an Economist Intelligence Unit business Healthcare Understanding China s Emerging Private Healthcare Market A report by The Economist Intelligence Unit February 2016
Contents Foreword 2 Executive Summary 3 Overview of China s Healthcare Landscape 4 Opportunities & Challenges in China s Private Healthcare Sector 6 Common Approaches to Private Healthcare Investment in China 12 Profiles of Key Private Healthcare Facilities in China 15 How Can Clearstate Help Your Business? 20 The Economist Intelligence Unit Limited 2016 1
Foreword Ivy Teh Managing Director at Clearstate, an Economist Intelligence Unit business. Since 2005, China has seen significant reform and expansion of its healthcare system. While healthcare provision has developed rapidly, China has continued to launch more aggressive reforms to expand access to care and further improve the quality of care. Over the past four years the Chinese government has formulated a series of policies to boost private healthcare and integrate it with the public healthcare system. The rise of the private healthcare sector, particularly private hospitals, has captured attention not only from investors, but also from patients, physicians and pharmaceutical and medical device companies. Both local and foreign companies are investing in the development of specialised and differentiated private hospitals, along with innovative aged care. However, many private providers face tough challenges such as difficulties in hiring physicians, dealing with bureaucratic constraints, or accessing finance. Innovative strategies are required to tap this growing industry successfully. Clearstate, an Economist Intelligence Unit business, is a healthcare market insight and intelligence consultancy that specialises in discovering opportunities in emerging economies for pharma, medtech and health services clients. In this latest white paper, we focus on China s emerging private healthcare market, pinpointing the major trends that will alter this evolving business environment over the next five years. We describe the government s efforts to entice the private sector into sharing the nation s acute care burden to alleviate overcrowding in the large public hospitals. We also examine the gradual shift in the types of care and services on offer to the paying patient, as more private investors enter primary and acute care provision. Finally, we offer our own views on how local and foreign companies should rethink their business models and the ways in which they engage with healthcare stakeholders in order to navigate the risks and benefit from the opportunities ahead. We hope that you will find this assessment of the rapidly growing private sector interesting, and that it will give you a new perspective on the development of your business in China. If you have any opinions you would like to share, then we would welcome your feedback. Best regards, Ivy.teh@clearstate.com 2 The Economist Intelligence Unit Limited 2016
Executive Summary C hina s government is spearheading an aggressive reform of the country s healthcare system as it seeks to expand access to care and improve the performance of the healthcare system. While health spending has risen, however, a rapidly ageing population is only serving to exacerbate the strains on the public sector as the system struggles to cater for a rising number of patients with chronic diseases. The government is therefore encouraging the private sector to take over some of the burden of care delivery, in the hope of developing an efficient mix of public and private providers and suppliers to serves its citizens needs. In this white paper, we examine the government policies and market opportunities that underpin private investor confidence in China s healthcare market, as well as the challenges that are currently limiting growth. Over the past five years, as China has gradually lifted its previously stringent controls on market access, the country s healthcare sector has seen a flurry of private investment deals from both foreign and local companies. These pioneers have fostered the rapid development of the industry, as they learnt to navigate the intricacies of engaging local authorities and of operating a healthcare facility in China. This paper highlights several prominent private investors of hospitals and aged care centres, and profiles their market approach in order to pass on the fruits of their experience. We explore how some have opted for diversification in order to maximise revenue growth, while others have focused on streamlining costs or deepening their use of local knowledge and expertise, particularly in the area of hospital management. The Economist Intelligence Unit Limited 2016 3
OVERVIEW OF CHINA S HEALTHCARE LANDSCAPE 1 China National Health and Family Planning Commission Statistical Yearbook 2015 4 The Chinese government is driving the growth of the private healthcare sector China, the world s largest nation with a population of 1.3bn people, has inherited a largely hospitalbased healthcare system managed by the Ministry of Health and local governments. This is supplemented by a vast cadre of village doctors and a newly developed system of grassroots providers. Government data suggest that in 2014 51.5% of hospitals in China operated in the public sector, which acts as the main provider of healthcare. Private hospitals typically cater to the needs of a smaller pool of medical tourists and expatriates, more affluent local citizens and those who seek patient-centric care. Accordingly, while public hospitals in China have an average of around 280 beds each, the average private hospital has just 65 beds. Most of these small private hospitals started off as clinics, often lacking hospital management capabilities. Furthermore, these hospitals generally lacked a sound financing model to support scalability. Although an estimated 83.5% of private hospitals are small (with fewer than 100 beds), growth for these hospitals has lagged that of larger hospitals (with over 100 beds). (See figure 1, page 6.) Over the past few