Opinion: Are foreign hospitals really encouraged?

On June 11 2015, the General Office of the State Council issued the Several Policy Measures for Promoting the Accelerated Development of Privately-funded Hospitals (国务院办公厅关于促进社会办医加快发展若干政策措施) (Measures). The Measures are aimed at further loosening regulatory requirements in order to encourage the development of private investors in healthcare industries.

In fact, the National Health and Family Planning Commission (NHFPC) issued a similar circular titled the Several Opinions regarding the Enhancement of Development of Privately-funded Hospitals (Opinions) at the end of 2013.

Apparently, the new Measures aim to re-emphasize the central government's decisions to open this market to private investors.

The previous NHFPC's Opinions provide for important reform, such as opening the doors for setting up wholly foreign-owned hospitals in the Shanghai Free Trade Zone and seven specific municipalities/provinces. It would be interesting to know whether foreign investors can benefit from more favorable policies from the Measures.

WFOE hospitals: encouraged?

The new Measures do not provide a single word on the encouragement or development of wholly foreign-invested hospitals, despite the two circulars issued by the NHFPC last year. The absence of an explicit provision makes it unclear whether foreign investors are still encouraged to set up a wholly foreign-owned hospital.

A circular issued by Fujian province after the Measures only mentions the encouragement of Sino-foreign joint ventures and does not mention wholly foreign-owned enterprises (WFOEs), despite the fact that Fujian province has already been listed as one of the seven pilot provinces where wholly foreign hospitals can be set up. The newly-revised Foreign Investment Industrial Guidance Catalogue effective as of April 10 2015 still excludes the establishment of WFOE hospitals. This inconsistency between the foreign investment policies of the Ministry of Commerce and NHFPC makes the industry doubt whether policies actually encourage the development of wholly foreign-owned hospitals.

Transparency in health planning

The maximum number and location of hospitals are important factors to take into account when investing in hospitals in China. Local authorities may encourage a certain type of medical institution to be set up in its region and limit – or even prohibit – the establishment of other kinds of medical institutions considered unnecessary. This new policy without a doubt removes this barrier. The Measures provide that all local authorities must regularly publish the number of hospitals and layout, as well as bed and large-scale equipment requirements in their regions and take into consideration private hospitals during health planning. They cancel the requirements for maximum number and location of hospitals. The authorities will publish or modify their health and medical institution plans and make them available to the public.

All these rules are aimed at providing a more transparent legal environment in terms of urban health planning during investment. However, the absence of clear guidance on aspects such as frequency of change of plans, ad hoc planning approval, obligation to announce modified plans and availability of interrogation of up-to-date planning may make it difficult to operate in practice.

A positive development is that some local provinces, such as Fujian, have issued their respective local circulars to elaborate on the planning of medical zones to accommodate foreign-invested medical institutions. However, how these zones will be planned and organized remains obscure, as well as which companies and institutes are encouraged.

SOE hospitals: a target for foreign investors?

The Measures intend to separate medical institutions operating inside state owned enterprises (SOEs) and convert them into independent hospitals. Several SOEs have set up medical institutions dedicated to providing services to their own employees. Some of these were then further developed to provide medical services to the public around the location of the enterprise. This initiative to separate hospitals owned by SOEs is also driven by the broader SOE reform.

Whether the Measures will incite foreign investors to be actively involved in the reform of these medical institutions is unknown. On one hand, as SOEs can provide a piece of land or real property, this reform will help investors avoid a series of regulatory and planning issues in connection with the real estate. On the other hand, the complicated accounting and financial situations and internal operations of these institutions may make the restructuring risky or less attractive to foreign investors. The Measures do not provide any further detailed rules on how to facilitate this restructuring.

Tax benefits

The Measures provide for exemption of business tax for medical services offered by private hospitals, plus three years exemption of property tax and urban land use tax for the land and real estate used by the private hospitals.

In fact, PRC tax law has already provided for the exemption of business tax for medical services offered by hospitals, so this exemption is not innovative at all. Further, the fact that foreign hospitals may probably lease the premises to set up private hospitals instead of purchasing land use rights, the exemption of real property tax and urban land use tax does not seem innovative either.

Several local provinces are ready to provide some local financial incentives, such as subsidies, as supplementary financial benefits.

Discriminatory qualification for reimbursement

No regulation provides that private hospitals cannot be qualified as medical insurance reimbursement entities. The new Measures reemphasize that such discriminatory practices against hospitals will be barred. In fact, the real concern is not discrimination per se, but the lack of nationwide regulation on qualification requirements. As a result, local authorities make their own respective rules in their interests. For instance, some may provide that a certain type of medical institution may have priority to be qualified, while others provide for a time limit for the application (such as twice a year). A number of local authorities have taken into account the issuance of the Measures and have canceled their time limit requirement.

Managing risks and looking forward

In conclusion, it is promising that the State Council wishes to further enhance the development of the private hospital industry in China and encourage more private capital, including private funds and invested hospitals.

However, without more explicit rules at the national level, it remains difficult for local authorities to implement or come up with innovative measures.

The absence of clear guidelines, planning rules or procedures surely is risky for foreign investors, and they still need to be prudent in keeping abreast with the developments in this industry.


Nicolas Zhu, CMS, Shanghai