Deloitte China Healthcare Services Industry Report II: Current Status and Trends of Private Hospitals and Clinics

To achieve a leading position in the industry, private hospitals must continuously innovate and improve. As highlighted by the U.S.-based Joint Commission International (JCI), it is essential to consistently enhance quality, innovate products, and refine services.

—Zhao Xingli, Vice President of Medical Affairs, Hemei Medical

In the future, private hospitals will serve as the “catfish,” driving the reform and development of public hospitals and prompting them to improve efficiency and enhance service quality.

——Jiang Tianfan, Phoenix Medical Group, Director and Chief Financial Officer

Private hospitals initially served as followers and supplements to public hospitals, then evolved into limited competitors in certain strong specialties, and will strive to become surpassers as their capabilities strengthen in the future. Currently, we are still at the first stage: following and filling gaps.

—Guo Yue, President, Shanghai Renji Medical

1. Current Status and Trends in the Development of Private Hospitals
Policy Support Continues to Strengthen, Providing Sustained Benefits for Private Hospitals
In 1985, the State Council issued the "Report on Several Provisions Regarding the Reform of Health Work," proposing to "relax policies, streamline administration and delegate power, raise funds from multiple sources, and broaden pathways for the development of the health sector." This marked the beginning of social capital entering China's healthcare industry. Over the past three decades, policies governing socially funded healthcare have evolved through an initial exploratory phase (1985–1992), a market-oriented promotion phase (1992–2005), and a phase of debate and reflection on marketization (2005–2009), becoming increasingly clear after the launch of the new healthcare reform in 2009.China’s healthcare reform aims strategically for "universal access to basic medical and health services"; therefore, "ensuring basic coverage" will remain the overarching tone. As the primary providers of basic medical services, public hospitals will maintain their dominant position in the healthcare service industry. Meanwhile, the government will support and guide social capital into the medical service sector for co-development, with three main objectives: first, to increase healthcare resources through diversified provision, alleviate supply-demand imbalances, and meet the public’s multi-level and diverse needs; second, to divert patients to privately run medical institutions, thereby freeing up government resources to enhance basic medical services; and third, to leverage the "catfish effect" of private hospitals to stimulate market competition and drive public hospitals to improve efficiency and quality.In 2013, the General Office of the State Council released the "12th Five-Year Plan" for healthcare reform, explicitly stating that by 2015, the number of beds and service volume in non-public medical institutions should account for 20% of the total. Supporting policies have become more targeted and substantive in relaxing entry standards for social capital and improving the environment for socially funded healthcare, while reforms of public hospitals have gradually intensified (Table 1). It is evident that the continuous strengthening of central policies and the implementation of detailed local rules will continue to benefit private healthcare enterprises participating in market competition, as well as medical service enterprises involved in public hospital reforms.

Private Hospitals Are Growing Rapidly, Yet Still Far from Government Targets, with Significant Room for Expansion
Private hospitals in China have experienced rapid growth in recent years. As of June 2014, the number of private hospitals nationwide had reached 11,737, more than double the pre-healthcare reform figure. Between 2008 and 2013, the sector maintained a compound annual growth rate (CAGR) of approximately 16%. Meanwhile, the proportion of private hospitals among all hospitals in China rose from 27% in 2008 to 47% by June 2014, reflecting a trend of declining share for public hospitals and robust expansion of the private sector. In addition to the increase in the number of institutions, the volume of services provided by private hospitals has also grown rapidly. In the first half of 2014, outpatient and emergency visits reached 145.81 million, and hospital discharges totaled 8.66 million, representing year-on-year increases of 14% and 19%, respectively.

Although private hospitals account for nearly half of the total number of medical institutions, their patient visits and discharges constitute only about 10% of the national service volume. This reflects the current state of private hospitals being relatively small in scale and having weaker service capabilities, falling far short of the target set by the State Council’s “12th Five-Year” Medical Reform Plan to achieve a 20% share of total services by 2015. China’s healthcare consumption market is rapidly expanding and holds immense potential. With the deepening of the new round of healthcare reforms and the gradual establishment of mechanisms for allocating market-based medical service resources, the market share of private hospitals is expected to continue rising, maintaining rapid growth.

Capital Fuels Accelerated Industry Growth, with Investment Risks and Opportunities Coexisting
In recent years, a surge in hospital investment has swept across China, driven by favorable policy environments and a significant imbalance between the supply and demand of medical services. Leveraging capital, private hospitals have been able to integrate and enhance resources across various domains, including process management, human resources, and medical equipment, while simultaneously accelerating market expansion, scaling up operations, and boosting brand awareness. Propelled by substantial capital inflows, the development of private hospitals is poised to accelerate, achieving rapid growth not only in service volume but also in upgrades to medical quality and service offerings.

• Institutional Investors Flock to Hospitals and Hospital Management Companies
Hospitals and hospital management enterprises have been favored by venture capital and private equity (VC/PE) firms in recent years, with transaction volumes continuously increasing. In the one-and-a-half-year period from 2013 to July 2014, VC/PE financing transactions and disclosed transaction amounts accounted for 27% and 39%, respectively, of the total volume over the previous decade, reaching 15 deals and $250 million. Investment activities have primarily focused on specialized hospitals; over the past ten years, VC/PE financing transactions in specialized hospitals constituted 84% of the total. For instance, CDH Investments has successively invested in Angel Maternity & Child Health Care Hospital, Emeier, New Century Children’s Hospital, and Wenzhou Kangning Hospital. Sequoia China has also invested in Angel Maternity & Child Health Care Hospital, Peking University International Rehabilitation Medical Center, and Lanjing Dental.There are two primary reasons for this trend. First, unlike general hospitals, which are large and comprehensive, specialized hospitals require smaller investment amounts and have relatively shorter cultivation periods. Second, most private hospitals in China adopt differentiated operational strategies compared to public hospitals, focusing primarily on distinctive specialized services. Among these, chain specialized hospitals that are service-oriented and highly replicable have demonstrated strong growth potential, becoming hotspots for investment. In the sector of general hospitals, hospital groups with clear profit models, such as Phoenix Healthcare and Shanghai Renji Medical, have also attracted significant capital interest.

