Shanghai greenlights foreign-owned hospitals

The change in the Guidance Catalogue reflected the Opinion on Intensifying the Reform of the Pharmaceutical and Health System (关于深化医药卫生体制改革的意见) from 2009 and 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 2010, to gradually allow investment in the form of a WFOE.

In April 2012, the Ministry of Health released the Interim 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) (the Measures) for public comments. This draft was a revision to measures issued in 2000.

The draft was interpreted as a hostile signal against foreign investors in healthcare as it required the total investment to be more than Rmb100 million ($16.5 million), up from Rmb20 million in the 2000 Interim Measures.

Despite clear signals in the Guidance Catalogue and the Measures, there was still no legal framework expressly allowing or governing foreign investment in medical institutions through WFOEs.

Hong Kong, Macau and Taiwan

Service providers from Hong Kong, Macau and Taiwan (HMT) are subject to special policies and have been able to invest in different forms of medical institutions since 2008. For example, Hong Kong and Macau service providers have been able to invest in outpatient clinics in the form of a WFOE since December 2008.

Later in 2010, HMT service providers were allowed to invest in hospitals in the form of a WFOE in Shanghai, Fujian, Guangdong, Hainan and Jiangsu. For Hong Kong and Macau, this was later extended to cover all of China in 2012.

“Strictly speaking, this is the first time in China foreign investors are permitted to invest in the form of a WFOE, but from 2008, China gradually opened the door to WFOEs to HMT investors,” said Huang Sheng, a lawyer with Jun He in Beijing.

Tentative Measures

Shanghai Municipality released the Tentative Measures for the Administration of Wholly Foreign-owned Medical Institutions in the China (Shanghai) Pilot Free Trade Zone (上海市中国（上海）自由贸易试验区外商独资医疗机构管理暂行办法) (FTZ Measures) on November 13.

The FTZ Measures are reassuring for foreign investors, as without a specific legal framework, they would have been in the same position as before, despite the FTZ allowing investment in the form of a WFOE.

“In terms of application methods, previously they had to be submitted separately to the Ministry of Health, MOFCOM and the local Administration for Industry and Commerce. Now the method provided as one application offers a more efficient way,” said David Dai of MWE China Law Offices in Shanghai.

“According to the Tentative Measures, the approval procedure in the FTZ is dramatically simplified to a one-stop application. After submitting all of the required application documents, it will take 40 working days to get an approval,” said Huang. In addition, the minimum investment required in the FTZ is Rmb20 million, which will come as a great relief to foreign investors.

Foreign investors still have to meet a certain minimum requirement as stipulated in the Interim Measures for JVs from 2000. Investors have to provide one of the following:

• Internationally advanced managerial experience in managing health institutions, modes of management and modes of services; or

• Internationally cutting-edge medical technologies and equipment; or

• Complement or make up for the inadequacy of local medical service capacity, medical treatment technologies, medical facilities, and for the insufficiency of funding to the local health industry.

“This is one of the challenges
that investors are finding because the criteria impose fairly strict restrictions. The fact that only qualified investors are allowed and must have the relevant direct or indirect experience is hindering progress,” said Rebecca Silli, a partner at Minter Ellison in Hong Kong. It is thought that the authorities are using the FTZ as a testing ground for wholly foreign-owned medical institutions.

“Given the concerns about the competition to the public medical institutions and other uncertainties, it is understandable that the Chinese government is using the liberalisation in the FTZ as a test case in a very limited region before such policy is to be rolled out nationwide,” said Qin.

Restrictions

Foreign investors were hoping for bigger amendments. The FTZ may be a stepping stone to greater reform in this space, but it is hard to say if and when this policy will be rolled out nationwide. Despite the positive move, foreign investors have to be cautious as there are still questions that remain unanswered.

“At this early stage of the opening up of this industry, few investors will consider that WFOEs are attractive, as this raises other challenges. For instance, once you have a WFOE, what access will there be to doctors, especially considering qualified and sought-after PRC doctors can find it hard to leave public health institutions” said Silli.

There is also the question of location, with many investors wondering if the Shanghai FTZ is the right place to open a medical institution. The cost of land within the Zone has rapidly increased, which minimises its attractiveness. Foreign investors also need to consider if patients would be willing to travel to the FTZ for treatment.

“This is a positive move, theoretically knowing that you can have a WFOE, but investors are still waiting for additional regulations and clearer government policies to be adopted, in order to be able to push projects to successful completion,” said Silli.