Capital Opportunities in County-Level Healthcare Reform: Policy Evolution and Investment Prospects

Since the State Council launched pilot programs for the comprehensive reform of county-level public hospitals in 2012, more than 1,300 counties have successively undergone two rounds of pilot reforms. This year marks the official nationwide rollout of the comprehensive reform of county-level public hospitals across China.

Red, orange, yellow, green, cyan, blue, and purple—who holds the colorful ribbon dancing in the sky? As the grand curtain of reform quietly rises, who will be able to seize this opportunity?

Policy Review

In June 2012, the General Office of the State Council issued the “Opinions on Pilot Comprehensive Reform of County-Level Public Hospitals” (Guo Ban Fa [2012] No. 33). With regard to service capacity, it required strict control over the scale of construction and allocation of large-scale equipment in county-level hospitals; encouraged intensive resource utilization; explored the establishment of centralized inspection and testing centers; promoted mutual recognition of inspection and test results among medical institutions; and advanced the outsourcing of logistical services. Regions with appropriate conditions were encouraged to explore the integration, restructuring, and reform of medical resources to optimize resource allocation. Policies supporting and guiding social capital to participate in the provision of medical services were to be implemented.

In March 2014, the National Health and Family Planning Commission, the Ministry of Finance, the State Commission Office for Public Sector Reform, the National Development and Reform Commission, and the Ministry of Human Resources and Social Security jointly issued the “Opinions on Promoting Comprehensive Reform of County-Level Public Hospitals” (Guo Wei Ti Gai Fa [2014] No. 12). Regarding the enhancement of service capacity, the document stated: improve incentive policies for private medical institutions in areas such as land use, investment and financing, fiscal and taxation, pricing, and industrial policy; broaden the market access for social capital in the healthcare sector; and ensure that non-public medical institutions receive equal treatment with public medical institutions in designated social insurance providership, construction of key specialties, professional title evaluation, academic standing, hospital accreditation, and technical access. It also called for studying policies to promote the restructuring of public hospitals in counties (cities) with abundant public hospital resources, encouraging eligible regions to explore various approaches to introducing social capital. Furthermore, it required the improvement of the tiered diagnosis and treatment model, striving to achieve a target of approximately 90% of patients seeking care within their county by the end of 2015.

In May 2015, the General Office of the State Council issued the Implementation Opinions on Comprehensively Promoting the Comprehensive Reform of County-Level Public Hospitals (Guo Ban Fa [2015] No. 33). With regard to optimizing the allocation of medical resources within counties, the provisions remain unchanged from those in the 2014 opinions.

In September 2015, the General Office of the State Council issued the Guiding Opinions on Advancing the Construction of a Tiered Diagnosis and Treatment System (Guo Ban Fa [2015] No. 70). The Opinions stipulated that by 2020, the service capacity for tiered diagnosis and treatment would be comprehensively enhanced, and safeguard mechanisms would be gradually improved. A medical service system with rational layout, appropriate scale, optimized hierarchy, clear responsibilities, comprehensive functions, and high efficiency would be basically established. A tiered diagnosis and treatment model featuring initial consultation at primary care institutions, two-way referral, separate management of acute and chronic conditions, and coordination between upper- and lower-level institutions would take shape, thereby establishing a tiered diagnosis and treatment system suited to China’s national conditions. Furthermore, the Opinions required raising the proportion of patients treated within their respective counties to approximately 90%, basically achieving the goal that patients with serious illnesses receive treatment without leaving their counties.

As evidenced by the aforementioned documents, a key objective of healthcare reform at the county level is to enhance the service capacity of primary care institutions and retain more patients within the grassroots healthcare system. To achieve the goal of strengthening primary care, relying solely on the development of public hospitals without the participation of social capital will make it impossible to successfully implement the various tasks of the reform under existing conditions.

Current Operational Status of County-Level Hospitals

As of the end of 2014, there were a total of 25,860 hospitals across China. Among them, 2,854 counties (county-level cities) operated 12,365 county-level hospitals and 2,002 county-level maternal and child health care institutions (Source: Statistical Bulletin on the Development of Health and Family Planning in China, 2014). The number of county-level hospitals accounted for 47.8% of the total number of hospitals nationwide. Although the number of outpatient and emergency visits at county-level hospitals has steadily increased in recent years (Figure 1), reaching 1.01 billion visits in 2014 for county-level (including county-level cities) hospitals nationwide, this figure still represented only 34% of the total national hospital visits (which totaled 2.97 billion). The disparity between the number of county-level hospitals and their patient volume reflects the generally small scale and operational difficulties faced by these institutions. Furthermore, reports released by the National Health and Family Planning Commission indicate that county-level hospitals are under significant operational pressure.

