New Growth Momentum for Private Hospitals in China?

By Ngan Yin Lai
Industry Analyst, Malaysia
Frost & Sullivan

The recent price deregulation for private hospitals in China is anticipated to stimulate new growth momentum for the sector. Post the deregulation, private hospitals have been allowed to set prices for medical services based on the principle of fair and free market competition. In addition, qualified private hospitals will be included in public health insurance schemes, similar to public hospitals. This write-up analyses the extent to which these new measures will facilitate the growth of private hospitals in China.

The Current State of China's Private Hospitals

Since 2008, China's private hospital sector has been experiencing strong growth. The number of private hospitals has increased from 5,403 in 2008 to 11,432 in 2014 (as of February), accounting for 46% of the total hospitals in the country. Outpatient volumes grew at a compound annual growth rate (CAGR) of 15%, and inpatient volumes grew at 20%, from 2008 to 2013. Although private hospitals experienced double-digit growth in patient volumes, the sector contributed only 10% of total patient volumes in 2013. Further, most private hospitals are small in size (98% of the hospitals have a bed size that is less than 500). In 2012, the number of beds for private hospitals was 582,177 (15% of the total hospital beds), and this number reached 677,000 (estimate) in 2013.

Chart 1: Hospital Outpatient Volume, China, 2008 & 2013 and Hospital Inpatient Volume, China, 2008 & 2013

Under the 12th Healthcare Reform Plan, the government aims to increase the role of private hospitals in the provision of healthcare service - private hospitals will account for 20% of total hospital beds and patient volumes by 2015.

Based on a 7.6% CAGR, the number of hospital beds will reach 5,184,000 by 2015. Based on a 7.7% CAGR for total outpatient volume and a 11.7% CAGR for total inpatient volume, total outpatient and inpatient volumes will reach 3,223 million and 178.96 million, respectively, by 2015. In 2 years, private hospitals will need to increase the number of beds to 359,800, and aim for 355 million outpatient volumes and 18.3 million inpatient volumes, to achieve the target.

The Path to Privatization Opens Up Investment Opportunities

Initiatives to open up the hospital sector for private capital were introduced in 1997. The Chinese Ministry of Health (MOH) stated that the government intended to relax rules for private investment in healthcare. 3 years later, the government permitted joint ventures between Chinese businesses and foreign investors in healthcare facilities; however, foreign equity was limited to 70%.

The healthcare reform agenda 2009-2020 reveals the firm stance of the government to encourage private investment in healthcare. Reforms have been put in place in the past few years - (i) allowing 100% foreign equity by removing the foreign investment in healthcare services under the restricted category of the Catalogue of Industries for Foreign Investment, effective 2012 and (ii) business tax exemptions.

The most recent measure to draw private capital into the hospital sector is to allow private hospitals to set their own prices for medical services and to enroll qualified private hospitals into public health insurance schemes.

This will make investing in the hospital sector more attractive as it will enable private hospitals to earn higher margins for the specialized services they offer. Many private hospitals are specialty hospitals, as the entry barrier is lower than that of general hospitals. Tapping on their strength to provide high-quality medical services and advanced technologies, private specialty hospitals cater to the healthcare needs of the burgeoning upper middle class who can afford the high prices. More than 75% of the urban population will reach an income level of $9,000 - $34,000 by 2022*. This huge potential purchasing power will create high demand for the specialized care offered by private hospitals.

The measure for enrolling private hospitals into public health insurance schemes will work as a double-edge sword for private hospitals. Being entitled to the coverage of public health insurance will encourage the general public to utilize healthcare services at public hospitals. On the other hand, private hospitals will need to conform to the prices for medical services, drugs, and medical examinations that are set by the National Development and Reform Commission once they are entitled to the reimbursement of public health insurance schemes. This will lower the profit margins of private hospitals.

The public health insurance authority will have to relax some of the requirements for private hospitals to qualify for reimbursement. For private hospitals to be included in public health insurance schemes, a minimum of 50% of their services must comprise basic medical care, as listed in the reimbursement schemes. Many private hospitals will not be able to meet the requirement because they are specialty hospitals and many of the services offered are not covered by the reimbursement schemes.

Challenges for Investing in Private Healthcare

While the prospect of investing in the hospital sector is encouraging, private capital investments in the sector will face 2 major challenges. Private hospitals have not been able to recruit experienced and skilled doctors. Most doctors prefer to work at public hospitals that provide better benefits, career advancements, and reputation. The absence of a policy that allows doctors to practice at multiple locations prevents doctors at public hospitals from working part-time at private hospitals.

The scarcity of land in big cities is another major challenge for private investors. The current land use policy provides land at low cost to public hospitals only. Private hospitals will have to absorb huge (and rising) costs for land lease, which will lead to escalating operating costs.

The latest wave of measures signifies a step forward in encouraging private investments in the hospital sector. Private companies interested in investing in the hospital sector should carefully study the intricacies of the market - policies play out differently across provinces in China due to differences in provincial politics and implementation. Investors should come up with strategies that fully utilize their strengths and core values.

Note: * McKinsey Quarterly (June 2013). Mapping China's Middle Class