• Active hospital M&A as industrial capital extends olive branches
The healthcare services sector is increasingly viewed as a key growth driver for future consumption. Large enterprises have been actively entering and expanding their hospital investments through various means, such as mergers and acquisitions (M&A) and equity participation. Consequently, hospital M&A activity has been exceptionally vibrant since 2013. Within a span of just one and a half years, both the number of M&A transactions and the total transaction value reached record highs, accounting for 35% and 64%, respectively, of the totals over the previous decade.In terms of acquiring entities, 65% were pharmaceutical and medical device companies (with pharmaceutical firms comprising 58%). Their investment motivations were primarily twofold: first, to secure hospitals as powerful sales channels, thereby extending their industrial chains and achieving synergies; and second, to capitalize on the strong profitability of hospitals, with the aim of building comprehensive health industry groups. For instance, after investing in the high-end brand United Family Healthcare and three private hospitals, Fosun Pharma acquired a 60% stake in Chancheng Hospital, a Grade III Class A hospital, in 2013. This move established an initial layout for its medical services business, combining high-end coastal healthcare with specialized and general hospitals in second- and third-tier cities, with a plan to reach a scale of 10,000 beds by 2015. Similarly, Gansu Duyiwei Biological Pharmaceutical Co., Ltd. acquired seven hospitals in 2013 and 2014, and changed its name to “Hengkang Medical Group Co., Ltd.” at the end of 2013 to reflect its strategic layout across the upstream and downstream segments of the pharmaceutical and healthcare industries.The second largest category of acquirers, accounting for 23% of the total, came from non-related industries, such as Legend Holdings’ acquisition of Bybo Dental. These companies’ investments in hospitals were primarily driven by return on investment, reflecting the current heat and attractiveness of the healthcare services sector.

Whether for achieving investment returns or realizing overall industrial layout, it is evident that opportunities and risks coexist in hospital investments. There are success stories such as Jinling Pharmaceutical’s acquisition of Suqian People’s Hospital, which turned losses into profits, and Tiantu Capital’s investment in Phoenix Medical, which yielded over eightfold returns. Conversely, there are failures, such as Huayuan Group’s quiet exit three years after acquiring five hospitals in Xinxiang, and Double-Crane Pharmaceutical’s divestment of its shares in the East District Hospital of Xinxiang Central Hospital. Hospitals belong to a capital-intensive industry characterized by high construction and operational costs and long incubation periods. Moreover, the success of hospital projects heavily depends on the technical capabilities of the medical service team, making it highly risky to rapidly scale up hospitals in the short term. Secondly, private hospitals in China commonly exhibit irregular practices in financial management and internal controls. To expand private hospitals and facilitate capital integration, standardizing processes and management systems becomes an imperative challenge. Thirdly, China lacks mature hospital management models, making post-investment operations another significant difficulty. Finally, the intensive influx of capital inevitably drives up hospital valuations, further increasing investment costs and risks. Therefore, selecting appropriate timing and target markets, and employing corresponding investment and management strategies to enhance hospital value, are essential prerequisites for investment success.

I believe that the true heyday for Phoenix Healthcare will arrive in three to five years, when institutional investors and pharmaceutical companies, having completed their initial expansion phases, shift their focus to enhancing hospital value. The key drivers of hospital value lie in management—specifically, sound management philosophies, robust management systems, stringent cost-control frameworks, and group-based operational models—all of which are strengths that Phoenix Healthcare can deliver.

— Jiang Tianfan, Director and Chief Financial Officer, Phoenix Medical Group

Capital is currently flooding into the healthcare services sector, and the next trend will be the integration of management talent with capital. Hospital management possesses its own unique characteristics, requiring professionals who have a profound understanding of the industry and the operational dynamics of healthcare, and who can integrate this knowledge with management science; capital alone is far from sufficient.

— Hu Min, Partner, Deloitte Audit Services

The Importance of Hospital Management Will Become Increasingly Prominent
The influx of substantial capital has driven the rapid growth of private hospitals, making post-investment management and value enhancement a top priority. Meanwhile, the participation of social capital in the reform of public hospitals is a crucial component of healthcare reform. Whether through restructuring and acquisition or entrusted management, these models impose stringent requirements on strengthening hospital management to improve operational performance. Hospital management possesses its own professionalism and complexity. Under the current medical system, certain characteristics of hospitals in China—such as opaque financial systems, prevalent channel rebates, lack of autonomy in determining drug procurement prices, and regulatory policy risks—further exacerbate management difficulties. Therefore, as private healthcare provision advances, competition intensifies, and the allocation of medical resources becomes increasingly market-oriented, the importance of hospital management will become ever more prominent. We believe the following aspects warrant consideration.First, senior management serves as the navigator of a hospital, determining its development strategy, organizational operating model, and performance management mechanisms; thus, the selection of management personnel is critical. Currently, the majority of investors in hospitals are investment firms, pharmaceutical companies, and enterprises from non-pharmaceutical sectors, which often lack relevant management experience and expertise. In interviews with major investment institutions and industry insiders, E-Drug Manager noted that hospital management is best handled by professional third-party management teams, or by retaining the original management team while ensuring the hospital’s overall strategic direction remains unchanged. For instance, Phoenix Healthcare, acting as a third-party management institution, enhances the operational efficiency of entrusted hospitals through management output, with investment payback periods typically ranging from four to five years. After Fosun Pharma acquired Suqian Zhongwu Hospital, it delegated specific management operations to the original management team.Second, corporate-style management should be employed to improve hospital operations. While private hospitals bear the social responsibility of treating patients and saving lives, they must also ensure their own sustainability by maximizing output with minimal input. This necessitates the adoption of corporate management strategies. Hospitals can determine their development strategies by conducting in-depth analyses of their strengths, weaknesses, and market environments, positioning target demographics, and creating appropriate service product portfolios. Additionally, they can implement Total Quality Management (TQM), adopt standardized processes, and introduce information technology to enhance both the quality of medical services and hospital efficiency.Third, the development of medical teams. The medical workforce constitutes the core value of a hospital. A common challenge faced by private hospitals is a shortage of medical talent; therefore, managing and improving the efficiency of human resource utilization is a critical issue to address. For example, Shanghai Renji Medical not only prioritizes recruiting and retaining outstanding talent but also places significant emphasis on training medical professionals and optimizing human resource efficiency. One of its strategies involves having experts lead teams in patient care, which alleviates the workload of experts while facilitating knowledge sharing and fostering the development of medical teams.

