On August 12, 2018, Mr. John Zhao, CEO of China US Health Alliance, delivered a speech on the challenges faced by international private hospitals and clinics in China, during the 4th Annual Conference of the Society of Chinese American Physician Entrepreneurs.

In the past ten years, about two dozen US based hospital operators and medical centers have been involved in projects to create “international” hospitals or medical centers in China. More are planning, negotiating with partners, or looking for opportunities to get a piece of that fastest growing healthcare market in the world. Yet, they have encountered various challenges and pitfalls, and wasted much capital and time on opportunities that seemed like low hanging fruits to pick.

Mr. Zhao listed 6 challenges international players need to keep in mind in China.

1. Competition from large local public medical centers

Health service in China is dominated by large public hospitals. Major cities have 10 to 20 hospitals that have over 1500 beds. The largest hospital in the country has over 7000 beds on one campus. Most of them have more than 50 years of history and some can trace their roots to Christian medical missions back in the 1800’s.  These large urban public medical centers have the highest –level of medical care and offer services in better settings for higher-paying patients than their usual facilities for regular patients covered by government insurance programs.

These large public medical centers will be the direct competition to international hospitals, and they enjoy a lot of advantages.

2. Cost Structure

International medical centers have to acquire land at market rate, which can be exorbitant in and around major cities, in locations that are far inferior to existing public hospitals, which often are in prime locations. For construction and equipment, it is about a quarter million US dollars per bed. For public hospitals, all major capital expenditures are funded by government appropriation. In addition, public hospitals don’t pay any taxes, while international hospitals pay VAT and income taxes. From the onset, international private hospitals are put at a great disadvantage at the cost basis.

3. Staffing Issue

Well trained and experienced professional staffs are all employees of public hospitals, where they also get trained and conduct research projects. They enjoy decent income and job security with often lifetime employment, and are on a clear path of professional growth. Private hospitals have to pay significantly higher salaries to lure them away, if ever.

4. Reputation Deficit

Private hospitals emerged about 20 years ago in China and most of them were controlled by a group of uneducated peasants from a few towns in Fujian province. They started by illegally giving antibiotics to patients with venereal diseases who were too embarrassed to go to public hospitals. They scared the patients out of their money and grew from underground clinics to storefront “hospitals”. That’s the image and reputation of “private hospitals” in China.

Due to lax regulation and enforcement, those shady “private hospitals” were in business for a long time, until very recently, when better equipped and managed private hospitals gradually took over their business. However, the deficit in reputation of private hospitals among patients will still take a long time to recover.

5. Low Reimbursement Level

China offers health services as social welfare to its people, and charges in public hospitals for covered services, pharmaceuticals and devices are below real costs. For example, most public hospitals charge about $5-$10 for a regular physicians visit, and $20-$30 for a hospital bed per day, including nursing. For comparison, one-hour feet massages cost about $20 on the street. Upscale services for higher-paying private patients in public hospitals charge about $45 per physician visit and $100-$200 a day, which are still low by US standards.

Commercial health insurance is also a relatively new development. Government insurances cover universally, so commercial health insurance serves only as a supplement. All of commercial health insurances are part of a life insurance or property & liability company, so health insurance policies only pay a lump sum for conditions like cancer, or indemnify medical expenses for certain conditions.  There are no US style comprehensive health plans in China as of the writing of this letter.

6. Legal System for Malpractice

Malpractice claims and adjudication are handled through administrative channels and arbitration mechanism out of the legal system. There are no uniform rules or standards, nor case data collection.  Malpractice insurance policies cover only up to twenty thousand dollars, and damage payments range between a few thousand dollars to up to one hundred thousand dollars, based on news report of such incidents.

US investors, operators, universities involved in international hospital or other health services in China need to be aware of these challenges, and seek solutions accordingly. US entities should leverage their technological, management and service advantages, design a business model to that market environment, select the right mix of specialties and services, and prepare for a long-term commitment. China US Health Alliance offers strategic consulting services to US entities involved or interested in ventures in China.

Please write to Johnqzhao@cnusha.org for your comments. Thanks!