Investors still looking for place in medical sector

Despite lower barriers, private parties struggle against public hospitals

Experts and investors gathered over the weekend at the CEIBS 10th Annual China Health Care Forum 2014, an industry event held to discuss the latest breakthroughs in China's healthcare reforms.

Much of the attention was focused on a circular entitled "Opinions on Promoting the Development of the Healthcare Services Industry." Released by the State Council in September 2013, this latest set of healthcare policy guidelines featured predictions that the industry will be worth more than 8 trillion yuan ($1.28 trillion) by 2020. In this document, the central government also vowed to fully mobilize the "enthusiasm and creativity of social forces" and to facilitate the market's fundamental role in resource allocation under government guidance. Investors in particular were also thrilled by the circular's unambiguous expression of support for diversified hospital ownership and the relaxation of barriers against non-governmental investment.

The past several years have seen a huge groundswell of interest in healthcare services among private enterprises, foreign investors and even some financial institutions. In November 2013, for instance, Liu Yonghao and Feng Lun, the respective chairmen of agribusiness conglomerate New Hope Group and real estate company Vantone, formed a strategic alliance with several healthcare service operators in Putian, Fujian Province, to manage about 1,000 private hospitals nationwide. In April, Chinese drug maker Shanghai Fosun Pharmaceutical Group and private equity firm TPG Capital bought a majority stake in Chindex International, a China-focused hospital chain, for $461 million.

The stakes are clearly high. Given economic conditions and the burdens that come with a rapidly aging society, there is huge potential in China's healthcare services industry. Per capita GDP in China reached about $6,000 in 2012, qualifying the country as a middle-income nation, according to the World Bank's classification system. Continued economic development will surely translate into a growing demand for high quality healthcare services among the country's burgeoning middle class. In the meantime, China's rapidly growing population of senior citizens also bodes well for the industry. The official data show that more than 130 million people over the age of 65 were living in the country as of last year, accounting for some 9.7 percent of China's entire population.

It is against such a backdrop that the central government has been encouraging social investment in medical facilities and institutions. As a result, the number of private hospitals has increased from zero in 1985 to more than 9,700 in 2013, accounting for nearly 45 percent of all hospitals in the country.

Yet, private hospitals still lag far behind their public peers in terms of recognition. Data from India-based Asclepius Consulting show that China's public hospitals have a combined 3.6 million beds, with utilization typically around 90 percent at any given time. At several of the country's most prestigious institutions, this figure rarely falls much below 100 percent. But China's private hospitals boast only 600,000 beds in total though, with utilization hovering at around 50 to 60 percent even among the best 100 of these institutions.

Some attribute the early difficulties to factors such as talent shortages in the private healthcare sector and incomplete social insurance coverage, but these problems should gradually get resolved over the coming years as more players take the field. What really matters for private medical institutions will be finding strategies that both maximize their strengths and satisfy market demand. In other words, these institutions should not focus on providing the same broad range of comprehensive services that their public peers already deliver so successfully.

Moreover, improvements also need to be made by relevant authorities. Although the government has lowered the investment threshold for the healthcare sector, regulatory complications persist. Private operators are still subject to a hodgepodge of regional health plans which dictate the allocation of medical care resources for localities around the country. At the same time though, private investors are now being actively encouraged by local authorities to set up hospitals in rural areas where medical facilities are generally underdeveloped and the potential for profit is limited. The implication here is that local governments may be using private capital as a crutch to fulfill their own obligations. My advice for authorities at this point would be to focus on improving public healthcare services in underserved areas and leave private investors more space to fulfill actual market demand.