"Specialized departments with low entry barriers" remain the core business, while expanding into new development directions will become the trend.
Due to early shortcomings in technology, talent, and public awareness, most private hospitals adopted a competitive strategy of differentiated medical services compared to public hospitals. They specialized in fields with relatively lower requirements for technical talent, lower medical risks, faster capital returns, and unmet public healthcare needs that could not be adequately addressed by public hospitals, achieving rapid expansion over the past few years. Among these, obstetrics and gynecology hospitals experienced the fastest growth, expanding from 23 facilities in 2003 to 432 in 2012, with a compound annual growth rate (CAGR) of up to 39%. Additionally, cosmetic surgery and dentistry both recorded growth rates exceeding 18%, while rehabilitation, ophthalmology, orthopedics, and children’s hospitals expanded at rates between 14% and 17%. By 2012, 62% of specialty hospitals nationwide were privately operated. The proportion of private hospitals exceeded 80% in cosmetic surgery, obstetrics and gynecology, orthopedics, and ophthalmology, while private hospitals accounted for approximately 60% in dermatology, hematology, cardiovascular care, dentistry, and rehabilitation. (Figures 8 and 9)

It should be noted that after several years of development, the expansion of some traditional popular specialty fields has begun to slow down. For instance, the growth rate of obstetrics and gynecology hospitals dropped from 61% in 2004 to 14% in 2012; dentistry declined from 49% to 18%; and ophthalmology decreased from 22% to 15% (Figure 10). It is foreseeable that as competition intensifies further, these markets will become increasingly saturated. Consequently, private capital will need to shift towards new directions, such as specialty fields with higher technical barriers, general hospitals, and high-end healthcare, each of which will emerge as distinct growth drivers. We will discuss this in detail in the next chapter.

Scaled Hospital Operations Are the Direction of Development
The introduction of social capital into the healthcare sector aims to stimulate market competition, thereby compelling public hospitals to improve operational efficiency and service quality. Consequently, the inevitable development trend for private hospitals will be scaled operations, enabling them to compete with well-established public hospitals through high-quality, efficient medical care and services. The key to scaled hospital operations lies not only in the rapid and robust expansion of hospital/clinic networks but also in professional management capabilities, as well as synergistic and economies-of-scale effects. Hospitals can optimize resource allocation by implementing two-way patient referrals, conducting multidisciplinary consultations for complex cases, and sharing specialist expertise across facilities, thereby promoting rational resource utilization, sharing, and complementary advantages. Additionally, they can establish centralized pharmaceutical distribution, laboratory testing, and quality control centers to share large-scale equipment, streamline departments, and reduce expenses. Furthermore, scaling up enhances bargaining power to lower costs. Large-scale operations also help bolster public trust, build brand image, and expand market reach.

Private hospitals have shown a trend toward large-scale operations, primarily manifested in two ways. The first is the specialized chain network model. For example, Aier Eye Hospital established more than 70 ophthalmic hospitals across 24 provinces and municipalities directly under the central government between 2003 and 2014. By employing a “three-tier chain” business model, it provides high-quality, multi-level value-added ophthalmic medical services to patients and became the first listed medical institution in China. The second model is the comprehensive medical group. For instance, Phoenix Medical currently owns 12 hospitals and 28 community healthcare institutions through acquisitions and trusteeships, forming an integrated medical service system in Beijing that encompasses community health, basic preventive care, and critical care treatment. This group enhances hospital operational efficiency through centralized management and leverages economies of scale, while reducing costs for pharmaceuticals and medical consumables through secondary price negotiations.

2. Development Strategies for Private Hospitals
Considerations for the Strategic Positioning of Private Hospitals
The strategic positioning of private hospitals should consider the following dimensions:
• Level of urban economic development. The local population’s economic affordability and payment capacity, along with their demand for healthcare services of varying levels and quality, determine a hospital’s positioning in terms of service scope and operational scale. For instance, high-end medical care targets affluent individuals, who are predominantly concentrated in first-tier cities such as Beijing and Shanghai and constitute a relatively small proportion of the general population. Consequently, high-end medical hospitals are currently mostly located in first-tier cities and operate on a limited scale.

• Local healthcare reform policies. The implementation details and progress of healthcare reform policies vary across regions, resulting in differing regulatory barriers and market competition environments for private hospitals regarding market entry and operations. Consequently, adjustments are necessary in terms of service areas, entry modes, and competitive strategies. For instance, Suqian City in Jiangsu Province initiated healthcare reforms in 2000 and became the only prefecture-level city in China with exclusively private medical institutions by 2003. Its policy environment is now quite mature, leading to relatively low policy barriers. However, as competition among private hospitals has become intense and supply is approaching saturation, a key consideration will be how to gain a competitive edge in medical services and pricing to capture market share. In contrast, in certain "pilot" cities, although the implementation of specific policy details remains exploratory, the overall policy environment is favorable. With public hospital reforms being vigorously advanced and social capital not yet fully engaged, these cities may present attractive market entry points.