years, many large hospitals have been built and opened across the country, with joint venture deals and acquisitions driving strong growth in this segment. In 2012 the Chinese government announced ambitious plans to develop the private healthcare sector, in order to relieve the strains on the public healthcare system resulting from the rapid ageing of the population. It set in motion a series of reforms that aimed to raise the proportion of hospital beds funded by the private sector to around 20% by 2015. The primary way that the government sought to ease the public sector burden was by raising the attractiveness of private investment into healthcare. Under the 13th Five-Year Plan, discussions for which began in mid-2013, healthcare reforms are structured into three categories infrastructure development, cost-reduction and expansion of insurance coverage with the aim of identifying and nurturing new areas of investment. Key initiatives include improving access for private investors to develop and acquire private hospitals, encouraging the development of private aged care facilities and home care services, developing more comprehensive medical insurance, expanding the scope of physicians insurance and establishing a more efficient mechanism for resolving disputes. In addition, the government is keen to nurture mhealth by encouraging investment in online healthcare products and information-sharing on cloud platforms. However, achieving these goals will be challenging. The private sector in China still faces too many regulatory and legislative pitfalls, while recruitment is getting more onerous as private investors seek skilled staff for their newly built or managed private hospitals. The final challenge is to attract enough The Economist Intelligence Unit Limited 2016
patients at a price sufficient not only to cover the costs of good care, but also to secure investor returns. Statistical comparison of public and private hospitals in China Public hospitals Small Medium Large Very Large Hospital beds (m) Hospital visits (m) 16,000 5 14,000 12,000 4 10,000 3 8,000 6,000 2 4,000 2,000 1 0 2010 2011 2012 2013 2014 2015 0 2010 2011 2012 2013 2014 2015 CAGR -0.3% CAGR 6.3% Private hospitals Small Medium Large Very Large Hospital beds (m) Hospital visits (m) 16,000 1.4 14,000 1.2 12,000 1.0 10,000 0.8 8,000 0.6 6,000 4,000 0.4 2,000 0.2 0 2010 2011 2012 2013 2014 2015 0.0 2010 2011 2012 2013 2014 2015 CAGR 16.4% CAGR 30.9% Sources: China National Health and Family Planning Commission; Clearstate analysis. 5,000 4,000 3,000 2,000 1,000 0 700 600 500 400 300 200 100 0 The Economist Intelligence Unit Limited 2016 5
OPPORTUNITIES & CHALLENGES IN CHINA S PRIVATE HEALTHCARE SECTOR OPPORTUNITIES The government is lowering the barriers to private investment T o support the development of the private healthcare sector, the Chinese government has taken active steps to remove regulatory barriers that previously acted as a deterrent to investors. One such step came in the late 2011, when the government announced that it would revise China s Foreign Direct Investment (FDI) catalogue in 2012 to allow for up to 100% foreign ownership of hospitals under a Wholly Foreign Owned Entity (WFOE) structure. Previously all investment had to be done via joint ventures with a minimum of 30% Chinese ownership. The creation of the China (Shanghai) Pilot Free-Trade Zone in late 2013 provided a more effective platform for FDI into the healthcare sector. Initially, investors here were discouraged by stipulations such as a minimum investment threshold of CN 20m (US$3m) and a maximum operating period of 20 years. However, these requirements were lifted in 2014 in a bid to accelerate private investment. Artemed Group, a German healthcare provider operating eight hospitals and five aged care centres in Germany, was the first to move. In July 2014 it signed an agreement to establish China s first wholly foreign-owned hospital in the Shanghai Pilot Free-Trade Zone, which is expected to open within 18 months. In another key policy change in mid-2014 the Chinese government moved to allow domestic or foreign private investors to acquire and manage an existing public hospital. Two cities (Beijing and Tianjin) and four provinces (Jiangsu, Fujian, Guangdong and Hainan) subsequently followed Shanghai s lead in providing opportunities for foreign investors to set up or acquire hospitals within their jurisdiction. The lifting of restrictions did help to encourage investor interest in China s healthcare sector, especially from US-based healthcare providers. According to Dealogic, merger and acquisitions in China s healthcare sector totalled at least US$11.3bn in the first eleven months of 2014, continuing an upward trajectory from at least US$10bn in the same period of 2013. In addition to foreign ownership policy changes, the Chinese government has taken strides in removing resourcing barriers by relaxing the requirement for physicians to practise at single sites. Before the wave of reforms brought on by the 12th Five-Year Plan, the private healthcare sector had been largely left to its own devices in its struggle to match up to the care standards offered by the public healthcare system. One major barrier was the regulation barring physicians from working at multiple sites, which made it difficult for small private hospitals to offer an attractive enough salary package for skilled physicians to quit their jobs in the public healthcare sector. 6 The Economist Intelligence Unit Limited 2016
