China Provides Unique Market Opportunities for American Hospitals

By Michael J. Donovan

Payette Rendering XiangYa Fifth Hospital
Rendering of the XiangYa Fifth Hospital by Payette. The hospital will have 2,500 beds and 6.5 million sq. ft. of floor space.

Changsha, China (October 23, 2018) - With hospital revenue in the United States stagnating, China is becoming an increasingly attractive market for forward-thinking hospitals seeking additional revenue streams. For the past few decades, hospitals in the United States have been able to enjoy significant growth without having to alter their business models substantially. A pay-for-service model worked well for them. However, 2018 seems to be the year when consumers and companies are seriously embarking on a mission to make healthcare more affordable in the United States. Many seem to share Warren Buffett’s notion that healthcare is the “tapeworm of the American economy.” Multiple factors are forcing American hospitals to have to rethink their revenue streams. In-patient revenue streams in the U.S. will no longer be able to support growth for hospitals.

However, China has patients. Lots of them. People with chronic diseases account for 260 million of China’s population. People over the age of 60 account for 230 million. People with disabilities account for 85 million. China’s healthcare market is the world’s second largest and is the fastest growing among major markets. A more affluent population and forward-thinking governmental policies are fueling this growth. China’s healthcare market is projected to surpass US$1 trillion by 2020 and US$2.3 trillion by 2030. This is incredible growth considering the market was approximately US$280 billion in 2010.

In October 2016, China released “Healthy China 2030” to outline guidelines to foster a healthier population by promoting lifestyle changes, optimizing health services and focusing on a shift from a disease treatment strategy to a disease prevention one. “Healthy China 2030” is important since it is the first medium to long-term strategy in health planning made at the national level in China. It represents a shift from national guidance based solely on economic growth to one based on health-centered growth.

Can China provide a lifeline for American hospitals? Certainly, if the U.S. hospitals understand how to effectively access the market. Despite this once in a generation market opportunity, ample revenue for American hospitals is not a sure bet. Hospitals need a clear strategy and direction in order to ensure a healthy revenue stream for the years to come. In the last decade, China has opened its door to foreign healthcare providers and investors. Yet, few American hospitals have entered the Chinese market. This is rapidly changing.

China is reaching a stage of development where American hospitals can implement novel practices in China and then implement them in the US. Just 5 years ago this would not have been possible. The volume of patients coupled with the technological speed of development in pharmaceuticals, biotech and AI is creating a transition where China can learn from U.S. hospitals and where American hospitals can benefit from some of the developments that are taking place in China. American hospitals have the opportunity to not only increase their revenue but also increase their competitiveness back in the U.S. by actively taking part in the Chinese market.

As China’s healthcare system matures, more American hospitals are seeking to expand their operations in China. The relationship is evolving beyond just a consulting-client relationship to partnerships that are delivering true value for both sides. The first wave of ventures focused on designing hospitals and providing nursing or cancer management expertise. These were natural first steps for American hospitals to test the waters of the Chinese healthcare system after China opened the door to foreign involvement in its hospital system in 2009. This is the type of relationship that the Massachusetts General Hospital entered into when it signed with Jiahui International Hospital in Shanghai. Recently, Brigham Health has assisted Evergrande Health Industry Group Ltd. in the design and building of its new hospital in Hainan. Evergrande Health is a subsidiary of the Evergrande Group, the world’s most valuable real estate company as of 2018. Hainan is a strategic development zone for China and has lofty goals of being a magnet for medical tourism.

ProMedica is taking a more proactive approach to the Chinese market than most American healthcare organizations. Despite acquisitions in the U.S., shrinking markets are forcing ProMedica to be a bit more aggressive than most American hospitals when pursuing the Chinese market. ProMedica is currently considering a dozen deals ranging from running private hospitals to providing consulting services for outpatient care and community health initiatives. Surely, with the increase in deals occurring in China, they can’t all result in positive gains.

Which American Hospitals Will Benefit the Most Moving Forward?

The American hospital groups that will gain to benefit the most from the Chinese market will (1) develop deeper partnerships with Chinese institutes, (2) enter specialized markets, and/or (3) bolster their research and teaching goals.

1. Deeper Partnerships with Chinese Institutes

The drive for Chinese hospitals to partner with American firms in the early 2010s was fueled by the desire to elevate their prestige by linking their name with an elite American institute and the necessity for expertise in hospital management and patient care for complex diseases such as cancer. This was particularly true for real estate tycoons looking to enter the healthcare market. Now, we’re beginning to enter an era where a different playbook is needed for American hospitals to profit and grow successfully in China. There are fewer and fewer Chinese institutes that are solely seeking American hospitals to serve as consultants.

