Restrictions eased but obstacles still a bitter pill for foreign hospitals

By Ada Zhang, Martin Hu & Partners
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Foreign companies began investing in China’s healthcare sector in the 1980s, and in 1997 the former Ministry of Foreign Trade and Economic Cooperation (MOFTEC) and the Ministry of Health introduced the Supplementary Provisions on the Establishment of Foreign-invested Medical Institutions, which specified that foreign-invested medical institutions could only take the form of Sino-foreign equity or a cooperative joint venture, in which the Chinese party should hold an equity ratio of no less than 50% in general, or no less than 30% under special circumstances.

Ada Zhang Associate Martin Hu & Partners
Ada Zhang
Associate
Martin Hu & Partners

In July 2000, the Ministry of Health and the former MOFTEC jointly published the Interim Measures Governing Sino-foreign Equity and Cooperative Joint Venture Medical Institutions, which set out the conditions, requirements, standards, management approval authority and procedures for the establishment of these medical institutions, as well as their standards of practice. Under the interim measures, foreign ownership restrictions were eased (a foreign company’s share of the equity ratio or interest could reach up to 70%).

However, Article 35 of the interim measures expressly provided that “an application for the establishment of a wholly foreign-owned medical institution in China shall not be approved”.

In the 2002 version of the Catalogue of Industries for Guiding Foreign Investment, medical institutions were placed under the category of restricted industries, which were only allowed to take the form of equity or a cooperative joint venture.

Increasing disputes

It was estimated that there were more than 200 equity and cooperative joint venture medical institutions of various forms in China at the beginning of the century.

They were primarily smaller institutions involving a small amount of investment. Most were not general hospitals, and they were usually located in the developed coastal cities. There were few medical institutions that were really funded by international medical institutions.

These medical facilities have also given rise to a series of problems. Many conflicts were emerging between Chinese and foreign parties at the cooperation stage because of the restrictions of the Chinese domestic healthcare system and differing ideas of the Chinese and foreign parties.

Policy eased

The restrictive policies on foreign-funded hospitals have been eased in recent years. In 2010, the General Office of the State Council forwarded the Notice Regarding an Opinion on Further Encouraging and Guiding Social Capital towards Organising Medical Institutions, published by the National Development and Reform Commission (NDRC) and Ministry of Health, giving equal status to non-public medical institutions and public medical institutions.

In November 2010, the NDRC, Ministry of Health, Ministry of Finance, Ministry of Commerce (MOC) and Ministry of Human Resources and Social Security published the Opinion on Further Encouraging and Guiding Social Capital towards Organising Medical Institutions, proposing six measures for broadening the scope of access by social capital to organising medical institutions.

The measures included: switching foreign-funded medical institutions from the category of restricted foreign investment projects to the category of permitted foreign investment projects; phasing out the restriction over the proportion of foreign equity in foreign-funded medical institutions; and introducing a pilot scheme for gradually deregulating wholly foreign-owned medical institutions.

On 30 December 2011, the NDRC and MOC jointly issued a new version of the Catalogue of Industries for Guiding Foreign Investment, effective from 30 January 2012, which clearly points out that foreign investment in medical institutions will be switched to the category of permitted projects.

It should be noted that the Notice on Organising Medical Institutions of a Business Nature Using Social Capital, issued by the Ministry of Health on 13 April 2012, provides for the first time that social capital may be used to apply for running profit or non-profit making medical institutions, based on their objectives of operation.

This change of policy has completely removed the restriction that overseas investment institutions – especially major international healthcare groups in Europe and the US – must set up medical institutions in the form of a joint venture in China, and will also dispel the worries of foreign investors about distribution of profits, management constraints and other issues concerning investment in hospitals in China.

Cumbersome approvals

Foreign investors still face many challenges because the applications for establishing wholly foreign-owned hospitals need to go through a number of approval procedures for land development, medical equipment, medical insurance eligibility, medical staffing, health and disease control, and waste disposal.

The process is time consuming, involving various departments. There is also little land available in cities like Beijing, Shanghai and Guangzhou for foreign investors to build large wholly-owned hospitals, and the service capability of healthcare institutions in urban areas is close to saturation point. And there are other hurdles. Applications for the purchase of additional medical equipment above a certain level, for example, have to be filed with the administrative departments of provincial health offices, and qualified operators of this equipment must be deployed in advance.

Invisible barriers

China’s healthcare system is virtually creating obstacles to the establishment of wholly foreign-owned hospitals. Although most of these hospitals have positioned themselves for the high-end medical services sector, their customers – who are mostly expatriates and senior white-collar workers – represent only a small group of individuals in the Chinese healthcare market. If these hospitals really wanted to open up the Chinese market, they would then have to compete with China’s healthcare system. China is implementing a zero-price mark-up policy for pharmaceuticals. Wholly foreign-owned hospitals can set their own pricing, but these price levels will substantially affect the number of patients they receive.

Furthermore, medical insurance in China is still at a low level, with wide coverage. Public hospitals have access to various government subsidies, while foreign-funded hospitals do not. This undermines the competitiveness of foreign-funded hospitals. As China relaxes its control over medical institutions invested by social capital, foreign-invested medical institutions will definitely encounter intense competition, which now only exists between private medical institutions.

Ada Zhang is an associate at Martin Hu & Partners (MHP Law Firm)

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张奕宁 Ada Zhang

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