The National Health and Family Planning Commission’s 2014 “Evaluation Report on the Comprehensive Reform Pilot of County-Level Public Hospitals” showed that as of June 2013, pilot county-level hospitals had experienced a total revenue loss of RMB 4.509 billion due to the elimination of drug markups. Of this amount, RMB 2.422 billion (53.70%) was compensated through adjustments to medical service prices; RMB 892 million (19.78%) was covered by increased fiscal subsidies; and a remaining shortfall of RMB 1.196 billion (26.52%) was entirely absorbed by the hospitals themselves, leading to widespread perceptions of significant operational pressure. In 2015, the State Council’s Office of Healthcare Reform reiterated in its “Supervision Report on the Comprehensive Reform of County-Level Public Hospitals” that county-level hospitals bore a heavy debt burden, imposing substantial economic pressure on their normal operations and hindering the establishment of new hospital operational mechanisms.

In accordance with reform requirements, county-level hospitals were expected to secure compensation through two channels following the elimination of drug markups: increased government fiscal subsidies and higher prices for medical services. However, in practice, hospitals have been unable to significantly raise service prices across a broad scope due to various policy constraints, while fiscal subsidies from some county-level governments have also proven difficult to sustainably increase. Consequently, the removal of drug markups has instead exacerbated the financial burden on county-level hospitals. In pilot counties implementing these reforms, it is widely reported that modest adjustments to medical technical service prices have had limited compensatory effects, making revenue growth the most pressing concern for hospital directors.

For a long time, most county-level hospitals have incurred heavy debt burdens during their development due to irrational expansion, blind procurement of advanced medical equipment and technology introduction, and insufficient fiscal investment from local governments. Furthermore, the debt levels of these hospitals have been further exacerbated by incomplete compensation following the abolition of drug markups under pilot reforms. According to calculations based on data from the 2013 China Health and Family Planning Statistical Yearbook, the average asset-liability ratio of all hospitals nationwide has reached 43.8%.

According to the 2013 National Health and Family Planning Statistical Yearbook, among county-administered general hospitals nationwide, the average balance of revenue and expenditure was RMB 4.851 million. After the elimination of drug markups, with an average loss of RMB 5.539 million per hospital, the balance would shift to an average deficit of RMB 688,000. Among county-level city-administered general hospitals, the average balance of revenue and expenditure was RMB 5.02 million. After the elimination of drug markups, with an average loss of RMB 7.239 million per hospital, the balance would shift to an average deficit of RMB 2.219 million (Table 1).

Taking 188 county-level hospitals in a certain eastern province (2013 operational data) as an example, the average total debt per hospital was RMB 48.26 million, with an average asset-liability ratio of 43.38%. Seven hospitals were insolvent, among which the one with the highest debt had total assets and liabilities reaching RMB 1.185 billion, and an asset-liability ratio as high as 121.06%. The average proportion of drug surplus to total revenue per hospital was 4.68%; if drug markups were abolished, each hospital would incur an average loss of RMB 4.574 million. Furthermore, the average self-sufficiency rate of operating expenses for county-level hospitals across the province was only 88.7%.

The National Audit Office’s 2011 audit results on local government debt in China pointed out that hospitals in some regions had large debt scales and significant repayment pressures. This issue was particularly prominent in local medical and health institutions. In some county-level public hospitals, the total amount of principal and interest repaid in a given year exceeded the annual surplus from operational revenues and expenditures, with some hospitals even unable to repay their debts. It is evident that the operational status of county-level hospitals is concerning. Especially for county-level hospitals facing comprehensive reforms in the future, some local fiscal subsidies are relatively weak, and stable, routine financial subsidy policies for county-level public hospitals have not yet been established. For these hospitals, operations will become even more difficult, raising questions about how the goals of healthcare reform can be achieved.

The Dilemmas Facing County-Level Governments

The “Research Report on the Economic Operation of County-Level Public Hospitals” released by the former Ministry of Health in 2012 showed that the long-term debt scale of county-level public hospitals reached RMB 65.85 billion in 2010, with debts for infrastructure construction and equipment accounting for 73%. As fixed assets were purchased, constructed, completed, and put into use, most hospitals gradually entered a peak period of debt repayment, leading to increased debt pressure. These debts may ultimately become de facto government debts, thereby increasing future government fiscal expenditures and operational financial risks. However, the fiscal situation of China’s county-level governments is also far from optimistic. The National Audit Office pointed out in the “Audit Results of National Government Debts” (Announcement No. 32 of 2013) that as of the end of June 2013, the debts for which county-level governments nationwide bore direct repayment responsibility amounted to RMB 395.74 billion, with contingent debts totaling RMB 108.46 billion. Compared with 2010, the average annual growth rate of county-level government debts was as high as 26.6%. In the coming years, county-level governments will face immense pressure to repay debts and remain in a peak repayment period. Therefore, under the burden of high debt levels and slowing economic growth, county-level governments will find it difficult to continue expanding reinvestment in healthcare.

With the comprehensive rollout of healthcare reforms at the county level, taking the 3,490 general hospitals at the county (city) level across China in 2012 as an example, the annual revenue loss from abolishing drug markups alone reached RMB 21.94 billion. If the government were to fully cover these losses, fiscal subsidies to hospitals would need to increase by an additional 80.4% on top of existing levels. Moreover, this figure pertains only to county-level general hospitals; there are also 8,875 other county-level hospitals and 2,002 maternal and child health institutions in urgent need of financial support.

