1. Encouraging and guiding social capital investment in medical institutions is of great significance.
According to the data released by Zero2IPO Database, although the number of medical institutions was on a par with the past years or even underwent drops sometimes, their scales have been expanding. For example, hospital beds totaled up to 4.42M in China in 2009, up 9.34% year-on-year, the compound growth rate of hospital beds registered at 5.71% between 2003 and 2009, among which the year of 2008 and 2009 enjoyed the rapidest growth, namely both above 9%. Despite the increases in the hospital beds, the use rate has been on the rise year by year, to 77.7% in 2009, up 3.1% year-on-year. The number of outpatient amounted to 3.5B in 2009, an increase of 11.1% year-on-year. According to the above-mentioned data, the growth rate of public medical requirements has surpassed that of medical resource, in other words, medical institutions have been overstretched.
The part and parcel of the enhanced medical system reform include the encouragement and guidance of social capital investment in medical institutions and establishment of medical institution establishment system featured by diversified investors and investment types, conducive to enrich medical resource, spur service support, cater for the multi-tier and multi-outlet medical service requirements of the people, foster a competitive medical system, upgrade medical service and improve medical service system.
2. Encouraging equal treatment brings new opportunities for private hospitals
In February 2000, the Ministry of Health collectively staged out the Guiding Opinion on Town Medical Hygiene Structural Reform with other 7 ministries, to divided medical institutions into two types for the first time, namely non-profit and profit-making ones, for the identification of the key role of profit-making medical institutions in the national medical system. Then, there were a series of policies released to ensure equal competition, professional evaluation and medical insurance designated institution status for profit-making medical institutions, as well as support and encourage social capital flowing into medical service industry.
The document No.58 provided a more loose policy environment for non-public medical institutions in license release, government procurement, personnel recruitment, academic climate, professional evaluation, equipment layout, etc. In this context, the treatment of non-public and public medical institutions are expected to be gradually on an equal footing, shattering all previous records and accordingly bringing more opportunities for private hospitals. The document No.58 includes the following items, in addition to the reiteration of equal treatment of public and non-public medical institutions.
To point out "supporting social capital to establish profit-making medical institutions, and encouraging qualified persons to set up private clinics" for the first time.
To encourage social capital being involved into the restructuring of public hospitals and to rationally identify the sphere of the restructuring according to regional health care planning. To guide social capital to take part in the restructuring of public hospitals including State-owned ones via diversified ways. To actively and systematically transfer the part of public hospitals into non-public ones for the decrease of public hospitals and their reasonable layout as well as the formation of a multi-outlet medical institution establishment mechanism. To preferentially select reputable non-public medical institutions to join in the restructuring of public hospitals.
To permit overseas capital establishing medical institutions. To further open up to the outside via revising the item of "medical institutions set up by overseas capital" into "permitted foreign investment projects". To permit overseas medical institutions, enterprises and other organizations to set up joint ventures or cooperative venture medical institutions in China with domestic medical institutions, enterprises and other organizations and gradually remove the limits on the shareholding proportion of overseas capital. To allow qualified overseas capital to establish pilot wholly foreign-owned medical institutions in China. Overseas capital shall be entitled to set up both profit-making and non-profit medical institutions. To encourage overseas capital to establish medical institutions in the central and west regions of China.
To encourage the donation for the establishment of non-profit medical institutions by social capital, spur enterprises, public institutions, social groups and individuals to donate for non-profit medical institutions established by social capital. To implement related taxation preferential policies. To encourage Red Cross, charities, foundations to inject capital to the establishment of non-profit medical institutions, or form a long-term donation relationship with non-profit medical institutions set up by social capital.
3. Despite more favorable policies, VC/PE shall be cautious in hospital investment.
Under the clear guide of healthcare reform and other state policies during the two years, VC/PE showed unprecedented enthusiasm in medical care investment. In accordance with the statistics of Zero2IPO Research Center, as many venture capital firms have bought into private medical institutions, China is undergoing an investment boom in private hospitals nationwide. Five private medical institutions garnered a total of RMB500.00M from VC/PE just during the first 11 months of 2010, clearly outperforming previous years both in number of investments and investment scale.
