An ambitious new pilot scheme that allows foreign ownership of China’s hospitals is still a complicated procedure for overseas investors, writes Wang Jing
Acouple of months ago we witnessed a major breakthrough for healthcare services in China. In August, a pilot programme was announced which will allow foreign investors to establish wholly foreign-owned hospitals in seven cities and provinces. For the central government it’s a much needed boost towards its “20% by 2015” goal on private investment in hospitals. For foreign investors that wish to benefit from China’s booming healthcare sector, it’s also a welcome development. However, one should not underestimate the challenges facing China’s healthcare market.
This article provides an overview of the recent regulatory changes in the healthcare sector, and advice on the practical implications that multinational healthcare investors should bear in mind when considering activity in this sector.
Overview of foreign-invested institutions
It is fair to say that China’s healthcare market lags behind many other sectors in terms of the market-oriented reforms started more than 30 years ago.
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Noteworthy reform in the healthcare sector only started a few years ago, when the State Council decided to introduce private investment in the healthcare sector. Since then, there has been a private hospitals boom, at least in terms of numbers. According to the National Health and Family Planning Commission (NHFPC), there were 11,800 private hospitals in China as of July 2014 compared to just 3,200 in 2005, now accounting for almost 50% of the total number of hospitals in China.
However, as a sharp contrast, among the private hospitals, foreign-invested medical institutions are few and far between. Unlike many other sectors where well known multinational companies already have a strong presence in China, there are few foreign-invested hospitals that carry a household name in the country. However, all this may be set to change.
The pilot notice
The Ministry of Commerce (MOFOCM) and the NHFPC – the successor to the previous Ministry of Health (MOH) – jointly announced the Notice on the Implementation of Pilot Work for Establishment of Wholly Foreign-Owned Hospitals (Guo Wei Yi Han (2014) No. 244, or the pilot notice) on 27 August.
According to the pilot notice, the pilot programme will operate in Beijing, Tianjin, Shanghai, Jiangsu, Fujian, Guangdong and Hainan – each a pilot region – and will allow foreign investors to set up wholly foreign owned hospitals, by way of greenfield establishments or through the acquisition of existing hospitals.
The pilot notice says a foreign investor in wholly foreign owned hospitals in China must meet the following standards:
- It must be a legal person (excluding individual investors), capable of incurring civil liabilities;
- It must have direct or indirect experience in investment and management in the healthcare sector (excluding pure financial investors); and
- It must be able to: (1) provide internationally advanced management ideas, models and service patterns; (2) provide internationally advanced medical technology and equipment; and (3) reduce of counterbalance the inefficiencies in the location of investment in terms of medical service capability, medical technology, financing and medical facilities.
Wholly foreign-owned hospitals must meet national standards set by the state. Where there is a gap in the national standards, they will be required to abide by provisions set out in the Notice of the Ministry of Health on the Approval of Establishment of Specialty Hospitals (2011).
It is worth noting that foreign investors, except for those from Hong Kong, Macau and Taiwan (who are referred to in the notice as overseas investors), cannot set up hospitals featuring traditional Chinese medical services in the above pilot regions.
Gradual moves
The pilot notice is an exciting development for foreign investors in China’s healthcare service sector. It follows the updated version of the negative list of the Shanghai Free Trade Zone (FTZ) published in June 2014 – when wholly foreign owned hospitals were permitted – and the State Council’s Opinion on the Promotion of Health Service Industries (Guo Fa 2013 No. 40), published in late 2013.
However, this development is by no means an easy one that just happened overnight, but rather the result of long-term efforts of stakeholders, both domestic and foreign, to push open the doors. The central government’s regulation of foreign investment in hospitals can be traced back to 1989, when the then Ministry of Foreign Economic Trade (MFET), the predecessor of MOFCOM, and the MOH jointly promulgated a regulation for foreign (mainly overseas Chinese) invested hospitals, clinics and foreign physician practices in China.
The 1989 regulation introduced a trial programme for foreigners and overseas Chinese to establish joint venture, not-for-profit hospitals in China. In 1997, the MFET and MOH issued a Supplemental Regulation on Establishment of Foreign Invested Medical Institutions to regulate the approval requirements in this regard.
These policies expressly set out the requirements for Sino-foreign joint venture medical institutions and laid the foundation of the JV approach, which is set out in length in the Interim Measures on Management of Sino-Foreign Joint Venture and Co-operation Medical Institutions (the JV regulation), jointly promulgated by the MOH and MFET in 2000. Under the JV regulation, foreign interest in Chinese medical institutions is capped at 70%. Of the limited number of foreign-invested medical institutions in China, most are Sino-foreign joint ventures, including the famous United Family Hospital in Beijing, which is owned by recently privatised Chindex.
Prior to the pilot notice, only two overseas-owned hospitals – Hong Kong and Taiwan – had been established in China: Shanghai Landseed Hospital, wholly owned by a Taiwanese investor and established in 2012; and C-MER (Shenzhen) Dennis Lam Eye Hospital, wholly owned by a Hong Kong investor and established in 2013 pursuant to some regional arrangements (see the accompanying table).
