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Analysis: Don’t expect a slow down in healthcare investment in China

Jiadi Yu, principal investment officer at the IFC in Hong Kong, explains why China’s reforms make sure that there will be no slow down in healthcare investment.

China has the fastest-growing health care market in the world, with expenditure increasing from US$91 billion in 2004 to US$590 billion in 2014 – a ten-year compound annual growth rate of 21%. Moreover, the number of private hospitals has caught up with the public hospitals, although only 12% of patients receive treatment in private facilities. While such a growth trajectory should make China a giant honey pot for investors, it has proved surprisingly tricky for some, especially foreign ones, to adapt their business models successfully to the Chinese market.

But times are changing. The Chinese government is in the middle of a radical overhaul of how its citizens get their health care and is strongly encouraging private sector involvement. By transitioning to a so-called tiered healthcare delivery system, the government aims to reduce system inefficiencies and divvy up public funds more evenly between urban and rural areas, between major and minor cities. The goal is for the new system to be in place by 2020.

One part of the reform aims to upend a long-held preference that Chinese people have in healthcare – one that may surprise outsiders. Let me explain: Imagine you are feeling feverish and worry that you are coming down with a cold or flu. Do you go to your local clinic to consult your family doctor? Or do you head to a big hospital in a large city?

Most Westerners’ first port of call would be their local clinic. Chinese people, however, have a deeply ingrained distrust for community clinics and so tend to head straight for large public hospitals, even for minor ailments. One reason is that the best doctors are mostly at large public hospitals. Another reason is that, in contrast to most Western countries where patients have a local general practitioner, this tradition has yet to take root in China. GPs comprise just 5% of all physicians in China.

Many Class III (the highest patient capacity) hospitals in Beijing and Shanghai receive more than 10,000 outpatients daily. At least 50% of them could have obtained treatment in lower tier hospitals or community centres. The reforms aim to redirect patient flows from large hospitals to smaller ones or community clinics. The government is constructing attractive-looking, well-equipped primary care clinics and is increasing the rate of public reimbursement for treatment provided at these clinics. It also is spearheading a drive to train more GPs.

Some foreign investors, such as Singapore-based Parkway and UK-based Bupa, anticipating the impending shift in how the market operates, have been busy establishing primary care and specialty clinics. But investors face a major obstacle: the absence of insurance coverage. They are finding it near impossible to get covered by the social insurance system because they tend to charge higher prices than public facilities, rendering them ineligible for public reimbursement. So their patients pay out-of-pocket or through commercial (private) insurance.

The problem is that hardly any Chinese people have commercial health insurance – the penetration rate is just 2%, compared with the 96% of the population that are covered by social insurance. The government is trying to remedy this low take-up of commercial insurance. For example, it allows employers who buy private insurance for their workers to deduct the cost for tax purposes.

Another obstacle investors are facing is access to the good doctors in the public system. In China, a physician’s license is linked to the facility where they practice, which restricts their mobility. Moreover, doctors’ social security benefits, including housing funds, malpractice insurance, and pensions, are non-transferable if they switch employers.

The reforms aim to change public hospitals' semi-government status and gradually eliminate guaranteed employment status for public hospital doctors, which would incentivise doctors to pursue independent practice. Interesting initiatives are emerging such as the formulation of the doctor groups like Dr. Smile Medical Group, which provides an independent platform for expert doctors to practice at contracted private clinics and hospitals. Some doctor groups also plan to set up their own ambulatory surgery centers. 

Over the past decade, foreign investors in China have faced a steep learning curve, whether when embarking on a large hospital project or setting up primary care clinics, partly because the regulatory environment was not conducive. The ongoing reforms, in seeking to create a more business-friendly environment, are presenting new opportunities, especially in the subsectors of primary care clinics, specialty hospitals, rehab centres, and diagnostic laboratories.

But before investors dive into Chinese waters, they should first learn how to navigate them. If they don’t, they may end up treading water financially or, worse still, sinking.

