Industry eyes China's 'failed' health care
reform
By Matt Young
An arm of the Chinese government made an unexpected announcement recently: it
openly admitted that health-care reform in China has failed.
In a report by the Development Research Center of the State Council, the
authors wrote that "generally speaking, the reform [has been] unsuccessful",
citing wasted resources and a decreasing number of clinical medical
organizations, even as the population increases.
But while the government's attempts to reform the system may have failed, the
health-care market in China is growing
successfully. After all, if the system is broken, it needs fixing, and private
industry is willing to oblige as long as there's a scent of profit in the air.
Since the first Sino-foreign hospital was founded in 1989, 200 joint-venture or
cooperative-venture hospitals or clinics have sprouted in the country,
according to a report by the ChinaCare Group, a Beijing-based health-care
consulting firm. In September the group's president, David Wood, wrote in
another report that in the
Beijing region, there were 14 hospital projects under way
and "if all were successful, would add over 8,300 beds to the bed base in the
region". The problem is, success still is hard to come by in the Chinese
health-care market.
But Wood, a well-known guru of Chinese health care, said that while
profitability may be elusive, the timing could be right to establish one's
credentials in the market while it's still tepid. He recommended two specific
areas as ripe for investment, the first being ambulatory care.
"What the Chinese health-care consumer wants is great patient service," Wood
said. If a hospital can provide a bright, clean environment with courteous
personnel, that would be very attractive and found in few - if any - Chinese
hospitals, he added. A maternity hospital is also a good idea, Wood said. While
medical equipment for a general-care facility would cost US$20 million to $30
million for a 250-to-500-bed facility, a maternity facility's gear and gadgets
would probably cost only $3 million, he said.
Cost considerations are very important in China because access to health
insurance still is miserably non-existent for many. While China's 1.3 billion
people urgently need more and better medical care, they usually can't pay for
top-end treatment. That often leaves joint-venture hospitals and clinics
targeting wealthy segments of the population and expatriates. Still, there
aren't enough sick ones to turn a profit easily.
Success or excess?
Maryland-based Chindex International Inc provides an excellent case study of a
major player in the Chinese health-care market, both in hospitals and
medical-product distribution, that is aiming for growth even as it sustains
losses.
Chindex owns one of the largest joint-venture hospital systems in China and has
maternity facilities as part of its core, which again is one of the areas Wood
believes to be ripe for investment. But Wood said United Family Hospitals, a
joint-venture subsidiary of Chindex, seems to be teetering on the edge of
failure because costs are out of control.
Chindex lost $5.7 million, or $1.06 per share, for the 2005 fiscal year. That
was partly because of expenses related to a delayed hospital opening in
Shanghai, according to the company's
recent annual report. The company also lost $2 million, or 53 cents per share,
in fiscal year 2004 because of the SARS (severe acute respiratory syndrome)
epidemic, according to that year's annual report. But Wood sees different
reasons for losses.
"Beijing United Family Hospital charges more than even California hospitals
charge for deliveries," Wood said. It has to because it has high costs,
marketing itself as an expat hospital, which requires an expat staff and expat
prices. The result is that Beijing United Family Hospital averages fewer than
10 patients per night, he said.
Lawrence Pemble, executive vice president of finance for Chindex, countered
that overall in China, "Our hospital group has been extremely profitable over
time." What has taken losses is the group's health-care products distribution
segment, and it recently was shut down, Pemble said.
That segment reported $2.6 million in operating losses for the year, as well as
a 9% decrease in revenues. A major factor in the division's fate was a
significant reduction in the distribution territory for its major L'Oreal
product line, a company report said. L'Oreal also mandated stricter trade
terms, hurting the division's gross profit margin and cash flows. As a last
attempt at success, the division planned to market its own branded pharmacy
products, but problems with registering and marketing them properly got in its
way.
Pemble maintains that with the distribution outfit gone, Chindex is positioned
better to focus on what it does best: health-care services and medical capital
equipment. It is planning on more expansions, nearing another joint-venture
hospital agreement in Xiamen, a port city opposite
Taiwan.
"There are timing restrictions as to when we can proceed with it," Pemble said.
"It's a typical Chinese project in that it moves from point to point with a lot
of issues to be solved along the way." The company also is planning another
joint venture in Guangzhou.
Despite Chindex's pride in its revenue growth (which exceeded $100 million for
the first time in 2005), it may have one too many excuses for its "promising"
leftover health-care services and medical capital equipment divisions, which
actually lost money for the same year.
Health coverage in sight
Wood placed his remaining confidence in another health-care sector making a run
for the money in China - the insurance industry. While foreign health-insurance
companies are currently barred from selling in the domestic Chinese market,
they should be permitted to enter within a few years, Wood said. "Several of
our clients expressed a lot of interest."
Even so, there are again many barriers to successful market entry. In the West,
family practitioners or general practitioners often take care of minor, less
critical issues without referral to expensive specialists. But with no family
practitioners in China, patients are accustomed to self-referring themselves
directly to specialists.
"Culturally that is going to be a very difficult obstacle to overcome," Wood
said. "How does the insurance company introduce some sort of a 'gatekeeper'
into the process who will limit the utilization, a process which is so
essential for the insurance companies to be profitable?"
In addition, Westerners generally understand that an insurance policy written
for a maximum number of visits, inpatient days and other items doesn't mean
they should necessarily take full advantage of the allotment, but rather, use
them only if necessary. But given their cultural habits, the Chinese would
likely want to take advantage of the maximum allotment allowed, potentially
driving costs way up for insurers.
"If you say, 'You don't need 50 visits,' you are going to have rebellion," Wood
said.
Matt Young is a Washington, DC-based freelancer and a staff writer for
EyeWorld Magazine and EyeWorld Asia-Pacific Magazine.
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