent of all hospital beds across the country funded through private investment by 2015. Considering that as of 2012, only 8 percent of the country's hospital beds were privately funded, this is an ambitious goal. This policy is also fraught with political risk. The average Chinese expects the government to provide health care at no cost. Many Chinese families rationalize the damage to their environment and food supply because they believe that the eventual economic progress will result in social benefits, of which health care is the most basic and essential. Chinese health care consumers have long been wary of private health care, largely because of the negative experiences many had with small privately-run clinics that proliferated across the country in the '90s. In addition, while paying a doctor a "red envelope" has become commonplace, most Chinese anticipate private health care to only cost more.

The Chinese government understands these concerns, but has its own dilemma: even if it is successful in spending all of the 2009 and 2011 stimulus money wisely, the country's health care needs will outstrip the government's resources. This realization has driven China's policy makers to put forward two additional sets of policies designed to draw in private capital, which will complement the "20 percent by 2015" goal. The first policy was a late 2011 announcement that the country's Foreign Direct Investment (FDI) catalog would be modified in 2012 to allow for 100 percent foreign ownership of hospitals under the so-called Wholly Foreign Owned Entity (WFOE) structure. Previously, foreign capital was largely limited to joint ventures (JV) in China's hospital space.

The second follow-up policy to the "20 percent by 2015" objective was the Ministry of Health's (MOH) announcement that the government would make it possible for private investors -- both domestic and foreign -- to own a public hospital. The MOH had piloted this idea several years before with terrible results, largely because the privatization scheme was limited to poorly located and badly under-performing public hospitals that private capital did not want to own. This time round, the program has been expanded. Questions still remain surrounding residual issues private investors inherit after completing such a deal; however, these unknowns have not prevented both domestic and foreign capital from making initial investments. One of the first American pioneers to take advantage of the MOH's privatization transaction will be China Healthcare Corporation (CHC), which has already set in motion two deals using this approach.

The combined effect of the "20 percent by 2015," FDI catalog, and public-to-private transaction policies is a positive indicator that China's health care reforms will carve out space for FDI. However, health care investors remain cautious about how future FDI reforms could impact their ability to invest capital successfully in China. Leading their fears is the uncomfortable reality, made especially clear during this summer's anti-corruption drive against bribery in the pharmaceutical sector, that health care in China is entering an era where access and affordability are political matters. While this is always the case in any part of the world, it is a particularly sensitive issue in China. Investors -- especially foreign operators -- will need to understand the unique risks they face as providers of a scarce service in China. These investors will hence need unique reassurances by the Chinese government that their investments are safe and secure from future regressive FDI reforms. Comments like those of a Vice Minister from the National Health and Family Planning Commission (NHFPC), Sun Zhigang, who said the emphasis on private health care was over-stated and would be "largely encouraged only at the 'grassroots' level," send mixed messages to private capital.

The domestic and foreign capital that has flowed into the private hospital sector since 2012 has been disappointing. A recent study by CN Healthcare, one of China's leading health care think tanks, identified approximately $1.7 billion of investments into private hospitals over the last two years. This amount was well below what either the public or private sector was anticipating. To ensure FDI flows match the Chinese government's expectations, the country would do well to provide additional safeguards designed to protect private investment. Until 2012, China's health care sector was one of the last parts of the country's economy where foreign investment was prohibited. While the steps the Chinese government has taken thus far are symbolically important, they may also have been too little, too late. Additional incentives and protections will be required to draw more domestic and foreign capital into China's strained health care sector, and translate the "20 percent by 2015" pipeline dream into reality.

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Benjamin Shobert is the founder and Managing Director of Rubicon Strategy Group.

This article also appears in China Hands.