Posted on: 06/02/2017 UTC+08:00


News

Parkway Life REIT, which is owned by IHH Healthcare, has acquired five properties in Japan for ¥4.8 billion (US$42.2 million). It has bought four nursing homes and one group home from Marubeni Corporation, UBI Kabushiki Kaisha and UBI Capital Kabushiki Kaisha.
Chinese medical products conglomerate Shandong Weigao Group Medical Polymer has appointed Wu Xue Feng as chief financial officer. This follows the resignation of Cui Jin.
Singapore-based healthtech startup mClinica has raised US$6.3 million in Series A funding. The round was led by Silicon Valley based Unitus Impact and joined by London headquartered Global Innovation Fund, MDI Ventures of Indonesia, and Endeavor Catalyst of the US. Existing investors 500 Startups, IMJ Investment Partners and Kickstart Ventures also participated.
SGX-listed healthcare provider Healthway Medical Corporation (HMC) has warned that it expects to record a loss for the fourth quarter of the year and for 2016 as a whole. “The loss is mainly attributable to the significant impairment of certain receivables, as well as goodwill,” it said in a statement to the Singapore Exchange.
New Zealand-based cancer diagnostics company, Pacific Edge (PEB) has raised NZ$8 million (US$5.7 million) in a share placement. The placement was undertaken at no discount to market, with institutional and other select investors subscribing for new shares at A$0.50 per share, the market price of PEB shares on 14 February.
In its second announcement in a week, Dublin-based and ASX listed IT healthcare company Oneview Healthcare has announced a collaboration agreement with US technology giant Intel to accelerate time-to-market patient experience software.
Australian medtech company Medibio has appointed US-based Jack Cosentino, as CEO and managing director. Cosentino’s experience includes over 20 years of senior leadership and executive roles in medical device and medical technology companies.
Women’s healthcare specialist Singapore O&G (SOG) has followed its impressive H1 results last summer with spectacular full year results. It has reported a 64.8% rise in profits to S$8.8 million (US$6.2 million) on revenues that were up 74.7% to S$28.7 million.



Analysis

Healthcare Partners has increased its hostile takeover bid for NZX-listed specialist medical investment firm Abano Healthcare Group. It is now offering NZ$10.16 per share (US$7.34) per share, up from NZ$10.00 per share. The increased offer takes into account the dividend that Abano paid last month.
Real estate group OUE has made a S$62.9 million (US$44.4 million) takeover bid for financially troubled International Healthway Corporation (IHC), a Singapore-listed integrated healthcare services and facilities provider.
Care home operator Pine Care Group has raised HK$121.8 million (US$15.7 million) in its moderately oversubscribed IPO, making it the year’s second healthcare company to float on the Hong Kong Stock Exchange. It sold 259.2 million shares at HK$0.69 per share, which was the top of the HK$0.63 – HK$0.69 per share range. Sole sponsor is Guotai Junan Capital.
Oxley Holdings has thrown a lifeline to embattled International Healthway Corporation (IHC), a Singapore-listed integrated healthcare services and facilities provider. The property developer and two of its senior managers have agreed a much needed convertible loan facility of up to S$50 million (US$35.3 million).
The Aon Asia Market Review 2017 report forecasts a net medical inflation rate of 6% in Asia for 2017, marginally down on the 6.3% recorded last year.
Jiadi Yu, principal investment officer at the IFC in Hong Kong, explains why China’s reforms make sure that there will be no slow down in healthcare investment.
In a bad-tempered extraordinary general meeting last week, shareholders at International Healthway Corporation (IHC), a Singapore-listed integrated healthcare services and facilities provider, voted out its entire board. They removed IHC executive director Lim Beng Choo, non-independent non-executive chairman Gerald Lim, as well as independent directors Alviedo Rodolfo Jr San Miguel and Leonard Chia Chee Hyong from the board.
The announcement at the very end of last week that Sime Derby planned to split itself into three was broadly welcomed by the market. At least seven years in the planning, the Malaysian conglomerate said that it wanted “to create three iconic stand alone businesses which will be pure plays in the plantation, property, and trading and logistics sectors”.

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