• Considerations on Preferential Tax Policies. Amidst population aging and the accelerating pace of healthcare reform, coupled with the intensive rollout of relevant national policies, the rapid development of private hospitals is highly anticipated. However, existing preferential tax policies were introduced at an earlier stage and are skewed toward non-profit medical institutions (primarily public hospitals). Their alignment with the current status and trends of industry development needs improvement, and their systematic nature and forward-looking perspective are insufficient (see Appendix for details). Therefore, we anticipate that the state will engage in comprehensive planning from an industry-wide perspective to formulate or refine supporting preferential tax policies to encourage and support the sector’s growth. For potential investors in the industry, it is advisable to evaluate the cost-effectiveness of tax burdens under the current preferential tax policies and to closely monitor future industry policies to assess their impact on tax costs and business models.

• Supply and Demand Dynamics. Since most patients tend to seek medical care locally, healthcare services are subject to a strong geographic service radius constraint. Therefore, investors should consider the local disease spectrum, analyze market potential, and assess the supply of healthcare services. Markets with supply-demand imbalances present more attractive investment opportunities.

• Healthcare Service Projects. Investors should determine their business scope by considering market conditions and the growth prospects of various service segments. For instance, specialized hospitals require relatively lower capital investment and are easier to operate; however, due to low entry barriers, they are easily replicable, which may lead to intense competition and compressed profit margins. In contrast, general hospitals involve longer investment cycles, higher risks, and greater operational complexity, but are harder to replicate. Once public recognition is established, they are difficult to replace, offering significant first-mover advantages. Investors should select appropriate healthcare service projects based on their own capabilities and investment objectives.

• Entry Models. There are four primary models for investing in hospitals: greenfield development, acquisition of private hospitals, and acquisition or trusteeship of public hospitals. We will provide a detailed analysis of the pros, cons, and development trends of these four models in the next section.

Selection of Service Segments for Private Hospitals
Private hospitals are still in the early stages of development. Compared with public hospitals, they are at a disadvantage in terms of comprehensive strength and operational environment. Therefore, adopting differentiated operations will remain the main theme of strategic positioning for private hospitals. Based on the aforementioned considerations for strategic positioning and our observations of the current private medical services industry, we believe that there are several growth hotspots in the medical services industry.

Premium Medical Services

• High-end healthcare refers to personalized, high-quality medical services provided to affluent populations. According to a 2011 Deloitte consumer survey, only 21% of consumers were satisfied with the healthcare system. When consumers are less sensitive to service prices or are covered by high-end medical insurance, they naturally turn to high-end healthcare. It is evident that rising national income, the emergence of middle- and high-income groups, the development of commercial insurance, and heightened public health awareness will continue to drive demand for high-end healthcare in China. Meanwhile, to ensure that basic medical needs are met, the government has proposed limiting the supply of special-needs services in public hospitals, further widening the gap between supply and demand in the high-end healthcare sector. Consequently, private hospitals are expected to maintain rapid growth in this segment. We believe that three trends will emerge in the high-end healthcare services market.

• Geographic decentralization of premium healthcare. The target clientele for premium healthcare primarily comprises expatriates working in China and high-net-worth individuals, such as entrepreneurs, senior executives, affluent businesspeople, and celebrities. As these groups are currently concentrated in major metropolitan areas like Beijing and Shanghai, premium healthcare hospitals and clinics are predominantly located in first-tier cities. With further growth in national income and the radiating influence of major urban centers, premium healthcare services are expanding into second-tier cities. For instance, while United Family Healthcare’s early operations were focused mainly on Beijing and Shanghai, it has since expanded to Wuxi, Guangzhou, and Tianjin, with plans to extend its presence to second-tier cities such as Chengdu and Qingdao in the future.

• Shifts in the target patient populations of certain popular specialty fields in the early stages. In the early development of private hospitals in China, business operations primarily focused on specialty areas with relatively low technical barriers, resulting in intense competition and significant homogenization. Consequently, adopting high-end specialized medical services to achieve differentiated positioning relative to public hospitals and other private institutions became a key strategic response. For instance, Hemei Medical aligned with trends such as rising living standards, the emergence of middle- and high-income groups, and growing emphasis on women’s and children’s health. To address the homogeneous competition in mid- to low-end gynecological services, it transitioned from providing mid-tier gynecological care to offering high-end medical services for women and children.

• Medical tourism is experiencing rapid growth globally, with consumers choosing to travel to countries such as India and Thailand that offer high-quality medical care at relatively lower costs while also providing tourist attractions. China boasts relatively low medical service prices, a highly skilled professional workforce, and abundant tourism resources. In the long term, driven by supportive policies, the supply of medical services in China is expected to become increasingly diverse, positioning medical tourism as an emerging hotspot.

Case Study: Hemei Medical
Hemei Medical was founded by Mr. Lin Yuming, who established the first women’s specialty hospital—Shanxi Modern Women’s Hospital—in Taiyuan in 2002, pioneering the operational model for specialized medical services for women in China. Since then, the company has continuously expanded its market presence, establishing more than 30 branded chain hospitals in major cities such as Beijing, Chongqing, Wuhan, Changsha, Guangzhou, and Chengdu over the past decade. The company has launched three brands: “Modern Women,” “Liren,” and “Hemei.” Unlike the first two, “Hemei” is positioned as a high-end provider of obstetrics, gynecology, and pediatric care, with its facilities primarily located in large cities with strong payment capacity, such as Beijing and Shenzhen. This brand represents the company’s key focus and strategic direction for transformation in recent years.

Hemei Medical’s success stems from its management’s keen insight into industry policies and market conditions, its unique strategic vision in targeting specialty markets, and its excellent operational capabilities.

