What's up, doc? Investors knock at China hospitals

BEIJING Thu Sep 1, 2011 11:03pm EDT

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BEIJING (Reuters) - The black Audi parked at Beijing's best-regarded hospital bears a license plate of a province about 1,000 miles away -- testimony to the willingness of Chinese to go the extra mile to get top-notch healthcare.

But the cure sometimes seems as painful as the disease -- even for the rich -- as the healthcare system is riddled with crowded hospitals, too much bureaucracy and too few nurses.

That's where private investors see an opportunity, especially with the government showing its willingness to allow foreign investment in the hospital sector.

They have the remedy, they say, for a higher fee.

"Chinese used to think that their entitlement to healthcare meant they had to crowd into a crowded public facility, get very short visits with the doctor, may be line up from five o' clock in the morning," said Roberta Lipson, CEO of healthcare company Chindex.

"These folks -- who are staying at five-star hotels when they travel, taking trips to Europe, wearing designer clothes, eating at fancy restaurants -- finally realize that in healthcare they can have a choice as well."

Originally aimed at expats, Lipson's four hospitals in China have seen increasing numbers of well-heeled local patients willing to pay more for better care.

Potential foreign investors in the sector range from big hospital groups in the West to private-equity funds looking for profits from turning around loss-making Chinese hospitals.

Other beneficiaries would be the pioneers who already operate the roughly 100 foreign-invested clinics and hospitals in China, such as Parkway Holdings of Singapore.

BIG MONEY

Successful investors could see a return of about 20 percent, says private-equity investor Yan Zhang, who together with Chinese partners is seeking $60-$100 million in funding to invest in a hospital.

"Healthcare reforms in China will represent one of the largest private-equity opportunities anywhere. There are 13,000 hospitals in China, and all of them will need development capital of some sort."

Late last year, China said it would encourage foreign investment in the hospital sector. Most investors still await detailed guidelines, for instance on how to structure the investments or tap insurers, before taking the plunge.

Vice premier Li Keqiang chaired a special meeting of healthcare policy advisers this summer to get things moving. That set off a round of official visits to the few legitimate private hospitals to see how they work.

Healthcare spending in China has been growing rapidly and the country's pharmaceutical sales are expected to rise over 20 percent annually in coming years, research firm IMS says.

China currently spends about 5 percent of its GDP on healthcare, while the global average is 9 percent.

While communist China once promised cradle-to-grave healthcare, those promises stagnated after economic reforms began 30 years ago.

To remedy that, Beijing injected $125 billion as part of its stimulus package to provide a very basic level of care to all citizens.

The Peking Union Medical College Hospital in Beijing shows both the problems and the potential of the healthcare system.

With a reputation as the best hospital in the capital, it attracts patients who drive hundreds of miles for care.

Workers constructing the hospital's new wings thread their way through the wheelchairs waiting outside on the sidewalk. Crowds mill about the doors at all times and in all weather.

People's willingness to travel -- and spend -- to see the right doctor has excited investors, who foresee profits from upgrading the country's notoriously crowded and unfriendly hospitals.

The government hopes that private money flowing into big city hospitals will free up badly needed funds to upgrade county hospitals and rural clinics.

However, investors must be careful to define a clear-cut ownership structure among partners, including the local governments, said Gordon Liu, a professor at Peking University and adviser on China's healthcare reform.

"At the beginning it may not be a problem if the project is small, but if it grows fast to a big project, there may be a problem if you cannot define the government ownership share."

Ironically, Peking Union itself was originally founded by foreigners, in the waning years of the Qing dynasty.

But since the Communist rule began in 1949, the Chinese healthcare system has functioned as an offshoot of the state, and the popular perception now is that bribes are necessary to get decent care.

MOONLIGHTING DOCTORS

The healthcare reform has rolled out basic insurance to rural dwellers and built new clinics in the counties and townships, but has run up against a lack of skilled workers.

"I think they realize the pressure they have to provide good quality basic level of care which is accessible to every Chinese person," Chindex's Lipson said.

"That's a huge undertaking. They shouldn't try to attack high-end service at the same time, or niche requirements, or elective procedures which are better left to the private sector."

So far, the few private Chinese players have focused on elective procedures because they cannot tap the state-backed health insurance system.

Chindex hospitals and other clinics that cater to expats have mastered overseas insurance billing to get around that problem.

Some cities are slowly moving to allow state insurers to reimburse care at private facilities - a big positive for potential investors.

"That would be a huge stimulator," said Jin Wang, healthcare analyst at McKinsey & Co.

But the sector is still taxed higher -- at about 25 percent -- compared with high-tech or outsourcing sectors where foreign investors enjoy tax rates of 12-15 percent. And investment approval by the Ministry of Health can take up to seven years.

Private hospitals also find it difficult to attract top physicians as full-time staffers as doctors leaving state-owned hospitals risk losing their professional prestige and status.

Many of the doctors moonlight instead, keeping their ties to government hospitals, but earning extra bucks at private hospitals.

"I think the biggest challenge in building a new hospital in China is getting the doctors to staff it," private-equity investor Zhang said.

Those obstacles mean that it may be easier and more profitable to invest in and operate an upgraded wing at a state-owned general hospital than to attempt to build a private hospital from scratch.

Other promising options include the already established hospitals affiliated with state-owned enterprises, which may want to shed costly operations as they undergo restructuring.

(Editing by Vinu Pilakkott)

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