Wave of Social Capital Investment in Hospitals: Prospectus Filed Amid Surge in Private Healthcare Engagement
Jun 01, 2015 14:37
CST Updated
14:37
The long-rumored medical feast, the “2015 Health Summit,” finally kicked off in Xi’an on May 29. The theme of private healthcare investment, highlighted by the summit’s anthem “Social Capital Investing in Hospitals,” has drawn widespread attention and sparked active discussion among industry professionals.
Dilemma
In 2009, the Central Committee of the Communist Party of China proposed opinions on deepening the reform of the medical and healthcare system, known as the "New Healthcare Reform." In recent years, the country has undertaken comprehensive and bold reforms across various sectors, which are imperative. While these reforms have been advanced in depth, they have also encountered numerous challenges. Our reform strategy is characterized primarily by incremental changes, supplemented by targeted initiatives, a pattern that remains evident in the healthcare sector. To address the difficulties and high costs associated with accessing medical care, local Development and Reform Commissions blindly and aggressively expanded public hospitals, while neglecting to implement a tiered diagnosis and treatment model. This approach ultimately resulted in a waste of resources in newly built public hospitals, failing to alleviate the pressure on medical services. This outcome stems from a lack of clear interconnectivity awareness among leadership regarding targeted reforms and the absence of an appropriate top-level design. From this perspective, the expansion of public hospitals has hindered the development of private hospitals.
In Taiwan, there are two competing associations: the Private Healthcare Institutions Association and public hospitals. The fact that both sides are evenly matched indicates that private hospitals are comparable to public hospitals in terms of market share or overall strength. How has this been achieved? First, both types of hospitals receive equal and fair treatment under the National Health Insurance reimbursement system. Additionally, Taiwan has the Joint Commission of Hospital Accreditation (JCHA), which evaluates hospitals based on their size every three years. Under such stringent pressure, all hospitals strive to maintain their scale and operational capacity, fearing that insufficient revenue could force them into bankruptcy. In contrast, private hospitals in mainland China often cannot compete with public hospitals in terms of scale or professional standards, making fair competition or contention for patient resources unattainable. This disparity stems from imperfect policies and regulations in mainland China, where the lack of rigorous regulatory oversight and a fair, free competitive environment will continue to result in an imbalanced healthcare landscape characterized by one dominant leg (public hospitals) and one weak leg (private hospitals).
To develop private hospitals, the issue of multi-site practice is involved.Gao Jiechun, Director of the Institute of Hospital Management, Fudan UniversityHe argues that this issue is not complicated at all. To illustrate his point with a common analogy, it is akin to lending one’s own nanny to others as an hourly worker; as long as all details are properly negotiated—including working hours, liability responsibilities, and fees—the arrangement is acceptable. However, if the employer does not permit it, and the nanny seeks extra income by working secretly elsewhere, this clearly poses problems. The same logic applies to multi-site practice: bypassing the primary practice site to go directly to a secondary one is certainly inadvisable.
Overall, while the difficulties and high costs associated with accessing medical care are genuine issues, they are not insurmountable. With determined and bold leadership, all obstacles can ultimately be resolved. For instance, the rise of private hospitals represents one of the targeted remedies in healthcare reform. In response, social capital has moved with the times, with investors flocking to the sector and triggering a massive wave of hospital investments.
Solution
To break the deadlock, China has adopted the Public-Private Partnership (PPP) model. This model refers to a partnership-based cooperative relationship between the government and private organizations, established on the basis of concession agreements, for the joint construction of urban infrastructure projects or the provision of certain public goods and services. Regardless of the investment sector, the core of any PPP arrangement is fundamentally based on the corporate structure. In the realm of medical PPPs, the prevailing typical model remains that of for-profit hospitals organized under the corporate system. Other profit-making models are still subject to unstructured discussion, with much left to be explored.
The following is a discussion by on-site guests on the practical issues of the PPP model:
1. (Dean of Xiangya Hospital, Central South University, Sun Hong)First, the hospital director stated that public and private hospitals are not mutually exclusive. Public hospitals welcome the rise of their private counterparts, as this allows them to dedicate more time to in-depth research, refine clinical techniques, and ultimately enhance overall professional competence and service quality. The factor hindering the development of private hospitals is not the strength of public hospitals, but rather policy orientation. Public hospitals can collaborate with private hospitals, much like state-owned assets engage in partnerships. Furthermore, the following issues need to be addressed: hospital management, branding, and human rights. Cooperation between the two sectors can also promote the implementation of multi-site practice, representing a wise choice that benefits the nation, the public, and the institutions themselves.
2. (Guo Yue, President of Shanghai Renji Medical Group)The company declares itself an atypical public-private partnership (PPP) model. As a hospital output management firm, it essentially provides a platform for physicians to practice at multiple locations. Compared with the internal management structure of public hospitals, it differs in the following aspects: leveraging the brand and corporate culture of public hospitals, commercializing the fragmented time of experts at various levels, applying professional MBA-level business administration knowledge from business schools, and featuring investment capabilities. Therefore, it is imperative to explore win-win solutions that satisfy society, investors, and physicians alike.