• Adopt differentiated competitive strategies at different stages. In the early stage, due to the relative scarcity of physician resources, the company targeted the mid-tier women’s specialty segment—a market with substantial demand but insufficient attention from large hospitals—as its entry point. It pursued differentiated operations through departmental specialization, expansion of service offerings, distinctive facility design, and the introduction of new technologies, thereby compensating for its inability to match the expert technical capabilities of large public hospitals. In the later stage, after accumulating a certain level of expert technical strength, the company aligned with the national policy of “encouraging the development of high-end healthcare” and began to expand in a more refined manner. In 2009, it established the “Hemei Business Unit” to build “Hemei” as a premium medical brand. Particularly in recent years, under the government’s policy direction restricting special-needs services in public hospitals and considering the severe homogenization of competition in the low- to mid-tier women’s specialty sector, Hemei has shifted its focus to high-end healthcare and commenced its transformation.

• Leveraging capital to rapidly expand market share and secure first-mover advantage. The company has introduced capital from investors such as CDH Ventures and CCB International to accelerate its expansion, establishing more than 20 new hospitals over the past six years. Meanwhile, the company has also standardized its internal financial and management mechanisms through external investment, laying a solid foundation for its future IPO, and has currently begun planning an overseas red-chip structure.

• With years of dedicated effort in cultivating management talent to oversee hospital operations, the company operates its affiliated hospitals through a standardized system, ensuring the quality and safety of medical services while achieving rapid expansion. The operations of each Hemei chain hospital are overseen by a General Manager, and all management personnel are homegrown talents who have advanced from entry-level positions within the company, possessing an in-depth understanding of Hemei’s operational model. At the group level, multiple functional departments supervise and control medical quality and safety across affiliated hospitals, while promoting the sharing of medical technology and knowledge. This institutional framework ensures that standardized management, clinical workflows, and cutting-edge medical technologies are replicated throughout the entire group network. The company is committed to continuously enhancing service quality by introducing advanced international healthcare service concepts. It has established a strategic partnership with the Harvard International Medical Alliance and is one of the few private healthcare institutions in China to have obtained international JCI accreditation.

Specialty Chain

Specialized hospitals represent the sector experiencing the most rapid expansion of private capital. According to the Health Statistical Yearbook, China had a total of 1,760 private hospitals in 2012, achieving a compound annual growth rate (CAGR) of 19% over the preceding decade. Compared with general hospitals, specialized hospitals require lower initial investment and have smaller demands for technology and talent, resulting in lower barriers to entry. From an operational perspective, their focus on specific specialties allows for greater concentration in recruiting experts, cultivating talent, and building brand identity, thereby reducing management complexity. Meanwhile, the strategy of developing distinctive specialties enables private hospitals to pursue differentiated competition, avoiding direct confrontation with public hospitals. Due to these characteristics, specialized hospitals generally have shorter ramp-up periods and higher profit margins, making them highly attractive to private capital in the early stages and fostering numerous outstanding chain brands such as Aier Eye Hospital, Arrail Dental, and Topchoice Medical. With the continued influx of capital, two strategic directions may be considered for future positioning.

• Scalable, service-oriented specialty healthcare chains
Although private hospitals cannot compete with public hospitals in terms of comprehensive strength, they can seek breakthroughs in service and pricing to gain a competitive advantage. Consumers are willing to pay a premium for high-quality service; therefore, superior service not only grants private hospitals pricing power but also helps them circumvent the bottleneck of being designated as medical insurance providers to some extent. Furthermore, service excellence does not involve overly complex medical technologies and is precisely what public hospitals lack most, allowing private hospitals to leverage their strengths to offset weaknesses. On the other hand, sustained price advantages (or offering better service at equivalent prices) must stem from strict cost control. Specialized hospitals are smaller in scale, making chain operation models and the ability to expand rapidly yet steadily key to success. The growth of the healthcare services industry will accompany the specialization of the medical field, and low-risk, service-oriented, and highly replicable niche segments will emerge as new investment hotspots.

In this category of hospitals, specialty areas that exhibit a high dependence on medical devices and consequently have relatively lower requirements for physicians’ technical skills warrant attention. For instance, Aier Eye Hospital, which utilizes excimer laser technology, expanded to over 70 chain hospitals within 11 years. Similarly, CCMed Healthcare, leveraging radiotherapy and imaging technologies, has established 140 tumor radiotherapy and diagnostic imaging centers across 55 cities in China. The technological characteristics of medical services provided by such hospitals compensate for the shortcomings in talent and technical expertise often faced by private hospitals. Furthermore, their standardized processes are highly replicable, enabling rapid expansion to achieve economies of scale and brand effects. With further advancements in medical technology and increasingly powerful medical instruments, this sector is poised to see the emergence of more rising stars.

• Specialized Fields with Relatively High Barriers to Entry
Different disease specialties present distinct windows of opportunity for development. Over the past decade, specialized chain hospitals in fields such as obstetrics and gynecology, dentistry, and ophthalmology have experienced rapid growth. These sectors, characterized by relatively low entry barriers, a strong emphasis on service quality, and a complementary role to public hospitals, attracted substantial investment in their early stages. However, low entry barriers also lead to a swift increase in competitors and gradual market saturation. Consequently, as private hospitals enhance their technical capabilities and overall competitiveness, industries with higher barriers to entry are becoming the new focus of investment. For instance, the expansion of children’s hospitals has accelerated in the past two years (Table 3 and Figure 12). In the long term, with the further advancement of national healthcare system reforms—particularly once medical professionals are able to move freely between institutions—private hospitals will be well-positioned to enter higher-barrier specialty fields such as orthopedics, oncology, and neurology.

General Hospital

General hospitals target the mass market, offering comprehensive departments and generating substantial demand for medical service personnel, which entails high investment costs. Meanwhile, to meet public needs, they rely heavily on medical insurance and are prone to direct competition with public hospitals. Consequently, most private general hospitals currently adopt a strategy of developing specialized departments within a general hospital framework, aiming to combine the scale advantages of general hospitals with the differentiated operational advantages of specialized hospitals.

