Better treatment for foreign investors as policies relaxed in medical services sector

With the continuing reform in China’s medical and health system and the issuance of the Notice of the General Office of the State Council Forwarding the Opinions of the National Development and Reform Commission, the Ministry of Health and Other Authorities on Further Encouraging and Guiding Private Capital in the Establishment of Medical Institutions (document No. 58) and subsequent related policies and regulations, China’s policies with respect to the entry of foreign investment into the medical service market have been further relaxed, presenting new opportunities.

Market access

Policy-wise, the entry of foreign investment into the medical service sector has undergone a gradual relaxation. Prior to 2000, there was a lack of policy, law guidance and permission for foreign investment. After 2000, foreign investors were permitted to establish Sino-foreign equity and co-operative joint venture institutions in China, provided that the Chinese parties’ equity did not account for less than 30%. Applications for the establishment of wholly foreign-owned medical institutions were denied approval. Since 1 January 2011, Hong Kong and Macau service providers have been permitted to establish wholly owned hospitals in Shanghai, Fujian, Guangdong, Hainan and Chongqing, and Taiwanese service providers were permitted in Shanghai, Jiangsu, Fujian, Guangdong and Hainan. Since 1 April this year, Hong Kong and Macau service providers have been permitted to establish wholly owned hospitals in all municipalities directly under the central government and provincial capitals.

Establishment conditions

Pursuant to the Provisional Measures for the Administration of Sino-Foreign Equity and Co-operative Joint Venture Medical Institutions and supplementary regulations, the following conditions must be satisfied to establish an equity or co-operative joint venture medical institution:

1. The establishment and development must comply with the local regional health plan and medical institution establishment plan, and the Ministry of Health’s Basic Standards for Medical Institutions;
2. It must be an independent legal entity;
3. The total investment may not be less than RMB20 million (US$3.2 million) or, if the investor is a Hong Kong or Macau service provider, the total investment may not be less than RMB10 million;
4. The equity of the Chinese party may not account for less than 30%;
5. The joint venture term may not exceed 20 years; and
6. Other conditions specified by the health authority at the provincial level or above.

Pursuant to the Provisional Measures for the Administration of the Establishment of Wholly Owned Hospitals in Mainland China by Hong Kong and Macau Service Providers and the Provisional Measures for the Administration of the Establishment of Wholly Owned Hospitals in Mainland China by Taiwanese Service Providers, if a Taiwan, Hong Kong or Macau wholly owned hospital is to be established, satisfaction of the basic standards for a level II hospital or higher is required in addition to satisfaction of the conditions set forth in points (1) and (2) above. The total investment in a level III hospital may not be less than RMB50 million, and not less than RMB20 million in a level II hospital.

It is worth mentioning that on 13 April this year, the Ministry of Health issued the Measures for the Administration of Sino-Foreign Equity and Co-operative Joint Venture Medical Institutions (draft for comment on amendments). The objectives of the draft are to amend and ultimately supersede the provisional measures.

The draft makes relatively substantial amendments to the total investment in, and term of, equity and co-operative joint venture medical institutions, specifying that the total investment in equity and co-operative joint venture medical institutions may not be less than RMB100 million, that the total investment in such medical institutions established in central or western China, or in old revolutionary areas, areas populated by ethnic minorities, border regions or poor regions may be appropriately reduced, but may not be less than RMB50 million, and that the joint venture term may not exceed 30 years.

Difficult issues

Relatively complex approval procedure. Notwithstanding the fact that current policy on the entry of foreign investment into the medical service sector has been further relaxed, it is easy to see that complex approval procedures still need to be navigated to establish equity and co-operative joint venture medical institutions and wholly Taiwan, Hong Kong and Macau- owned hospitals, and the threshold for establishment of these remains relatively high. Not only is joint approval by the health authority and commerce authority at the provincial level or above required, but also equity and co-operative joint venture medical institutions are not permitted to establish branches.

Foreign-invested medical institutions are subject to treatment that clearly differs from that of public hospitals, in terms of taxation and medical insurance. Although both document No. 58 and the draft for comment provide that both for-profit and non-profit medical institutions may be established with foreign capital, nevertheless in practice the majority of medical institutions established with foreign capital are for-profit medical institutions, and in comparison with public hospitals, such foreign-invested hospitals are at a clear disadvantage in terms of tax treatment and the securing of qualifications as designated entities offering care covered by medical insurance.

Policy and law bottlenecks still exist in respect of the acquisition by foreign investors of domestic non-profit hospitals. Current regulations and policies are silent on whether foreign investors can acquire non-profit hospitals, and precedents for the approval of such acquisitions are rare in practice. Synthesising the cases in which the author has been involved in recent years, and her inquiries with relevant approval authorities, there remain policy and law bottlenecks to the acquisition of domestic non-profit medical institutions by foreign investors, making approval difficult to secure.

Cindy Hu is a partner at Concord & Partners in Beijing