The document No.58 of the State Council prescribes that "non-public medical institutions shall be supported to allocate with large-scale equipments; local authorities shall fully consider requirements and reserve rational space for the development of non-public medical institutions while establishing and adjusting their large medical equipment allocating plan; healthcare organs shall approve the large medical equipments required for non-public medical institutions within their business scopes when approving the establishment and diagnosis subjects, and no restriction shall be placed upon those compliant with allocating standards and qualifications". From our point of view, easing restriction on non-public medical institutions to allocate large equipment would make for their development into large-sized and high-end hospitals, enhancing the development of large-scale non-public medical groups, chain hospitals in particular.
In spite of favorable state policies attracting massive capitals, private hospitals are still featured by unique risks in operation, so venture capital shall be cautious to rush for the field.
Medical control risk. Services or products of medical services industry are usually related to consumers’ health or even life, therefore medical technology and internal management are of vital importance, and a fatal medical accident may be the last straw for a private hospital.
Replication and expansion risk. Despite replicable business mode, as medical license, hospital land, reverse of talents and other resources may be inaccessible even with adequate capital, fast expansion would lead to quick downfall, without sufficient preparation and sound management.
Doctor resources risk. Doctor resource as the soul of a hospital would finally determine the development of the hospital. Although state policies have been encouraging private hospitals to enjoy the same treatment as public hospitals in R&D, professional evaluation, continuing education, etc, private hospitals are still in a weak position in talent introduction, training and other aspects in comparison with public hospitals. Therefore, private hospitals have yet to improve mechanism to introduce and retain talents.
"National treatment" problem. Though state policies have long since released private hospitals’ application for medical insurance designated institutions, only "those non-public medical institutions carrying out medical services and medicine pricing policy prescribed by the government as well as complying with relevant regulations on designated medical institutions can apply", as per the document No.58 of the State Council. Such a provision of "carrying out medical services and medicine pricing policy prescribed by the government" has actually excluded profit-making medical institutions. Moreover, further considerations are necessary for venture capitals in selecting hospitals and exit options.
Therefore, it is worthwhile for venture capitals to focus on private hospitals with first-class experts and managers, modern management capability, flexible and efficient operation.
Sound risk management system. Implement scientific and standard professional management, definitely divide the hospital management from diagnosis business to realize the unity between rights and liabilities and avoid repetitive management without overlap or vacancy, further improve diagnosis capability of doctor team, reduce occurrence of medical accidents, and establish strict medical and service management regulations pursuant to those recognized hospital management standards, i.e. international accreditation standard of JCI and national hospital accreditation standard.
Rational talent structure and stable doctor team. Stable talent team could ensure and guarantee sustainable improvement in medical technology and level. A private hospital shall not just focus on introducing professional talents, improving medical technology and distributing medical and management teams, but also persistently offer continuing education opportunities including medical staff training, academic exchange, advanced training, perfect performance evaluation system, motivate initiative, train and establish a reliable and hi-efficiency team.
Expansible medical institution with standardized procedure. Medical service industry belongs to the high technology industry featured by risks and difficulties, and its service objects define greater market responsibilities and operation risks. Therefore, venture capitals favor those medical projects with simple business mode and standardized procedures.
High-end hospital with definite orientation and quality services. Due to disadvantages in applying for accreditation of designated medical institutions, high-end hospitals which are positioned to massive patient base and avoid competition with medical insurance subjects can attract high-end consumers by relying on hi-quality services and professional medical technologies.
In conclusion, as China is witnessing constantly improved consumption level, increased urbanization and aging population, private medical institutions can get their shares only through precise positioning, honest operation and meeting multi-tier and diversified medical requirements with safe and quality services.