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recently, the ministry of commerce, the national health commission, and the national medical products administration jointly issued the "notice on carrying out pilot work to expand opening-up in the medical field", which plans to allow the establishment of wholly foreign-owned hospitals (excluding traditional chinese medicine hospitals and excluding mergers and acquisitions of public hospitals) in nine cities including beijing, tianjin, shanghai, and nanjing.

as early as 2014, the national health commission issued the "notice on the pilot project of establishing wholly foreign-owned hospitals", which stipulated that "overseas investors are allowed to establish wholly foreign-owned hospitals in beijing, tianjin, shanghai, jiangsu, fujian, guangdong and hainan provinces through new establishment or mergers and acquisitions. except for investors from hong kong, macao and taiwan, other overseas investors are not allowed to set up traditional chinese medicine hospitals in the above-mentioned provinces (cities)."

however, in march 2015, the national development and reform commission and the ministry of commerce issued a revised version of the "guiding catalogue of industries for foreign investment", which included medical institutions in the restricted category. in 2017, the "guiding catalogue of industries for foreign investment" issued by the state council once again clarified that the participation of medical institutions is limited to joint ventures and cooperation. in 2023, the state council issued a document to loosen the policy again, clarifying that "qualified foreign and hong kong, macao and taiwan doctors are supported to open clinics in beijing."

this year's government work report proposed to relax market access for medical and other service industries. therefore, the opening of wholly foreign-owned hospitals is more influenced by top-level design. under favorable policies, what will be the development trend of wholly foreign-owned hospitals in china, and what challenges and opportunities will they face?

my country plans to allow the establishment of wholly foreign-owned hospitals in many places. photo/visual china

the high-end market is not the only option

for wholly foreign-owned hospitals, positioning is the most critical issue, that is, who the target customers are, what kind of services are provided, and what strategic goals are hoped to be achieved.

from the perspective of various parties in the market, it is generally believed that wholly foreign-owned hospitals will be positioned at the high end. in addition to high-quality services, high-priced drugs and consumables are the main advantages to attract patients. however, this is only based on the market practice of sino-foreign joint ventures in the past 20 years, and does not represent the real development trend of wholly foreign-owned hospitals in the future. moreover, in the chinese market, foreign-owned hospitals include both high-end hospitals such as united family hospital and hospitals rooted in counties and mainly paid for by medical insurance, such as cilin hospital.

in the past 10 years, china's medical reform has entered an accelerated period. although the policy focus is on public hospitals, the advancement of the payment method reform based on medical insurance has brought obvious pressure to all hospitals connected to medical insurance. from the volume-based drug procurement to the nationwide promotion of the disease group (drg) payment method, from direct medical insurance settlement for medical treatment in other places to the strengthening of medical insurance fund supervision, the reform process of the medical insurance payment system has been significantly accelerated.

many non-public hospitals in china have been able to maintain high net profit margins for a long time, mainly because they can effectively avoid internal staff from relying on drugs to support their medical services. however, as medical insurance payment prices continue to decline, the profit margins of drugs have narrowed significantly, resulting in greater pressure on the original profit model. at the same time, considering that the technical capabilities of china's non-public hospitals are not strong and most of the surgeries they perform are concentrated on routine diseases, the impact of drg on them is stronger than that of large public hospitals.

moreover, with the acceleration of direct settlement of medical insurance for medical treatment in other places and the strict supervision of medical insurance funds, some illegal operations that were previously in the gray area will face continued pressure from supervision, which will cause the income of some non-public hospitals to be under greater pressure than expected.

from this perspective, foreign-owned hospitals will face greater challenges if they use medical insurance as the main payer. if they are positioned as high-end non-medical insurance hospitals, they are more suitable for differentiated competition. however, apart from investment institutions, foreign-owned hospitals with rich operating experience have actually accumulated good management experience in dealing with medical insurance reform. whether it is drg or drug price reform, medical insurance reform in overseas markets has been going on for more than 30 years. at present, 40% of hospitals in the united states are losing money, while in japan, more than 50% of hospitals are losing money. in developed countries, hospitals that can truly maintain profitability and are willing to expand overseas have more experience in dealing with medical insurance reform.

therefore, the positioning of wholly foreign-owned hospitals will not limit their development strategies due to their identity. they can enter the high-end market serving a small number of high-income people, or enter the market serving the general public with medical insurance as the main payer.

how to avoid limited development?