General hospitals will emerge as another hot spot for social capital investment. The primary reason is the severe imbalance between supply and demand in China’s medical resources, coupled with uneven geographic distribution. As patients tend to seek medical services locally, establishing new general hospitals or acquiring and managing underperforming hospitals based on local supply-and-demand conditions can secure a market position by addressing public healthcare needs unmet by public hospitals. Secondly, favorable policies are in place. The State Council executive meeting held this September proposed accelerating the construction of projects aimed at “shoring up weaknesses,” with the development of general hospitals being one of the key initiatives to be vigorously advanced over the next two years. The meeting also emphasized attracting greater participation from social capital to ensure smooth project implementation, indicating that government support for private general hospitals will further strengthen. Beyond macro-level policies, the implementation of detailed regulations at the micro level has also opened doors for private hospitals. For instance, Beijing this year abolished the requirement for physicians to obtain approval from their supervising authorities for multi-site practice, following the earlier removal of caps on the number of practice locations. The promotion of multi-site practice will revitalize existing medical resources, inject core growth momentum into private hospitals, and help them build medical teams and enhance brand recognition. Additionally, obtaining designated status for medical insurance reimbursement has become easier, alleviating payment concerns for patients seeking care at private general hospitals.

Compared with specialized hospitals, general hospitals have higher requirements in terms of capital, talent, and management. Due to this characteristic, general hospitals are more difficult to replicate. Once public recognition is established within their service radius, they are hard to displace, enjoying a significant first-mover advantage. Therefore, the current severe imbalance between the supply and demand of medical services has created a favorable opportunity for social capital to enter the general healthcare sector, with various investors rapidly seizing market share. According to statistics from the Health Yearbook, there were 6,047 private hospitals in China in 2012, with 1,808 newly added in 2011 and 2012 combined, accounting for 30% of the existing stock.

Case Study: Phoenix Healthcare Group
Phoenix Healthcare Group is a large private healthcare group that has participated in the reform of state-owned public hospitals since 2000. It currently operates 11 general hospitals, one traditional Chinese medicine hospital, one maternal and child health hospital, and 28 community clinics in the Beijing area. Among these, it holds an 80% equity stake in Beijing Jiangong Hospital, for which it owns property rights, while the rest are under management contracts, forming a comprehensive medical service system that includes community health services and critical care treatment. Phoenix Healthcare was listed in Hong Kong in November 2013. As China’s first healthcare operator to enter the international capital market, it achieved a price-to-earnings ratio of 24 times and set a record with 534-times oversubscription. Phoenix Healthcare has attracted significant market attention not only because its involvement in healthcare reform reflects investors’ expectations for the potential of China’s healthcare market, but also because it has achieved strong performance by participating in public hospital reform through industrialized approaches. In the first half of 2014, the company’s revenue increased by 20.8% year-on-year to RMB 507 million, and profit attributable to shareholders rose by 63.6% to RMB 82 million.

Phoenix Healthcare’s listed business model offers a reference for private capital participation in the reform of public hospitals. The company’s revenue primarily consists of three components: comprehensive hospital services, supply chain operations, and hospital management services. Revenue from comprehensive hospital services is derived from the medical service income of Beijing Jian Gong Hospital, in which Phoenix Healthcare holds a controlling investment stake. In the first half of 2014, this segment accounted for 48.8% of total revenue, making it one of the company’s primary revenue sources. Another major source is supply chain operations, which contributed 47.9% of total revenue in the first half of 2014. Phoenix Healthcare engages in the supply chain business for medical devices, consumables, and pharmaceuticals through its subsidiaries. As all hospitals within its network are located in Beijing, the company can consolidate demand for devices, consumables, and drugs across its hospital network, leveraging secondary price negotiations to secure volume-based discounts from suppliers. It then sells these products to its hospital network at the tender prices set by the local government, with the price differential constituting its supply chain revenue. The scale of the group’s hospital network and its future expansion are particularly critical, as they form the basis for leveraging economies of scale to achieve favorable bargaining power. Revenue from hospital management services comes from management fees earned through the asset-backed trusteeship of public hospitals. By exporting management expertise and capital, Phoenix Healthcare obtains operational control over hospitals without involving ownership rights, thereby circumventing, to some extent, the challenge that non-profit public hospitals cannot distribute profits. The company operates hospitals in a manner that maximizes the overall interests of the group, improving operational efficiency while strengthening control over the upstream supply of consumables, devices, and pharmaceuticals. Although hospital management services accounted for a relatively small proportion of total revenue—only 3.3% in the first half of 2014—this segment provides a rapid and cost-effective pathway for building the company’s hospital network and lays the foundation for acquiring target hospitals when the timing is appropriate.

Phoenix Healthcare’s success features many noteworthy aspects:

• Seized the opportunity presented by national healthcare reform. In its early stages, Phoenix Medical primarily focused on building new hospitals. However, as its operational and management capabilities were still in the accumulation phase, it struggled to compete with public hospitals in terms of talent and technical expertise, resulting in mediocre operational performance and a lengthy return-on-investment period. Consequently, the company gradually divested its ownership interests. After 2000, Phoenix Medical capitalized on the opportunities arising from national public hospital reforms, actively participating in pilot reform programs for public hospitals in Beijing. It rapidly built its healthcare service network through the trusteeship and acquisition of public hospitals.

• Enter the healthcare market through multiple channels and conduct market-oriented operations led by a hospital group. The company is positioned as a corporate group specializing in healthcare management and operations, deploying its hospital network in Beijing through a combination of trusteeship and acquisition of public hospitals, thereby circumventing challenges related to property rights and institutional attributes. Meanwhile, the company achieves resource synergy by integrating service offerings across the entire value chain, operating hospitals in a manner that maximizes group-wide benefits.