This block was particularly pronounced for elite physicians working in the largest and most famous Class 3A public hospitals in major cities. Chinese patients flock to such facilities regardless of their condition in order to obtain care from the best physicians, with most of the costs covered by social healthcare insurance coverage within the public healthcare system. Elite physicians contemplating crossing completely over to private hospitals, where patient numbers are far lower, would necessarily face a significant cut to their income. Now that the barrier on multi-site practices has been lifted, however, private providers are in a stronger position to recruit good physicians. In mid-2015 provincial health authorities in Guangdong also announced a trial plan to allow nurses in parts of Guangdong to conduct multi-site practices under the right conditions. Nurses working in tertiary hospitals could start specialised outpatient services in community healthcare settings, while community hospitals could also offer nursing services at homes. With the promulgation of multi-site practice licences as well as the simplification of administrative procedures for multi-practice sites in late-2014, the Chinese government demonstrates that it is taking a multi-faceted approach to nurturing China s private healthcare sector. By helping the development of soft infrastructure, such as staff, it can help to complement the rise of hard infrastructure in the form of hospitals and clinics developed partly through foreign ownership. Private hospitals in China are also becoming increasingly integrated into the country s public healthcare system, with selected private hospitals now eligible to provide reimbursable treatment for patients funded through social healthcare insurance. In mid-2014 (latest data), 37 private hospitals in Beijing, 43 in Shanghai, 40 in Hangzhou and 17 in Harbin were earmarked to be included in this scheme. Foreign-local consultancy partnerships have also flourished under these new market conditions. In mid-2014 the University of Pittsburgh Medical Center (UPMC), a US healthcare provider, announced a five-year consultancy deal with Xiangya Hospital in Hunan Province to establish a 200-bed international medical centre within its 3,500-bed general hospital. UPMC would provide training to medical and administrative staff in the centre, make recommendations on technology, procurement and staffing plans as well as provide telemedicine links to its existing hospitals in Pittsburgh. This is UPMC s second consultancy deal in China. Its first was in 2011 when it started providing remote, second-opinion pathology consultations to KingMed Diagnostics, which is China s largest independent medical laboratory. Small private hospitals offer opportunities for specialisation and differentiation The hospital sector is a highly competitive one, while private hospitals have often been squeezed out of competing for primary care patients due to their exclusion from the social healthcare insurance system. In order to differentiate themselves from public hospitals and justify the costs to patients who are paying out-of-pocket, therefore, many locally owned private hospitals have become serviceoriented general hospitals, with a high emphasis placed on the patient experience. The VIP wings The Economist Intelligence Unit Limited 2016 7
developed within Beijing Hospital exemplify this strategy. In China, general hospitals account for 65.5% of total private hospital beds. However, around 25.2% of private hospital beds are now provided by specialty hospitals. A rapidly ageing population combined with the increasingly sedentary lifestyle of China s urbanised population have contributed to a rise in chronic diseases, and increased the demand for specialty care in the healthcare system. Moreover, many private hospitals, particularly the 5% that are foreign-owned, have ventured into the specialty field in order to differentiate themselves from public hospitals. High-end specialty care chains include Aier Eye Hospital and Beijing Jiamei Dental, which employ state-of-theart technology to care for their patients. Recent investments have confirmed investors growing interest in specialty care. Delta Health, for example, is a venture-capital-backed Chinese provider that in 2012 opened its first clinic, DeltaWest Clinic, offering general outpatient care. It now intends to establish a chain of similar clinics across Shanghai, but has increasingly started to specialise in the diagnosis and care of cardiovascular disease. In late 2013, it announced a joint venture with Columbia University s cardiac surgery and cardiology division as well as Columbia Heartsource, a US-based physician-led management service organisation, to open Shanghai Delta Hospital, a world class cardiovascular hospital consisting of 230 beds in its initial phase. In mid-2015, meanwhile, Columbia Pacific Management (CPM), via its China arm, Columbia China, announced a major investment into the 200-bed Kaiyuan Orthopaedic Hospital in Shanghai. CPM s current Asian portfolio includes 28 hospitals across India and Southeast Asia as well as a number of outpatient clinics and aged care centres in China. In late 2014 it announced plans to build two 250- bed multispecialty hospitals in Wuxi and Changzhou, scheduled to open in 2018. The Kaiyuan venture, however, marks the first time that CPM will operate a hospital in China, as well as a move towards specialisation. The company intends to expand the orthopaedic hospital into a 300-bed facility over the next few years, while bringing its operation under the brand name of Columbia China. Ambitious government targets on aged care are likely to encourage foreign projects China s population is ageing rapidly. The number of people aged 65 and above will rise from 132m in 2015 to 331m by 2050, while the number aged 15-64 will fall from 1bn to 849m, according to projections by the UN Population Division. That will cause the ratio of those aged 65 and above to those aged 15-64 to triple from 13% in 2015 to 39% by 2050. Moreover, even now, many of China s urban workers are too burdened with busy work schedules or too ill-equipped to cope with caring for elderly family members afflicted with chronic diseases. Given these trends, it is little surprise that Chinese healthcare provision has quickly extended beyond primary and tertiary care into aged care. Aware of the growing problem, in 2013 the Chinese government set itself an ambitious target to have in place 8m aged care beds and 10m aged care staff by 2020. To achieve this and alleviate the public sector burden, it will need to encourage private investment in the aged care sector. 8 The Economist Intelligence Unit Limited 2016