if you want to enter the high-end market, the market is very small and the development potential is limited. there are three limitations. first, the number of high-end people is unlikely to explode. the high-end market started with the expatriate market in the early days, serving the medical needs of these executives and their families who came to china from abroad to work, with high-end medical insurance. however, with the localization of foreign-funded enterprises and the increasing challenges faced by foreign companies in china, the cost of expatriates is also increasing, so the development of the expatriate market has gradually slowed down. in recent years, this market has shown a downward trend in growth, so most high-end services have turned to the needs of local people. second, there are already many competitors in high-end medical institutions, the market competition is fierce, and the development bottleneck is very large. third, the service capabilities of this type of hospital are limited to outpatient clinics and simple surgeries. truly complex treatments require referral to public hospitals. new foreign hospital investors must take into account the experience of the high-end market to avoid repeating the old path of limited development.

to enter a market dominated by medical insurance, it is crucial to balance costs and investment. based on the experience of overseas markets, hospitals have three main strategies to deal with the pressure brought by payer reforms: developing superior specialties in densely populated and economically developed areas, focusing on developing specialties with thresholds such as critical illnesses and increasing investment in talent, and controlling costs and seeking a lower-cost business model.

first, in order to maintain and achieve growth, medical institutions have to be concentrated in densely populated areas. generally speaking, dense populations also mean more developed economies, and developed economies can provide more jobs. since high-income groups are concentrated in densely populated areas, they pay higher levels of medical insurance and have stronger purchasing power for commercial insurance. therefore, both demand and payment ability are stronger in densely populated areas, and medical institutions can gain more growth momentum.

the so-called advantaged specialty refers to the specialty that the hospital can establish high-quality technical service capabilities and can make a profit. in japan, although the demand for pediatrics continues to shrink, the increase in the number of older mothers has led to an increase in severe neonatal illness, which has promoted the construction of neonatal intensive care units (nicus). if a hospital has the relevant capabilities, the income it earns is several times that of ordinary pediatric treatment. therefore, the number of pediatricians in japan has increased rather than decreased in recent years, but the distribution is more uneven and more concentrated in developed areas such as tokyo.

second, after the implementation of drg and value-based medicine, payment policies tend to favor serious illnesses, and income from minor illnesses has continued to decline. therefore, developing emergency and referral services and acquiring relevant serious illnesses has become the main strategy for hospitals. taking hca, the largest for-profit hospital chain operator in the united states, as an example, three-quarters of hca's inpatient visits come from the emergency room, and half of inpatient surgeries are transferred from the emergency room. this shows the importance of the emergency room for hca to acquire patients and surgeries. in the past 10 years, hca's emergency room visits have increased from 6.97 million in 2013 to 9.34 million in 2023, with an average annual growth rate of 3%.

third, in the face of the refined supervision brought about by the payment model reform, effective cost control is the key to whether the hospital can make a profit. costs are mainly divided into labor costs and product costs. it is not easy to control labor costs, but it is easier to reduce the costs of drugs and consumables. especially under the general trend of centralized procurement and national medical insurance negotiations, the continued decline in product prices will help hospitals control costs.

the biggest challenge is talent

however, whether they are high-end or medical insurance-oriented, the biggest challenge for foreign-owned hospitals is talent.

due to the large gap in medical service prices between china and major developed countries, if top doctors are directly introduced from overseas, the hospital's revenue may not be able to cover the cost. although introducing doctors from local hospitals may give higher transparent income, since doctors with more seniority are more dependent on the various hidden benefits brought by the establishment, the high income of foreign-funded hospitals is not very attractive.

the doctor establishment and the platform, reputation and brand advantages provided by the system have always been the main reasons why private hospitals have difficulty attracting talent. the brand of chinese doctors depends largely on the hospital where they work. the hospital's golden signboard is a credible and reliable guarantee. doctors get not only the number of patients in such a platform, but also a way to build their own signboard. if they leave this platform, they will lose this most important factor in attracting customers. this will be the biggest consideration for doctors to leave the system, in addition to salary.

judging from the existing sino-foreign joint ventures in hospitals, a more practical model is to offer better salaries and working environment, and to use professional training and re-development in line with international standards to attract local and overseas young and middle-aged doctors, especially middle- and low-level doctors from local large hospitals as backbones. at the same time, senior doctors from large public hospitals are invited to see patients through multi-point practice, and secondary diagnosis and treatment by famous overseas doctors can be provided to domestic critically ill patients through the telemedicine model.

in fact, looking at the medical service systems of countries around the world, medical services have always been a localized market, and the best local hospitals are generally large public hospitals or private non-profit hospitals that have been deeply rooted in the local area for many years. from this perspective, due to the lack of high-quality talents, the development of wholly foreign-owned hospitals in china will only be a beneficial supplement to the domestic medical service market, providing more valuable management models, concepts and technical levels.

(the author is the founder of village man’s diary, a medical strategic consulting company)

author: zhao heng

editor: du wei