For example, in a certain eastern province, local government investment in 188 county-level hospitals accounted for 0.69% of fiscal revenue. Due to varying economic conditions across different regions, local government investment in hospitals ranged from as low as 0% to as high as 6.36%. If local governments were to fully bear the costs of compensating for the elimination of drug markups and for equipment and infrastructure investments, annual hospital funding would reach 1.51% of fiscal revenue. Compared to the current 0.69%, this would require an increase in investment of more than twofold.

Capital Opportunities Under County-Level Healthcare Reform

With the further deepening of healthcare reform at the county level, there are five major areas of opportunity for social capital:

First, the restructuring and reorganization of public hospitals.The government requires each county (or county-level city) to properly operate one to two county-level public hospitals. On this basis, reforms and restructuring of public hospitals may also be explored. For counties with large populations, particularly those exceeding one million residents, the future bed capacity of their hospitals should reach more than 5,000 beds (calculated based on the 2020 target of five beds per 1,000 people at the county level). The market demand can by no means be met by only one or two county-level hospitals. During field research, the author also found that some standalone private hospitals within certain counties achieve annual revenues nearing RMB 100 million. Some of these private hospitals are even located in townships, and a few have matched local county (or county-level city) people’s hospitals in terms of scale and technical capabilities.

Second, the incremental demand driven by the downward shift of patient healthcare-seeking behavior.In successive documents issued by the State Council, it has been proposed that major diseases should be treated within county-level jurisdictions, with a target of achieving a 90% medical consultation rate within counties. Based on the existing per capita hospital visit rate of 2.19 visits (according to 2014 statistical data), the annual number of hospital consultations in county-level areas across China would exceed 1.6 billion. If 90% of these consultations are conducted within county-level jurisdictions, the annual number of consultations would reach 1.44 billion. According to estimates by health authorities, the current total annual number of hospital consultations within counties nationwide is approximately 800 million, indicating that the volume of diagnostic and treatment services at county-level hospitals will need to grow by more than 80% from current levels to meet this target. For county-level hospitals, this implies a need to expand their medical staff and bed capacity to accommodate 90% of patients seeking care within their counties. This surge in patient demand cannot be addressed solely by government departments; therefore, private capital should seize this opportunity.

3. Investment opportunities arising from the integration and sharing of medical resources.Currently, most hospitals are relentlessly pursuing a model of being “large and comprehensive” or “small but all-encompassing,” placing excessive emphasis on extensive expansion. In terms of discipline configuration and medical equipment procurement, they strive for a “you have it, I have it, everyone has it” approach, failing to develop distinctive specialty strengths or establish service brands. The General Office of the State Council, in its “Implementation Opinions on Comprehensively Promoting the Comprehensive Reform of County-Level Public Hospitals,” once again emphasized that “county-level public hospitals are strictly prohibited from independently incurring debt for construction or for the purchase of large-scale medical equipment.” To conserve funds and avoid wasteful duplication in equipment investment among hospitals, county-level governments have created opportunities for social capital to integrate medical resources with public hospitals. This includes the joint establishment of independent regional medical laboratory testing institutions, pathology diagnosis centers, medical imaging examination centers, sterile supply centers, and blood purification centers, thereby achieving regional resource sharing.

Fourth, develop chain community hospitals.As the most common type of primary healthcare institution, community hospitals have a certain breadth and scope in their operations. Their profit models can be diversified, and their revenue sources are not as dependent on drug sales as those of clinics.

Community hospitals within county-level jurisdictions, historically constrained by limited technical expertise and outdated equipment, can attract a larger patient base by adopting chain-operation models and increasing investments in both hardware and software. These enhancements confer significant core competitive advantages, enabling them to compete effectively against government-run public hospitals at the same administrative level.

5. Develop traditional Chinese medicine (TCM) medical services.In advancing county-level healthcare reforms, the government has proposed to gradually expand the scope of non-pharmacological TCM diagnostic and therapeutic techniques covered by medical insurance payments, including in-house preparations of traditional Chinese medicine (TCM) produced by medical institutions, acupuncture, and therapeutic tuina. This initiative aims to encourage the provision and use of appropriate TCM services. Furthermore, pilot counties with populations exceeding 300,000 are required to have at least one Grade II Class A TCM hospital. This presents ample opportunities for private capital to collaborate with local governments in the construction, operation, and management of such hospitals.

The author is a researcher at the Healthcare Management Research Center of Tsinghua University, the China Economic Development Research Center of the University of International Business and Economics, and the Health Management and Policy Center of CEIBS. Email: caojian99@live.com. His research primarily focuses on healthcare economics, hospital capital operations, and hospital management. He co-authored the book Capital Operations and Clustering in the Hospital Industry (with Xie Yufeng and Cao Jian) and has published numerous articles.