The historic signing of the China-Australia Free Trade Agreement (ChAFTA) in mid-2015 provided a strong hint of the Chinese government s intent to import expertise and services in the aged care sector. Austrade, the Australian government trade commission, has already pinpointed a number of opportunities for Australian healthcare providers in China s aged care sector. These include training and education programmes in human resources, home care services, seniors living apartments or villages, design and planning for aged care and senior living apartments as well as infrastructure investment and operation. Back in 2013, Australia s oldest provider of home nursing and healthcare services, Royal District Nursing Service (RDNS), had already taken the initiative to build two major aged care projects in China, in conjunction with two local organisations: Zhongshan Vocational College and Beijing Real Estate Association/Geely University. The partnership with Zhongshan Vocational College revolves around developing and operating an aged care centre that would include 1,500 care places and a 400-bed hospital, training and developing the care staff as well as researching and developing quality standards, models of care, clinical pathways and operational management. CHALLENGES Bureaucratic red tape continues to dampen private investor confidence Although the Chinese government is easing regulatory barriers to facilitate greater foreign investment into the healthcare sector, the reforms have been slow to trickle down to the local provincial governments, which are still in charge of administering and approving operating licences. Investors expecting a well-structured and efficient administrative process as they launch their private healthcare ventures in China will almost certainly be disappointed. Ensen Care, a subsidiary of Legend Holdings, which is itself the owner of computer manufacturing giant Lenovo, found this out the hard way during the launch of its aged care centre pilot project, according to a report in The Economist 2. Opening in Changzhou, this pilot project aimed to help the local government to build up healthcare infrastructure, with private capital subsidising public spending. In exchange for a subsidised parcel of land, Ensen Care intended to build a hospital and a community centre which would then be transferred to municipal authorities. Ensen Care had relied on its formal partnership with the local authorities being sufficient in overcoming any obstacles in the construction and operating of the project. The company had thus initially projected an investment return of 7% on the aged care centre. Now, as it nears the official opening of the aged care centre, one executive told The Economist that the investment return will be closer to 3%. In the first year of its building project, its struggles with bureaucratic red tape have so far required it to submit 38 reports to municipal officials to obtain wideranging approvals. The city government even asked Ensen Care to start paying taxes before the aged care centre had opened for operation, in a bid to boost depleted local public funds. If such bureaucratic 2 2015. Looking for ways to spend. The Economist [Online] Available at http:// www.economist.com/ news/china/21664238- buried-debt-governmentstruggles-lure-investorslocal-projects-looking-ways The Economist Intelligence Unit Limited 2016 9
hurdles persist, there is a risk that Ensen Care, and other companies with ambitious investment plans will shy away from China s private healthcare sector in future. Physicians are hamstrung by public sector administration and a reluctance to work in the private sector Although the Chinese government has implemented policies to address the dearth of quality physicians in the private sector, administrative challenges still hinder the use of multi-site physician licences. Even after the first circular outlining the new rules was published, physicians were still required to seek permission from their primary employer and to register their multi-site practice with local health authorities before they started to provide consultations at another facility. This is because their medical licences are held by the hospitals where they currently work. The latest circular, which expressly requires local health authorities to simplify the registration procedure, is a step in the right direction. But it still does not remove the employer consent requirement outright, which means that it leaves public hospital employers some leeway to restrict the availability of physicians to work in the private sector. After all, administrators at elite public hospitals are likely to view a developed private sector as an unwelcome rival and will be loath to weaken their own establishment by allowing skilled physicians to leave. Some regions are piloting the use of filing procedures in place of registration for multi-site physician practices. If these pilots prove successful and the procedure is implemented more widely, then it may eliminate the need for consent from public employers and empower physicians to be truly mobile. Even if the administrative barriers were eased for physicians, however, the most skilled physicians would still face significant social pressures. The prestige, career security, renown and political benefits associated with employment at top public and academic hospitals are considerable, while physicians evaluations and promotions are currently based solely on their performance at such hospitals. Any experience they have acquired at private facilities, or through multi-site practices, is disregarded. As a result, very few Chinese physicians currently have multiple-location licences. For example, in Shenzhen (one of China s most affluent and reform-minded cities), none of the 6,000 physicians is registered for multiple-location practice. Private hospitals are most keen to bring on board senior, experienced physicians in order to attract a larger pool of clientele, but it is far easier to recruit younger, less experienced physicians who run less risk of undermining their career aspirations. Financing is hard to obtain, although creative leasing alternatives are emerging Private companies looking to build and equip hospitals often find it an uphill task to secure the bank financing they need to realise their plans. Faced with the tightening of credit conditions by the Chinese government in recent months, many financial institutions have become more reluctant to lend money. Moreover, the majority of loans provided to the healthcare sector have traditionally been directed at state-managed facilities. If the private sector is to develop rapidly, then investors need to be able to 10 The Economist Intelligence Unit Limited 2016