3. (Hu Yongfang, Chairman and CEO of Cilin Hospital)Cilin Hospital, located in Cixi, Zhejiang Province, is the first large-scale general hospital established as a Sino-US joint venture. It operates as a Chinese-foreign equity joint venture and represents a typical Public-Private Partnership (PPP) model. She believes that private hospitals should leverage social capital while integrating the management expertise and technical capabilities of public hospitals. At the same time, they must fulfill their social responsibility to serve patients. Therefore, hospital site selection should meet both market demands and public needs. Healthcare is inherently local; thus, it is essential to understand the specific needs of local governments, patients, and physicians. This goes beyond the simple issue of shortages in medical and nursing staff to include the diversification of patient needs. The PPP model must also consider how to address these varied demands. American experience, philosophy, and management models in healthcare delivery must be adapted to align with China’s local conditions.
4. (Chen Penghui, Partner at Sequoia Capital) The core investment philosophy of Sequoia Capital is to invest in industry transformations. Changes within the healthcare sector also serve as entry points for investment; therefore, significant investments have been made in private hospitals, reflecting optimism about their future growth potential and development trends. Regarding the Public-Private Partnership (PPP) model, four distinct approaches have been adopted: investing in private hospitals that manage public hospitals (Angel Obstetrics and Gynecology Hospital); partnering with public hospitals on technical collaboration (Hanxi Cardiovascular Hospital); establishing joint ventures with leading experts from public hospitals to create private hospitals (Kyoto Children's Hospital); and collaborating with public hospitals to build new, incremental healthcare facilities (Peking University Rehabilitation Hospital). These initiatives demonstrate Sequoia’s exploration and strategic thinking regarding diversified hospital investments.
Typical Cases
March 2015,Anzhen Hospital and State-Owned Capital Explore Franchise Cooperation, in the specialized fields of cardiology and cardiac surgery, it has ventured into the private hospital sector. Regarding hospitals established by public institutions, national policy outlines two key points: public hospitals cooperate with social capital through franchising models, and they establish non-profit medical institutions. Therefore, Anzhen Hospital’s franchising arrangement complies with national regulations and aligns with policy guidelines. The basic model involves state-owned capital leasing land and constructing facilities, which are then leased to a non-profit hospital, with profits recouped through ground lease payments. In this process, Anzhen Hospital also charges fees for medical team personnel, management services, and brand franchise royalties (calculated based on the scale of hospital construction). The newly established “Anzhen International Hospital” features the following characteristics:
Dilemma
In 2009, the Central Committee of the Communist Party of China proposed opinions on deepening the reform of the medical and healthcare system, known as the "New Healthcare Reform." In recent years, the country has undertaken comprehensive and bold reforms across various sectors, which are imperative. While these reforms have been advanced in depth, they have also encountered numerous challenges. Our reform strategy is characterized primarily by incremental changes, supplemented by targeted initiatives, a pattern that remains evident in the healthcare sector. To address the difficulties and high costs associated with accessing medical care, local Development and Reform Commissions blindly and aggressively expanded public hospitals, while neglecting to implement a tiered diagnosis and treatment model. This approach ultimately resulted in a waste of resources in newly built public hospitals, failing to alleviate the pressure on medical services. This outcome stems from a lack of clear interconnectivity awareness among leadership regarding targeted reforms and the absence of an appropriate top-level design. From this perspective, the expansion of public hospitals has hindered the development of private hospitals.
In Taiwan, there are two competing associations: the Private Healthcare Institutions Association and public hospitals. The fact that both sides are evenly matched indicates that private hospitals are comparable to public hospitals in terms of market share or overall strength. How has this been achieved? First, both types of hospitals receive equal and fair treatment under the National Health Insurance reimbursement system. Additionally, Taiwan has the Joint Commission of Hospital Accreditation (JCHA), which evaluates hospitals based on their size every three years. Under such stringent pressure, all hospitals strive to maintain their scale and operational capacity, fearing that insufficient revenue could force them into bankruptcy. In contrast, private hospitals in mainland China often cannot compete with public hospitals in terms of scale or professional standards, making fair competition or contention for patient resources unattainable. This disparity stems from imperfect policies and regulations in mainland China, where the lack of rigorous regulatory oversight and a fair, free competitive environment will continue to result in an imbalanced healthcare landscape characterized by one dominant leg (public hospitals) and one weak leg (private hospitals).
To develop private hospitals, the issue of multi-site practice is involved.Gao Jiechun, Director of the Institute of Hospital Management, Fudan UniversityHe argues that this issue is not complicated at all. To illustrate his point with a common analogy, it is akin to lending one’s own nanny to others as an hourly worker; as long as all details are properly negotiated—including working hours, liability responsibilities, and fees—the arrangement is acceptable. However, if the employer does not permit it, and the nanny seeks extra income by working secretly elsewhere, this clearly poses problems. The same logic applies to multi-site practice: bypassing the primary practice site to go directly to a secondary one is certainly inadvisable.
