Foreign investment in healthcare opens

Only a handful of foreign investors have ventured into the highly regulated yet promising healthcare sector so far. These include Chindex, a US company that opened Beijing United Family Hospital in 1997 and Singapore's Parkway Group, which operates eight medical and dental clinics in Shanghai and Chengdu.

Reforms to the legal regime would offer encouragement to foreign investors seeking to enter this sector. Already under public consultation are amendments to existing regulations on Sino-foreign joint ventures for establishing medical institutions. There are also supplements to the Closer Economic Partnership Agreement (CEPA) and relevant regulations, which expand the geographic scope for investors from Hong Kong and Macau to operate hospitals as wholly foreign-owned enterprises.

Regulatory climate

Medical institutions are established and operated under a legal framework based on a set of regulations issued in 1994. These include the Regulations for the Administration of Medical Institutions (医疗机构管理条例), Implementing Rules for the Regulations for the Administration of Medical Institutions (医疗机构管理条例实施细则) and Basic Standards for Medical Institutions (医疗机构基本标准).

This legislative framework ensures medical institutions are in line with policies promulgated by local authorities, which depends on population and available medical resources and needs. Local regulations may also govern the operations of medical institutions.

The Basic Standards group health institutions into ten general categories. These include hospitals, maternity hospitals, township and community healthcare centres, outpatient stations, clinics, disease prevention and cure centres, emergency or first-aid centres, clinical laboratories and nursing centres, plus relevant subcategories.

It also sets out the standards and requirements for health institutions in each category or subcategory on matters concerning the number of beds, medical staff and construction area. Health institutions in each category or subcategory are ranked according to different classes and grades. For example, general hospitals are categorised into three classes depending on the number of beds. Class three hospitals have the greatest number of beds and class one the lowest. There are also numerous subcategories for some classes.

In addition, there are specific rules on the operation and practice of health institutions like advertising, doctors' practices and drug administration, which affect the operation of medical institutions. For example, when recruiting Chinese qualified doctors, private institutions must update their licences with local health departments and when hiring foreign-registered practitioners temporary practice licences must be obtained from health departments at or above the municipal level.

Gradual opening

Until 2011, the Foreign Investment Industrial Guidance Catalogue (外商投资产业指导目录) placed medical institutions in the restricted category, with an additional limitation on Sino-foreign equity or cooperative joint ventures. However, since the updated version of the Catalogue became effective on January 30 2012, medical institutions now fall under the permitted category, and the previous limitation on Sino-foreign equity and cooperative joint ventures was removed.

Re-categorising medical institutions indicated a change in the government's attitude towards foreign investment in the sector. It was also foreshadowed in the Circular on Further Encouraging and Guiding Non-governmental funding for Medical Institutions (关于进一步鼓励和引导社会资本举办医疗机构的意见) issued in November 2010. Article 5 of the Circular indicated that foreign wholly-owned medical intuitions may be permitted in the near future on a pilot basis.

In addition, Hong Kong and Macau service providers are already subject to a preferential regime which allows them to establish and operate hospitals as wholly foreign-owned enterprises in designated citites under Supplement VIII to the CEPA.

A complicated process

Despite the change in policy and attitude, there is no legal framework at present expressly allowing or governing foreign investments in medical institutions through wholly foreign-owned enterprises. Until regulations from the Ministry of Commerce and the Ministry of Health allow medical institutions to be established as WFOEs, existing regulations, which only contemplate the possibility of Sino-foreign joint ventures, still apply.

The Measures for the Administration of Sino-foreign Equity and Cooperative Joint Venture Medical Institutions (中外合资、合作医疗机构管理办法) issued in 2000, provides the framework for foreign investment through joint ventures. However, following the publication of draft Measures for public consultation, it is expected new Measures will be promulgated in the near future. The key proposed changes to the Measures are summarised in figure 1.

The 2012 draft Measures also provide that the government will gradually open-up the establishment of hospitals to wholly foreign investment. However, it should be noted that the 2012 draft Measures also restrict the ability of Chinese non-profit institutions to enter into for-profit Sino-foreign joint ventures establishing medical institutions.

Hong Kong and Macau investors

Investors from Hong Kong and Macau can set up wholly foreign-invested hospitals in a number of designated cities under Supplement VIII of the CEPA and the Tentative Measures for the Administration of the Establishment of Wholly-owned Hospitals in the Mainland by Hong Kong and Macao Service Providers (香港和澳门服务提供者在内地设立独资医院管理暂行办法) promulgated on December 22 2010. The geographical scope of these investments was recently extended in March this year to include capital cities of all provinces as well as municipalities directly under the central government.

According to the Measures, the main requirements for establishing a hospital for Hong Kong and Macau service providers include: the hospital must be established by an independent legal person; investors must be experienced in managing hospitals or possess leading medical technology; and capital requirements must be met. For example, the total investment in a class three hospital must be no less than Rmb50,000,000 ($7,856,173) and for a class two hospital it must be no less than Rmb20,000,000 ($3,142,377).

Challenges facing investors

China's needs and evolving regulations provide opportunities for foreign investors, but several challenges lie ahead. Securing the necessary approvals, competing with domestic players and finding adequate human resources are all real challenges foreign investors need to overcome to be successful.

Although encouraged by the central government, the responsibility of developing and reforming China's healthcare system lies with local authorities. Even though Beijing promulgated healthcare development and reforms as part of the 12th five-year plan, plans at the local levels are also applicable and will vary throughout the country. Local policies are based upon assessments of existing healthcare services and particular needs in the relevant district. Foreign investors should carefully consider these local plans.

Approvals required for the setting-up of a medical institution are numerous, subject to a lengthy time frame and may be complicated to obtain. Apart from healthcare sector-specific approvals, investment projects can also be subject to land transfer and construction approval.

Public players largely dominate today's healthcare market, in particular class three major public hospitals. According to official statistics from the Ministry of Health, approximately 88% of hospital beds in 2010 were provided by public hospitals, leaving a mere 12% to private players. Of these private players, a vast majority are domestic investors. In terms of competition, foreign investors will be up against already well-established domestic counterparts with significant resources.

Staffing may also prove another issue for investors as qualified and sought-after PRC doctors can find it hard to leave public health institutions. However, health authorities at different levels are now implementing pilot projects in certain areas like Beijing and Shanghai, allowing doctors to practice in no more than three locations. Doctors must have consent from their initial health institution. However, the ability to recruit Chinese qualified doctors working in public institutions on a part-time basis will improve the operational constraints on the growing number of private institutions.

Public and private health insurance will also impact the future development of private medical institutions. The 12th five-year plan targets both insurance sectors and it states: “commercial medical insurance will be actively developed as supplementary to the medical insurance system”.

It is very difficult, for private medical institutions to register with public health insurance authorities. This registration is essential if patients are to receive public insurance benefits. Further developments in the private insurance sector may have a positive impact on private institutions.

While the recent evolution of regulations and policies provides greater opportunities for foreign investment in China's changing healthcare sector, investors need to be aware of and overcome the multiple challenges ahead.

Rebecca Silli, Liang Yaohai and Gallien Lefevre, Gide Loyrette Nouel, Hong Kong