secure funds. This is particularly true for specialist hospitals which rely more than general hospitals on the use of state-of-the-art technology. Given the lack of ready credit from financing institutions, many investors are instead turning to leasing (rather than purchasing) as a way of procuring such technology. Capital equipment manufacturers such as Siemens, through Siemens Financial Services (SFS), are providing leasing services to spread out the purchase price into instalments across several years. In this way medtech companies and other manufacturers can offer hospitals a one-stop service, combining the financing, equipment and training into one package and greatly streamlining hospitals management processes. According to SFS, China s financial leasing market is enjoying double-digit growth rates at present. In mid-2015 the Chinese government announced that it would lend its support to private hospital financing by approving share listings and bond sales of qualified private hospitals, as well as by encouraging financial institutions to provide private hospitals with innovative products. Plans are also underway to encourage venture capital and financial guarantee institutions to cater to new small healthcare businesses. Non-profit private hospitals would also stand to receive subsidies from the government. These are early days, however, and it remains unclear how quickly this statement of intent will translate into any increase in private hospital financing. The Economist Intelligence Unit Limited 2016 11
COMMON APPROACHES TO PRIVATE HEALTHCARE INVESTMENT IN CHINA Based on a statistical report published by the Ministry of Commerce in 2012, total pharmaceutical sales were estimated at CN 1.11trn (US$180bn) and hospital drug sales accounted for around 80% of the market. Many pharmaceutical companies see hospitals as prime acquisition targets as they seek to build distribution channels for their products. There are also several instances of non-healthcare related companies, including property developers such as Jiangnan Mould & Plastic Technology Limited and Join-in Holdings, venturing into the hospital market. These are in addition to the private equity firms, venture capitalist firms, hospital conglomerates and other investors all looking for growth opportunities in this lucrative yet challenging segment within the healthcare space. Clearstate examines the various approaches adopted by this broad spectrum of companies in their investment bids. #1: Diversify business portfolios to achieve higher revenue growth Since the Chinese government released the floodgates for hospital investment in 2012, private equity firms such as Fosun Pharmaceutical, Tomato Holdings, Chindex International, Chinaco Healthcare Corporation, Concord Medical Services Holding are among those to report robust returns from their investments in the sector. Fosun Pharmaceutical established trusteeships in several key hospitals and earned hospital revenue of CN 166.9m in 2012, a 112% increase from 2011. The company has plans to invest in an additional 500 hospitals across Tier 2 and Tier 3 cities over the next 5-10 years. Nashville-based Chinaco Healthcare Corporation Ltd (CHC Healthcare), a private hospital group, recently opened its first replacement hospital, a Class 3A, 500-bed CHC international hospital in Cixi, Zhejiang province, replacing the current 150-bed Second People s Hospital. The facility is China s first large-scale joint venture hospital serving both public and private patient populations. Furthermore, there are plans to construct one general and three specialty care hospitals in Xiamen Wuyuan Medical Park. Through investments such as these, China s hospital market can secure additional capital infusion by offering positive returns to investors. #2: Lateral expansion of existing service offerings Building joint-venture hospitals or strategic partnerships is a way of filling voids in the healthcare services and providing a more coherent patient experience. Last year, Chindex International announced the opening of Beijing United Family Rehabilitation Hospital (BJU Rehab Hospital); this will add to United Family Healthcare s (UFH) existing array of healthcare services, which range from prophylactic care to therapeutic medical and surgical interventions and home health. 12 The Economist Intelligence Unit Limited 2016
