Investors Offer Hospitals a Market Injection; Public hospitals in China’s cities are attracting investors willing to confront ‘Himalayan’ challenges

01.23.2014 17:24

Investors Offer Hospitals a Market Injection

Public hospitals in China’s cities are attracting investors willing to confront ‘Himalayan’ challenges

By staff reporters Yu Ning, He Chunmei, Li Xuena, Zhou Qun, Li Yan, Luo Jieqi and Ren Bo

(Beijing) — Sick patients waiting in long lines at China’s public hospitals have at least one advantage over the local government officials who run these overcrowded facilities.

Seeing a doctor, eventually, is pretty much assured for patients with patience. But for all their hard work a public hospital’s government managers may never see a profit: Simply breaking even after paying the bills is usually as good as it gets.

Which is one reason why local governments and the nation’s health care industry players have been carefully reviewing guidelines issued in October by the State Council, China’s cabinet, designed to encourage fresh investment in the nation’s more than 10,000 public hospitals.

The guidelines complement previous policy directives introduced by Beijing in recent years that encouraged a more market-oriented approach to managing the big, mainly urban hospital networks at the heart of the nation’s health care system.

“This policy is very attractive,” said Wei Xin, CEO of Sinocapistar Investment Holding Group Co. Ltd., a privately owned investment firm. “Private investors will soon carve up the public hospitals pie that’s being offered.”

Indeed, Wei said his firm is launching a special fund for investors interested in putting money into public hospital takeover projects. Others potential hospital investors include pharmaceutical companies, venture capital firms and even foreign investors.

The central government’s initiative has already spurred success stories as well as failures. Both outcomes have been experienced by the state-owned drug company China Resources Pharmaceutical Group Ltd. (CRP), for example, which first set its investment sights on hospitals in Yunnan, a province in the southwest, and Guangdong, in the south, in 2010. CRP is a subsidiary of the state conglomerate China Resources Group.

In the Yunnan capital of Kunming, CRP paid the city government 700 million yuan for a 66 percent stake in Kunming Children’s Hospital, the city’s main pediatrics facility and one of eight public hospitals in town.

On the failure side, the company in 2013 was forced to abandon a year-long effort to buy Gaozhou City Hospital, a public facility in the Guangdong city of the same name. The deal fell through because of what officials called resistance from special interests at the hospital.

A subtext to CRP’s tale of two city hospitals is that local governments, the traditional owner-operators of these bustling health centers, have the power to make or break an investor’s plan. Indeed, some say local governments stand as the biggest barriers to the kind of public hospital reform advocated by the central government.

Powerful city governments are particularly formidable. For that reason, the health sector does not expect outside investors to try vying for big public hospitals in big cities, such as Beijing and Shanghai, anytime soon.

However, smaller cities and communities with hospitals that are struggling financially are expected to welcome new investors. Some already have: In addition to Kunming Children’s, hospitals have gotten new owners in the cities of Wuhan, in the central province of Hubei, and Xuzhou, in coastal Jiangsu.

Willing investors can be found because buying a major or a controlling stake in a public hospital, which can include valuable medical staffers and urban real estate, is seen as a cost-effective way to break into the business. Public hospitals, although rarely profitable, are usually well-equipped and staffed by skilled doctors. Thus, buying a hospital is considered more investment-effective than trying to build a new hospital from scratch.

Himalayan Challenge

How did CRP successfully scale the local government barrier in Kunming? By winning support from the highest echelons, said company CEO Zhang Haipeng.

“It was only possible because the mayor led and the (Communist) Party secretary advocated the project,” Zhang said. “Investing in public hospitals is like climbing the Himalayas.”

CRP, whose parent started out as a trade mediator between Hong Kong and the mainland, has close ties with government agencies nationwide. This political network gave it a head start in its bid for the Kunming hospital.

In the course of negotiations with CRP, Zhang explained, Kunming’s then- arty secretary, Qiu He, agreed to let outside investors buy shares in up to three public hospitals, including Kunming Children’s.

For a local government official, Zhang said, Qiu’s outlook was especially progressive because he was willing to let CRP, as a new investor, acquire a majority stake and manage the hospital.

A CRP investment team had been looking for exactly that kind of opportunity. But while researching potential investment targets across the country, Zhang said, the team generally found government officials reluctant to allow private management of a local hospital.