• Expansion along the industrial chain based on hospital networks. Given the dominant position of hospitals in China’s pharmaceutical industry chain, the company has been able to internalize a portion of the profits traditionally captured by pharmaceutical distribution enterprises.

• Capital operations for resource integration. The company achieved a public listing following its joint-stock reform, laying the foundation for later industry and financial resource consolidation to expand the group’s scale.

• Operate affiliated hospitals through a standardized management system and share resources within the group to achieve synergies. This includes rapidly replicating the management model and hospital culture by implementing corporate-wide standard operating procedures across all group hospitals, employing professional hospital administrators to oversee daily operations, and leveraging the company’s information technology and management systems to support administration; furthermore, enhance the diagnostic and treatment quality of each hospital by sharing expert support within the hospital group to facilitate the dissemination and replication of technical expertise.

Case Study: Renji Medical Investment Co., Ltd.
Shanghai Renji Medical Group was established in 2003. Initiated by Renji Hospital, which is affiliated with Shanghai Jiao Tong University, the group is a joint-stock limited liability company engaged in healthcare management and operations, founded through a collaboration between Renji Hospital and social capital. Over the past decade, the group has expanded rapidly through investment, trusteeship, and new construction. It currently operates more than 20 hospitals at Level II and above, achieving strong performance. For instance, Cangnan County People’s Hospital in Zhejiang Province, which came under the group’s entrusted management in 2004 at the request of the Cangnan County Government, has been upgraded from a Level II-B to a Level III-B hospital, with its annual revenue increasing from RMB 45 million prior to the trusteeship to RMB 520 million. Similarly, Suzhou Yongding Hospital, invested and built by Jiangsu Yongding Co., Ltd. and placed under the group’s management, saw its key operational indicators improve by more than 50% within just one year of the trusteeship.

Shanghai Renji Healthcare’s rapid yet steady expansion has been driven by the strong technical support and brand advantages of Shanghai Renji Hospital, its advanced hospital management system, flexible business model, and effective alignment with healthcare reform policies.

• Leveraging the talent, technical, and brand advantages of Renji Hospital to drive the group’s hospitals. With a history spanning 170 years, Shanghai Renji Hospital is a comprehensive Grade A tertiary hospital integrating medical care, teaching, and research, covering a full range of medical specialties. It enjoys strong public reputation. Renji Medical relies on Shanghai Renji Hospital’s robust talent pool, technical expertise, and brand strength to build its hospital network. By integrating the advantageous technical resources of Renji Hospital, the Group exports and replicates these capabilities to locally invested and managed hospitals through various models. In terms of expert deployment, multiple approaches are adopted, including permanent stationing, regular visits, and ad-hoc consultations. Technical support is provided in accordance with local patient needs, and experts lead teams to facilitate the sharing and replication of technologies at local hospitals. The Group places particular emphasis on improving the efficiency of medical talent utilization, organizing effective medical activities and resource integration around physicians to maximize their professional value. The brand of Shanghai Renji Hospital constitutes another major advantage for Renji Medical. While exporting technical capabilities, the Group leverages the radiating effect of the brand to enhance public awareness of all hospitals within the group.

• Leverage a professional and standardized hospital management system to ensure endogenous growth among member hospitals. Hospital operations are complex and self-contained; therefore, the ability to achieve rapid growth after joining a medical group hinges on the group’s management capabilities. Renji Healthcare has integrated advanced domestic and international hospital management practices to develop and establish a comprehensive system of professional and commercial hospital management products. This system effectively applies standardized management protocols, medical services, and clinical workflows to the daily operations of its group-affiliated hospitals. The Group adopts a “2+1” management philosophy: The “1” refers to the medical ethics and evaluation framework embodied in the principle of “Benevolent Art Healing the World.” The “2” pertains to technical practice, emphasizing on one hand the standardization and refinement of treatment techniques for common and frequently occurring diseases to build a solid foundation and reputation; and on the other hand, strengthening technical training and continuing education to enhance medical service capabilities. While consolidating professional technical expertise, Renji adjusts the portfolio of medical services based on the specific circumstances of each member hospital, cultivating specialized departments renowned for their distinctive strengths.

• Adopt flexible business models to achieve rapid expansion. Hospitals represent asset- and talent-intensive investments. Renji Healthcare has entered target hospitals through various forms, including trusteeship, acquisition, equity cooperation, and greenfield development, establishing a hospital group footprint in the Yangtze River Delta and East China regions. Target hospitals include both general and specialized facilities, with selection primarily based on local healthcare market supply and demand dynamics, competitive landscape, and hospital qualifications. The Group emphasizes the operational feasibility of its management and trusteeship models, determining the form and depth of management according to the current status of local healthcare systems, government requirements, and the nature and operational performance of each hospital.

• Seize healthcare reform policies and timing. In the early stages, when China’s healthcare market was relatively closed, the primary strategy for entering the healthcare services sector was through hospital trusteeship models. This approach enabled rapid market deployment while accumulating experience to explore management and trusteeship models tailored to China’s national conditions and healthcare reform policies. As the healthcare services market has become more open, central government support for private healthcare provision has strengthened, local policies have been successively implemented, and social capital investment in the healthcare services market has continued to grow. Consequently, Renji Hospital has shifted its focus to building new hospitals, with the goal of constructing 5–8 hospitals, each with 60,000 beds, within three to five years.