In a contrasting move, The First Affiliated Hospital of China Medical University extended its posthospital care to a private hospital partner with a specialty in chronic disease management, because it did not have internal capabilities in this field. This year, Aier Eye Hospitals announced its intention of expanding its business vertically into the cosmetic eye surgical hospital business while TC Medical partnered with Chongqing Research Centre to establish its reproductive care business. As a result, hospital groups are able to provide more comprehensive care and build a strong brand presence in their respective fields. #3: Acquire and accumulate hospital management expertise Over the past few years, Fosun Pharmaceutical has adopted an incremental, stepwise approach towards building its hospital management experience through the acquisitions of several hospitals, including Yueyang Guangji Hospital, Suqian Zhongwu Hospital, Changcheng District Central hospital. The success of Changcheng District Central hospital, with an annual total of 2m patient visits, was testament to Fosun Pharmaceutical s ability to manage the hospital well. Other successfully managed hospitals include Jian Gong Hospital, a Class 2A hospital in Beijing. In 2000, Phoenix Healthcare Group acquired a majority interest in the hospital, and helped to develop it into one of the city s largest private general hospitals. In 2010, it became the eighth general hospital in China to be awarded accreditation from Joint Commission International (JCI), a US-based accreditation body. Given that Class 3 hospitals have established a secure foothold in the healthcare sector, companies venturing into the general care segment have to possess strong management capabilities to attract sustainable inflow of patient revenue and outperform rivals. #4: Streamline channel costs and improve profitability With the recent government reforms in drug prices and the wave of patent cliffs across the pharmaceutical sector, pharmaceutical companies are looking at alternative ways to minimise the risk of decreased profitability. Since hospitals are central to drug market access, many pharmaceutical companies see establishing trusteeships and acquiring hospitals as ways to establish distribution channels and underpin sales. By owning the hospital, companies are able to bypass distributors and achieve more autonomy on drugs sales, which are closely tied to the patient pool of the hospital. If the hospitals earn enough accreditation to be upgraded to Class 3 hospitals, they can expect a greater influx of patients lured by this enhanced reputation. Most importantly, the removal of middleman greatly reduces administrative costs and thus improves profit margins for drugs. However, government reforms aimed at reducing public hospitals reliance on drug sales might threaten this strategy in future, either through nationwide regulatory changes or simply through greater pricing competition from the public sector. Currently, a pilot programme is underway in which public health centres across 100 prefecture-level or above cities are forbidden to impose a mark-up The Economist Intelligence Unit Limited 2016 13
on drug sales. If this proves successful, then the government aims to extend this rule to all public hospitals across the country by 2017, affecting the profitability of these distribution channels. #5: Explore unconventional approaches to improve/maximise market access As market competition intensifies amid cost-containment measures and price erosion, many companies are exploring unconventional business models to improve their market penetration. Inner Mongolia Furui Medical Science, a company dedicated to the hepatology field, aims to provide a comprehensive chronic liver disease management service. Its business is split into two segments: 60% of its revenues are derived from drug sales targeted to treat liver fibrosis, while the remaining 40% comes from the sales of its liver imaging system, Fibroscan. In 2012, the company established Beijing Furui Hospital to provide specialty care in the area of chronic liver management. Its ability to provide a continuum of care via the provision of its drugs and medical imaging equipment proved to be an innovative business model that other companies could imitate. Mayinglong Pharmaceutical Group is a traditional brand enterprise in China. Founded in 1582, it has a long history of focusing on the anorectal and lower digestive tract field, with its related drug sales accounting over 40% of the market. Having had the foresight to diversify the business into operating anorectal specialty hospitals, the company now manages a chain of five hospitals in China. It has therefore created a virtuous cycle of boosting its own product sales through these hospitals and strengthening the company s brand recognition within the field through quality care delivery. 14 The Economist Intelligence Unit Limited 2016
PROFILES OF KEY PRIVATE HEALTHCARE FACILITIES IN CHINA We have compiled profiles of several leading private facilities in China, chosen for the robustness of their management, soundness of their finances and renown as healthcare providers. We have also examined the investment plans of several major foreign and local private healthcare providers and companies, announced in the wake of the recent policy changes. ESTABLISHED HOSPITALS United Family Hospitals Ownership Chindex International (acquired by Shanghai Fosun Pharmaceutical Group) Geographic locations Beijing, Shanghai, Guangzhou, Tianjin, Qingdao Size ~350 beds combined (BJU: 120 beds) Growth rate 18.0% revenue growth (2012-13) Chindex was founded in 1981 by Roberta Lipson and Elyse Beth Silverberg, two Americans who had moved to Beijing in the late 1970s. In 2014, it was acquired by a group led by Shanghai Fosun Pharmaceutical Group, a subsidiary of Fosun International. Chindex s premium healthcare services are provided through its renowned world-class hospital system in China, United Family Healthcare (UFH). Today, UFH operates a total of over 19 private healthcare facilities across major cities in China and Mongolia, including general and rehabilitation hospitals, clinics and an oncology centre. Beijing United Family Hospital (BJU), the flagship UFH hospital, commenced operations through a JV between Chindex and the Chinese Academy of Medical Sciences in 1997. It is JCI-accredited, offering highly-qualified medical staff from around the world, direct billing to over 40 global insurance companies, a 24-hour emergency room, inpatient and outpatient care, state-of-the-art operating theatres and 24-hour in-house paediatric, radiology, pharmacy, and laboratory services. The Economist Intelligence Unit Limited 2016 15