Overall, while the difficulties and high costs associated with accessing medical care are genuine issues, they are not insurmountable. With determined and bold leadership, all obstacles can ultimately be resolved. For instance, the rise of private hospitals represents one of the targeted remedies in healthcare reform. In response, social capital has moved with the times, with investors flocking to the sector and triggering a massive wave of hospital investments.
Solution
To break the deadlock, China has adopted the Public-Private Partnership (PPP) model. This model refers to a partnership-based cooperative relationship between the government and private organizations, established on the basis of concession agreements, for the joint construction of urban infrastructure projects or the provision of certain public goods and services. Regardless of the investment sector, the core of any PPP arrangement is fundamentally based on the corporate structure. In the realm of medical PPPs, the prevailing typical model remains that of for-profit hospitals organized under the corporate system. Other profit-making models are still subject to unstructured discussion, with much left to be explored.
The following is a discussion by on-site guests on the practical issues of the PPP model:
1. (Dean of Xiangya Hospital, Central South University, Sun Hong)First, the hospital director stated that public and private hospitals are not mutually exclusive. Public hospitals welcome the rise of their private counterparts, as this allows them to dedicate more time to in-depth research, refine clinical techniques, and ultimately enhance overall professional competence and service quality. The factor hindering the development of private hospitals is not the strength of public hospitals, but rather policy orientation. Public hospitals can collaborate with private hospitals, much like state-owned assets engage in partnerships. Furthermore, the following issues need to be addressed: hospital management, branding, and human rights. Cooperation between the two sectors can also promote the implementation of multi-site practice, representing a wise choice that benefits the nation, the public, and the institutions themselves.
2. (Guo Yue, President of Shanghai Renji Medical Group)The company declares itself an atypical public-private partnership (PPP) model. As a hospital output management firm, it essentially provides a platform for physicians to practice at multiple locations. Compared with the internal management structure of public hospitals, it differs in the following aspects: leveraging the brand and corporate culture of public hospitals, commercializing the fragmented time of experts at various levels, applying professional MBA-level business administration knowledge from business schools, and featuring investment capabilities. Therefore, it is imperative to explore win-win solutions that satisfy society, investors, and physicians alike.
3. (Hu Yongfang, Chairman and CEO of Cilin Hospital)Cilin Hospital, located in Cixi, Zhejiang Province, is the first large-scale general hospital established as a Sino-US joint venture. It operates as a Chinese-foreign equity joint venture and represents a typical Public-Private Partnership (PPP) model. She believes that private hospitals should leverage social capital while integrating the management expertise and technical capabilities of public hospitals. At the same time, they must fulfill their social responsibility to serve patients. Therefore, hospital site selection should meet both market demands and public needs. Healthcare is inherently local; thus, it is essential to understand the specific needs of local governments, patients, and physicians. This goes beyond the simple issue of shortages in medical and nursing staff to include the diversification of patient needs. The PPP model must also consider how to address these varied demands. American experience, philosophy, and management models in healthcare delivery must be adapted to align with China’s local conditions.
4. (Chen Penghui, Partner at Sequoia Capital) The core investment philosophy of Sequoia Capital is to invest in industry transformations. Changes within the healthcare sector also serve as entry points for investment; therefore, significant investments have been made in private hospitals, reflecting optimism about their future growth potential and development trends. Regarding the Public-Private Partnership (PPP) model, four distinct approaches have been adopted: investing in private hospitals that manage public hospitals (Angel Obstetrics and Gynecology Hospital); partnering with public hospitals on technical collaboration (Hanxi Cardiovascular Hospital); establishing joint ventures with leading experts from public hospitals to create private hospitals (Kyoto Children's Hospital); and collaborating with public hospitals to build new, incremental healthcare facilities (Peking University Rehabilitation Hospital). These initiatives demonstrate Sequoia’s exploration and strategic thinking regarding diversified hospital investments.
Typical Cases
March 2015,Anzhen Hospital and State-Owned Capital Explore Franchise Cooperation, in the specialized fields of cardiology and cardiac surgery, it has ventured into the private hospital sector. Regarding hospitals established by public institutions, national policy outlines two key points: public hospitals cooperate with social capital through franchising models, and they establish non-profit medical institutions. Therefore, Anzhen Hospital’s franchising arrangement complies with national regulations and aligns with policy guidelines. The basic model involves state-owned capital leasing land and constructing facilities, which are then leased to a non-profit hospital, with profits recouped through ground lease payments. In this process, Anzhen Hospital also charges fees for medical team personnel, management services, and brand franchise royalties (calculated based on the scale of hospital construction). The newly established “Anzhen International Hospital” features the following characteristics:
Non-profit General Hospital with a Focus on Cardiovascular Diseases
Building a World-Class Hospital
Compliant with National Grade III Hospital & JCI Standards
Covers Social Medical Insurance and Commercial Insurance Standards
Meeting the Medical Needs of Patients at All Levels
A Model for Private Social Capital in Healthcare
Pilot of the Franchise Model