Health Services

With the improvement of China's economic level, the public is paying increasing attention to their own health. Healthcare-related consumption is beginning to break away from the traditional concept of "seeking medical care only when ill," presenting multi-level and diversified demands. In response to this shift in healthcare consumption, the State Council issued the "Several Opinions on Promoting the Development of the Health Service Industry" in November 2013, introducing the concept of the "health service industry" for the first time. It pointed out that the health service industry encompasses numerous fields, including medical services, rehabilitation and healthcare, fitness and wellness, and clarified that the main tasks in the coming period would be to promote diverse health services such as healthy elderly care and Traditional Chinese Medicine (TCM) healthcare services.Health services differ from medical services; the latter are premised on illness, whereas the former are based on the forward extension and backward continuation of medical services. "Forward extension" can cover emerging services such as health consultation, home healthcare, and TCM wellness, while "backward continuation" can include postoperative rehabilitation, confinement centers, chronic disease management for the elderly, and rehabilitative nursing. Compared to medical services, these fields have lower technical barriers, require less start-up capital, are highly service-oriented, and are areas that large public hospitals often lack the capacity to address. Therefore, they are expected to grow rapidly with policy support. The downside is that most health services are not covered by basic medical insurance. With the advancement of commercial insurance in China, this challenge is expected to be alleviated, further expanding the market.

Traditional service providers can leverage online platforms such as WeChat to bridge the gap with health service consumers, better capitalize on their data management advantages in health management, enhance consumer experience, and successfully achieve repeat sales.

— Wu Ping, National Leader, Life Sciences & Healthcare Industry, Deloitte China

Hospital Investment Entry Models
Hospital investments primarily take four forms: acquisition of private hospitals, trusteeship and acquisition of public hospitals, and greenfield development. The following discussion explores the advantages, disadvantages, and development trends of these models. It should be noted that each model has its own pros and cons; investors should conduct a comprehensive assessment based on their own capabilities and objectives. For enterprises operating on a group scale, diversified investment strategies can be considered to achieve steady expansion.

• Acquisition of private hospitals. Acquirers generally enhance hospital operational efficiency through the infusion of capital, management expertise, technology, or brand value. This model is currently quite common due to its relatively short ramp-up period and the ability to retain existing medical talent. However, a drawback is that most acquired hospitals have legacy issues, which can prevent the full implementation of the investor’s operational philosophy and methods in certain cases. Additionally, intense competition in the acquisition market has significantly inflated hospital valuations, leading to a situation where some hospital owners are reluctant to sell while investors adopt a wait-and-see approach.

• Entrusted Management of Public Hospitals. Since the launch of the new healthcare reform, local governments have actively explored diversified models for operating medical institutions and advanced the restructuring of public hospitals. Entrusted management has emerged as an effective approach to separating ownership from operational control. The entrusted party generates revenue through hospital management fees and supply chain-related profits by improving the operational efficiency of public hospitals. As this model does not involve changes in property rights, it carries lower political risk and can serve as a transitional measure for the gradual withdrawal of state capital from certain medical service sectors in the long run. Furthermore, social capital can help address non-performing loans, upgrade hardware facilities such as medical equipment, and alleviate fiscal pressures on local governments, making this model highly popular. From the perspective of the entrusted party, the hospitals under management are already designated insurance providers with established medical teams. Compared to building new hospitals, this approach features a shorter ramp-up period and lower risk, making entrusted management of public hospitals another common pathway for social capital to enter the comprehensive healthcare sector. Phoenix Medical Care, which went public in 2013, provided a relatively mature model for this practice. However, due to governmental caution, the public hospitals selected for entrusted management are typically those with poor operational performance and relatively weak medical technical capabilities, thereby placing high demands on the managerial and technical export capabilities of the entrusted party. Additionally, hospitals often require the retention of existing mechanisms, such as maintaining employee status and the public nature of the institution. Consequently, while introducing advanced management methods and systems, the entrusted party may encounter institutional constraints. Moreover, entrusted management contracts are time-bound, carrying the risk that the contract may not be renewed, potentially resulting in the loss of the managed hospital.

• Acquisition of public hospitals (participation in the restructuring of public hospitals). Public hospitals hold advantages over private hospitals in areas such as physician resources and public recognition, making them attractive acquisition targets. However, the government maintains an extremely cautious stance toward property rights reform in public hospitals, and there are currently no clear regulations on how social capital can participate in such restructuring, resulting in very slow progress. From an investor’s perspective, there are four main challenges in participating in the restructuring of public hospitals. First, the financial systems of public hospitals lack transparency, creating difficulties in hospital valuation. Second, acquisition negotiations often involve multiple government departments and require the support of hospital management and even employees, leading to prolonged negotiation periods and a high risk of failure. Third, public hospitals are all non-profit institutions. According to relevant national laws, profits from non-profit hospitals can only be reinvested within the hospital; thus, determining how to distribute profits after investment (and how listed companies can reflect performance in their financial statements) becomes a significant challenge. If one adopts the approach of converting a non-profit hospital into a for-profit entity, the hospital faces two types of risks. One is policy uncertainty, as the state neither encourages nor opposes such conversions. Additionally, changing the institutional nature means the hospital loses certain existing benefits, such as policy subsidies and tax incentives, which would reduce profitability. Fourth, hospitals from which state capital withdraws are often those with poor operational performance, burdened by significant historical liabilities. Meanwhile, investors must also address issues such as safeguarding physicians’ rights and social status to retain talent, posing further operational challenges in the later stages.

• Establishment of new hospitals. Compared with the previous three models, establishing new private hospitals involves lengthy approval and construction processes, substantial capital investment, a prolonged period to achieve profitability, and high risks. However, the advantage lies in the absence of legacy issues, granting investors greater control. In the past, due to policy biases favoring public hospitals, private hospitals were at a disadvantage in areas such as medical insurance reimbursement and talent acquisition, resulting in slower growth for newly established private general hospitals. As policy support gradually intensifies to create a fairer operational environment for private hospitals, social capital is increasingly adopting this model to enter the general hospital sector.

Remaining Report Topics:
III. Development Status of Public Hospitals and Community Hospitals

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This article is published by VCBeat with authorization from Deloitte. The views expressed are those of the author alone and do not represent the position of VCBeat.