Shanghai Landseed International Hospital became the first wholly externally funded hospital, as well as the first Taiwan-funded hospital, to open in mainland China when it began operations in mid-2012. Shanghai Landseed International Hospital Ownership Landseed International Medical Group (Taiwan) The hospital was built with CN 150m from the Taiwanese Landseed International Medical Group, which has prior experience operating a hospital in China since entering into a JV to build the Shanghai Chenxin Hospital in 2002. It features a comprehensive medical and healthcare centre with 24-hour outpatient service, 24-hour call centre services, advanced radiology services and various types of specialty care. Geographic location Size Physician strength Shanghai 100 beds 30 full-time, 30 part-time According to an early-2014 statement by Landseed Superintendent Chang Huan Chen, the hospital managed to roughly break even in 2013. However, he also cited the hurdles in recruiting quality local physicians and the lack of coverage under the social healthcare insurance scheme as limiting factors to greater growth. Local patient visits ~150,000 (2013) Aier Eye Hospitals Ownership Geographic locations Number of facilities Aier Eye Hospital Group (local) Shanghai, Guangzhou, Wuhan, Changsha, Chengdu, Chongqing, Hefei and more Nearly 50 eye hospitals The first Aier eye hospital was founded in 2001 in Shenyang, and four more soon followed. The company was incorporated in 2003, and in 2009 became the first Chinese medical services institution to be listed on the Shenzhen Exchange. It now operates nearly 50 eye hospitals and employs a total of 1,400 physicians across the nation. Its flagship hospital, Shanghai Aier Eye Hospital, is the research and technology hub of the entire network and serves to consult patients with the most difficult and rare conditions. The company has fast captured a niche in China s eye care market, which has a large patient base and weaker competition from public hospitals. The company estimated that it held 10% of this market in 2011. It has gone from being China s top ophthalmology group to also becoming the world s largest ophthalmological hospital chain. Revenue CN 1.5bn (2013) This aggressive expansion policy is set to continue over the coming years. The company targets managing 150-200 eye hospitals by 2020, adding such hospitals predominantly in urban areas with higher population densities. The aim is to expand cutting-edge technologies, products and services across the entire chain. 16 The Economist Intelligence Unit Limited 2016
Mayinglong Anorectal Chain Hospitals Ownership Mayinglong Pharmaceutical Group (local) Geographic locations Size Physician strength Beijing, Wuhan, Xi an, Shenyang, Nanjing 500 beds combined 40 chief and deputy chief physicians Mayinglong Pharmaceutical Group is a traditional brand enterprise in China, founded in 1582. It has a long history of focussing on the anorectal and lower digestive tract field as its core positioning, and the company estimates that its anorectal drug sales cover over 40% of the market. In a bid to grow its brand strength and extend its market dominance, Mayinglong Pharmaceutical Group established its first anorectal speciality hospital in late-2008 in Wuhan. In the ensuing years, it has added four more anorectal specialty hospitals in Beijing and other major cities. These hospitals have amassed a strong core of physicians who are experts in China s anorectal therapy field and are also keenly involved in scientific research. The physicians regularly partner with top-level national research institutions to ensure they are using the most advanced international anorectal diagnosis and treatment technologies. Delta Health China Announced deal Construction of Shanghai Delta Hospital Delta Heath China is an innovative healthcare provider majority held by Fidelity Growth Partners Asia and its related party, Moonray Investors. Type Size Geographic location Financing Existing facilities Acute-care cardiovascular hospital 350 beds (Phase I: 230 beds) Shanghai US$100m loan from China Merchants Bank Shanghai DeltaWest Clinic Delta Health announced in late 2013 a joint venture with Columbia University s cardiac surgery and cardiology division as well as Columbia Heartsource, a physician-led management service organisation, to open Shanghai Delta Hospital, a world class cardiovascular hospital. Due to open during 2016, the hospital will provide end-to-end service for cardiovascular diseases, from early diagnosis, to prevention, intervention and rehabilitation. The company has also worked closely with other stakeholders including The Shanghai Health Bureau, the Qingpu District Health Bureau and several public specialist hospitals to ensure that services from launch will be at an international standard. Delta Health would also establish outpatient medical clinics across Shanghai, with the first, Shanghai DeltaWest Clinic, opened since mid-2012. Beginning with the soon-to-be-launched Shanghai Delta Hospital and Shanghai DeltaWest Clinic, DeltaHealth s strength and focus will be on the delivering world-class medical expertise, superior patient service, and advanced hospital management The Economist Intelligence Unit Limited 2016 17
In 2008, Dr. Thomas Frist and his son-in-law Charles Elcan founded Nashville-based Chinaco Healthcare Corporation, a privately held company focused on improving healthcare delivery in China. Dr Frist was a co-founder of the Hospital Corporation of America in Nashville in 1968. Chinaco Healthcare Corporation New launch Conversion of 150-bed public hospital (Second People s Hospital) to CHC International Hospital In mid-2014, Chinaco admitted its first patients to its new 500-bed CHC International Hospital in Cixi, a growing city of 2m located 150 km south of Shanghai. The hospital is a first-ever joint venture between the company, which owns 70%, and the municipal government of Cixi, which holds a 30% stake. The project involved converting the Second People s Hospital, a 150-bed public facility. It is Chinaco s first hospital in China. Type Size Geographic location Controlling stake Class 3A general hospital 500 beds Cixi CHC (70%), local municipal government of Cixi (30%) Being the first large-scale US joint-venture hospital in China to serve both public and private paying populations, the hospital has gained international recognition from the highest levels of government in the US and China, as well as from the foremost leaders in the investment community. 18 The Economist Intelligence Unit Limited 2016