At the national level, the central government accelerated the liberalisation of the healthcare market by gradually allowing foreign ownership of hospitals since 2009, in a region- and pilot-based manner.
In December 2011, MOFOCM and the National Development and Reform Commission (NDRC) updated the Foreign Investment Industrial Guidance Catalogue. For the first time, the shareholding restriction for foreign participation in hospitals – in other words the 70% ceiling – was removed. In November 2013, the Shanghai FTZ promulgated the Interim Measures on Wholly Foreign-Owned Medical Institutions, which stipulate the detailed measures on the establishment and management of wholly foreign-owned medical institutions in the Shanghai FTZ.
However, the FTZ interim measures were based on the Negative List 2013 version. Most recent updates on the healthcare sector in the 2014 Negative List, such as the removal of restrictions on foreign-invested hospitals in relation to the total investment and operation period, are yet to be reflected in these interim measures.
Regional arrangements
As mentioned above, Hong Kong, Macau and Taiwan are subject to preferential treatment in terms of ownership in medical institutions in China under the bilateral arrangements they have with mainland China. Since 2010, service providers from Hong Kong, Macau and Taiwan have been allowed to invest in and take 100% ownership in hospitals in Shanghai, Fujian, Guangdong, Hainan and Jiangsu.
For Hong Kong and Macau, the initial geographic restrictions have been eliminated. The accompanying table summarises key differences between the regional arrangements and the pilot notice.
Interestingly, the pilot notice seems more lenient towards investors from other parts of the world since it does not include certain requirements imposed on investors from Hong Kong, Macau and Taiwan. For example, under Hong Kong’s CEPA, the hospital must, as a minimum, meet the standards of a Class 2 hospital, a sub-category of general hospitals that must have between 100 and 499 beds. Furthermore, while Class 3 and Class 2 hospitals in China must have a total investment amount of RMB50 million (US$8.1 million) and RMB20 million, respectively, such requirements do not exist in the pilot notice.
Potential challenges
The pilot notice indicates the central government’s determination to achieve the goal of having private healthcare providers contribute 20% of the total beds and services in the healthcare system in China by 2015 (as set out in the Healthcare Reform Plan released in 2012).
However, the pilot notice has left certain questions unanswered, and it is possible that these might pose challenges for both regulators and investors in practice. The first and biggest challenge comes from the fact that the pilot notice authorises the provincial counterparts of the NHFPC and MOFCOM to pass detailed rules and guidelines for the establishment of wholly foreign owned hospitals. None of the pilot regions has so far passed its local version of the pilot notice.
In Beijing, the Beijing Municipal Commission of Health and Family Planning and the Beijing Traditional Chinese Medicine Administration jointly issued the Beijing License Administration Measures for Medical Institutions on 25 June 2014, which became effective on 1 September 2014. The Beijing measures came into effect after the promulgation of the pilot notice, but fail to reflect the development embodied in it, and only provide for establishment procedures for Sino-foreign medical institutions.
Shanghai faces an equally complex situation, and needs to not only update its local version of the Measures for the Administration of Medical Institutions to reflect the pilot notice, but also to deal with the FTZ interim measures. Fortunately, wholly foreign-owned hospitals in the FTZ are not allowed to establish branches outside of the FTZ. Before each pilot region adopts new local rules, or updates their existing rules pursuant to the pilot notice, it might be practically difficult to see more wholly foreign-owned hospitals in the pilot regions.
Even if the pilot regions update their local rules, there are bound to be inconsistencies in terms of requirements, procedures and timelines, which foreign investors will have to bear in mind when they prepare their feasibility study of establishing or acquiring a Chinese hospital.
The second challenge is that the pilot notice only applies to hospitals, and not other types of medical institutions under the regulations on medical institutions. Thus, the pilot notice does not cover primary clinics, which are an important component of general healthcare reform in China.
Third, from a practical standpoint, wholly foreign owned hospitals will still be subject to existing restrictions such as the lack of tax relief, availability of qualified doctors, funding by public and private healthcare insurance, etc. None of these was addressed in the pilot notice.
Before all these challenges have been resolved in a satisfactory manner, foreign investors may be more likely to co-operate with a reputable or well-connected Chinese partner and choose a Sino-foreign joint venture as their preferred structure for entering the healthcare market.
It has been reported that the first wholly foreign-owned hospital – other than by overseas investors from Hong Kong, Macau or Taiwan – the Artemed hospital, will be built in the Shanghai FTZ pursuant to an agreement between the German-based Artemed Group, Hong Kong-based Silver Mountain Capital, Shanghai Waigaoqiao Free Trade Zone 3U Development, and Shanghai Waigaoqiao Medical Centre.
One should not expect the pilot notice to address the entirety of the problems facing China’s healthcare sector, or foreign healthcare investors. On the contrary, we believe the main purpose of the pilot notice is to introduce the pilot programme, gather experience and comments, and lay the groundwork for a more comprehensive regulation for foreign investment in the healthcare sector in China.
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Wang Jing is a partner at Norton Rose Fulbright’s Beijing office