As China grows in its level of competency, the relationships between American and Chinese hospitals need to evolve in order for both sides to receive real value. The University of Pittsburgh Medical Center realizes this. UPMC has a vibrant collaboration with Xiangya Hospital in Changsha. In 2014, they agreed to establish and work together in running the Xiangya International Medical Center. The Xiangya Hospital was founded in 1906 by the Yale-China Association. This year, UPMC has entered into a five-year agreement with Tahoe Hospital Management Co. Ltd. (a Chinese-based investment company) to help plan and operate the 350-bed Beijing Yuho Rehabilitation Hospital. One would expect to see UPMC take on bolder roles in China as they become increasingly more experienced in China. Chuck Bogosta, president of UPMC International, stated that managing and consulting are “not as sustainable as ownership.”

2. Specialized Markets

Generally, Chinese citizens do not trust private clinics as much as they do large, public hospitals. This has led to the public sector being greatly burdened. In order to relieve some of the pressure on the public sector, China has put forth incentives for the private healthcare system to grow.

A major impediment for private hospitals has been the inability for private hospitals to attract qualified medical staff. 80% of China’s medical professionals continue to work in the public sector due to more stable career prospects and better pay. Therefore, many local governments have implemented “multiple-site practices” so that these professionals can also work at private hospitals. China continues to strengthen its position of not having talented professionals be confined by the walls of one hospital as evidenced by its September draft of new guidelines for online medical treatment services, internet hospitals, and remote medical services.

In certain sectors, beneficial policies are finally paying off. Ophthalmology is one such sector that is proving to be lucrative for private hospitals. Ophthalmology hospitals have recorded the highest net margin of 13% among specialized hospitals (the average was 6%). AIER Eye Hospital Group has particularly seen fast growth. As of October 2017, AIER has established more than 200 specialized eye clinics throughout China and has a market cap of about US$10 billion. Eye health has been a major concern for China in recent years. They are currently actively expanding their business to Hong Kong and the United States.

Another attractive area for American hospitals is in the area of rehabilitation. In October 2016, China declared plans to promote its rehabilitation and assistive products industry. The plan is to grow this industry to US$103 billion by 2020. The market size in 2013 was approximately $US3 billion. New Jersey-based Children's Specialized Hospital has taken notice as it has signed a partnership deal with health care investment firm LIH Investment & Management Co. Ltd. last year to open a rehabilitation center in Shenzhen for children with severe injuries or those suffering from mental illness or development disorders.

Pediatric care as a whole is also experiencing strong growth. China’s amendment to the one-child policy has further increased the demand for pediatric services. Patients are demanding more services when it comes to quality of care for themselves during pregnancy and care for their children as they develop. Hospitals which focus on more efficient patient service and improved procedural results are growing well and receiving positive feedback from their patients.

On the other end of the spectrum, the demand for elderly care is increasingly rapidly. China already has 17% of their population over the age of 60 (~1.39 billion people). This percentage is expected to increase to 33% by 2050 (~1.46 billion people). In China, adults are legally responsible for the care of their parents as they age. The large aging population and an increasing middle class are creating large market demands for healthcare providers to offer unique solutions for the Chinese population. Real estate developers and hospitals are coming together to discuss how wellness centers, like ones that are popular in Florida, can be developed for the Chinese population. This provides unique opportunities for American healthcare providers.


3. Research and Teaching Hospitals

More hospitals and medical schools are seeking returns on their intellectual property. We constantly hear about how China is guilty of intellectual property theft. Yet, in biotechnology and pharmaceuticals, China is proving that they have what it takes to independently develop their own tech and collaborate effectively with their American counterparts. In healthcare, Americans and Chinese have more to gain by working together. American hospitals can benefit by developing new procedures and technology in China in order to supplement R&D that is being done in the US. Given the dwindling availability of grants in the U.S., China’s steady increase in funding for novel technology can directly benefit the American hospitals and medical schools that know how to maneuver in China. While other industries may continue to experience increased friction between American and Chinese companies in the years to come, the global healthcare winners will be the ones that can properly harness American innovation and Chinese implementation.

As pressure continues to mount for American hospitals to expand revenue streams, the Chinese market will become an increasingly attractive path. The challenge for American hospitals currently is to operate in a manner that provides value for both them and the Chinese market. It’s expected that the organizations that will benefit the most in the long run will be the ones that can navigate the market successfully in the short term and develop strong ties in China so that they have a solidified position in the Chinese healthcare market in the long term. Currently, China’s policies towards foreign healthcare providers are attractive. It’s assumed that late comers entering the market will not receive the same benefits as organizations that have entered early. The Chinese market presents an exciting opportunity for American hospitals seeking to expand their mission globally. One thesis seems to be increasingly shared by many American hospitals: the hospitals that will continue to prosper shall be the globally-minded ones.