Columbia China Announced deal Type Size Geographic location Current projects Existing facilities Major investment in Shanghai Kaiyuan Orthopaedic Hospital Acute-care orthopaedic hospital 200 beds (with planned expansion to 300 beds) Shanghai Two 250-bed hospitals in Wuxi, Changzhou Three clinics in Shanghai; three aged care centres in Beijing, Shanghai Columbia Pacific Management is one of the largest healthcare providers in Asia, operating 28 hospitals in India and Southeast Asia through Columbia Asia over the past two decades. It announced in mid-2015 that it is officially entering the China hospital market through Columbia China with a major investment in the 200-bed Shanghai Kaiyuan Orthopaedic Hospital in Shanghai, This will add to its existing portfolio of three clinics and three aged care centres (managed through another subsidiary, Cascade Healthcare) as well the planned development of two 250-bed hospitals in Wuxi and Changzhou. Managing Shanghai Kaiyuan Orthopaedic Hospital gives Columbia China a foothold in Shanghai s orthopaedics services market with its full range of orthopaedic services, as it seeks to develop the Columbia China brand. The company plans to expand the hospital into a 300-bed facility over the coming years. This hospital extends Columbia China s presence in Shanghai, where the company opened a multi-specialty clinic in the central Puxi District in 2014 and two plastic and reconstructive surgery clinic in the Changning District & Huangpu District in 2015. With the two hospitals in Wuxi and Changzhou due to open in 2018 and its ambitious plans to acquire and develop a total of 10 hospitals in China by 2025, Columbia China is wellpositioned to drive private-sector growth. The Economist Intelligence Unit Limited 2016 19
How can Clearstate help your business Evaluating your investment options is often a long drawn-out process, with strategic plan development, opportunity assessment, growth projection, exploratory stakeholder engagement, target shortlisting, fit assessment and commercial due diligence being some of the key steps. Clearstate, an Economist Intelligence Unit healthcare business, understands the Chinese healthcare market. We are able to tap into our data-rich resources to offer you market size and share information, as well as growth forecasts, and have a wide network of hospitals, healthcare and life science panels. In addition to our market analyses, we have the market-research nous to provide a true, unbiased depiction of clinical standards, price-points, market reputation, accurate customer insights and patient experiences, allowing you to build up a complete and confident understanding of a prospective investment target. R&D Strategic planning Access Commercial Corporate strategy Develop new products & solutions to address untapped and unmet needs in emerging customer segments, geographies and new adoption shifts Formulate mid to longterm strategies to capture opportunities from forward-looking trends Functional disciplines including pricing and reimbursement, government affairs and advocacy, health economics and stakeholder management Marketing, sales and communications functions that require differentiated positioning and outreach strategy to maximize returns and build customer base Identify and invest in organic and inorganic greenfield opportunities as well as drive strategy and business development efforts 1 2 3 4 5 Customer ecosystem & unmet needs Greenfield adoption trend New concept test Explore localization Tradeoffs of innovation vs. cost Market size & shape Growth projections Pricing & margin analysis Market shifts prediction Strategic plan development Stakeholders influence map Stakeholders engagement models Regulatory & reimbursement trends Funding programs Treatment pathway benchmark Competitive benchmark Partner search Channel streamline Customer insights & segmentation Communication effectiveness Branding strategy Technology & business model innovations M&A or partnership potentials search and profile Commercial due diligence Asset acquisition assessment 20 The Economist Intelligence Unit Limited 2016
About Clearstate Clearstate (www.clearstate.com), a business of The Economist Intelligence Unit, is a research consultancy specialising in the Healthcare & Life Sciences sectors in emerging economies. Clearstate is the go-to research consulting partner for clients seeking greenfield growth opportunities in fast-growing emerging economies. By leveraging The Economist Intelligence Unit s country expertise, we offer analysis of emerging economies opaque healthcare environments, as well as realistic forecasts of market growth. We have a strong reputation among our clients for the depth of our industry knowledge, our collaborative approach and our innovative solutioning. We are recognised for consistently listening and working in partnership with our clients to deliver comprehensive and granular answers beyond the obvious. About the Authors Ivy Teh is the Managing Director at Clearstate, and is an experienced research and strategy consultant in the healthcare sector in Asia Pacific and emerging markets. She has more than 15 years experience in leading healthcare business and operational strategy consulting projects. Jonathan Ley is a Senior Associate at Clearstate Greater China, based in Shanghai. He has more than five years experience in conducting and leading market research in the healthcare sector. The development of this white paper benefited significantly from the support provided by: Edwin Seah, Associate, Clearstate Ana Nicholls, Editor Industry Briefing, Economist Intelligence Unit Contact: Ivy Teh, Managing Director Clearstate ivy.teh@clearstate.com Tel: +65 6715 9228 The Economist Intelligence Unit Limited 2016 21
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