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Investors lured by call of siren
( 2004-02-05 11:03) (China Daily by Liu Jie)

Fan Xiaoyi, a 38-year-old homemaker, has chosen to give birth to her son at the Homecare Women and Children Hospital, a Sino-US joint venture. The cost of 50,000 yuan, or US$6,024, is more than 10 times higher than that charged by a public hospital.

"It's well worth paying the extra expenses," she says, holding her newborn son in her arms.

"This is my first, and, most probably, the only child I am going to have," Fan says. "I want the best for him and for myself," she adds.

With a family income of 350,000 yuan (US$42,169) a year, she can afford this option .

Rapid economic progress has enriched many people across the country, especially in the major cities and in the more prosperous coastal regions, raising expectations for a wide range of services. Chief among that is medical service.

Such pressing demand has given rise to enormous opportunities in China's primary health care market, which has become a siren call to foreign investors from around the world.

A few of the world's largest healthcare providers have established hospitals in various major Chinese cities in the form of joint ventures with domestic partners. Many more are expected to follow.

The bid to carve out a share of the billion-dollar health care business by these pioneering foreign companies is closely watched by many medical establishments in developed countries who are keen on tapping the vast potential opportunities in the Chinese market. It is widely believed that within the next two decades, the size of China's healthcare market will rival the US and Japan.

Latest official figures show that total spending on healthcare in China in 2000 amounted to 5.3 per cent of the country's gross domestic product (GDP) of 8.9 trillion yuan (US$1.072 trillion). The share of healthcare expenditure to total GDP in China, which was only 0.3 percentage point above the minimum level recommended by the World Health Organization, is widely considered to be too low for a fast developing economy that has been growing at an average of between 7 and 8 per cent.

Many healthcare experts estimate that healthcare spending, especially in the cities and the coastal regions, have been growing at a faster rate than GDP, which was projected to amount to more than 11 trillion yuan (US$1.325 trillion) in 2003, up about 8.5 per cent from 2002.

With encouragement from the central government, private hospitals and medical clinics have mushroomed in the cities and townships throughout the country. Many of them are small-scale establishments owned by local interests. Latest figures compiled by the China Hospital Management Society showed that there are at least 500 such private hospitals in China, each of which has a registered capital of about 200,000 yuan (US$24,096.39).

At the other end of the scale are the large public hospitals that have partnered with foreign interests in their transformation into market-oriented medical service providers to compete for well-to-do patients who are willing to pay more for a better environment and, perceivably, more attentive care.

In the past several years, a total of 18 joint venture hospitals and more than 60 joint venture clinics have opened in Beijing, Shanghai and several cities in Shandong and Fujian provinces.

These are establishments that have been approved by the central government. About another 200 joint venture hospitals and clinics with only local government approval have sprung up in 19 municipalities, provinces and autonomous regions.

SK Hospital Beijing, with a total investment of 29 million yuan (US$3.493 million), is the first hospital in China set up by the South Korean business conglomerate SK Group. The joint venture was opened in December 2003 in Beijing. SK has a 70 per cent stake in the project. The rest is shared between the International Health Exchange and Co-operation Centre, which is affiliated to China's Ministry of Health, and a domestic enterprise based in Fuzhou.

The 50-bed hospital, located in an up-market residential area in Beijing's Chaoyang District, has an ambiance that is more akin to a boutique hotel than a medical facility. Targeting families with annual income in excess of 200,000 yuan (US$24,096.39), the hospital expects that its major business will come from cosmetic surgery and related treatments.

"We've spent two years studying the market before we made the decision on this hospital venture," says Choi Chang-iK, chief executive officer of the SK Hospital Beijing. "Our study shows that the healthcare market in China catering to the medium to high income groups is going to be very competitive in the coming years, and those who come in at an early stage will stand a better chance at success," he says. "That's why we were so keen on getting the project off the ground before anyone else."

Healthcare has always been a significant part of SK Group's business. The diversified conglomerate is a major owner and operator of hospitals and other medical facilities in South Korea.

Cheng Xie, president of SK China, says that the company's Beijing hospital is much smaller in scale compared to its hospitals in South Korea. But he adds that the group has big expansion plans for China. "We are planning to open 20 hospitals in different cities in China in the next five years," he says. Instead of going it alone, the company much prefers to have a government-affiliated partner for every hospital it plans to open in China, Cheng says.

The expected proliferation of joint venture hospitals with foreign capital and technology could pose a threat to domestic private hospitals which are usually not as well funded. But "in the longer-term it should be a good thing for China," says Lei Haichao, a researcher at the Beijing Medical Economy Research Institute.

Introducing higher quality healthcare to China, these joint venture hospitals are forcing domestic medical institutions to upgrade their facilities to compete, Lei explains. This can help raise the general standard of healthcare in China and expedite the reform of the medical system, he says.

Nevertheless, domestic hospitals and other healthcare establishments will still enjoy some form of government protection at the initial stages of the reform. For instance, joint venture hospitals with foreign interests are excluded from the public health insurance scheme. Patients treated at these establishments are not entitled to reimbursement.

Such a restriction is apparently designed to confine foreign joint venture hospitals to the high-income segment of the market, thus preventing them from engaging in direct competition with large State-run hospitals as well as domestic private hospitals and clinics.

As part of the medical reform programme, the government has been encouraging private enterprises to invest in the healthcare industry. Many have obviously answered the call. Aohua Medical Service (AMS) in Shenzhen has just opened its 24th Gamma Knife Centre in Beijing. The 20 million yuan (US$2.409 million) medical facility is a joint venture between AMS and the Beijing Airforce 466 Hospital.

Song Jun, AMS general manager, says that his company is responsible for building the facility and the supply of all medical equipment while its partner provides medical service and technological support. This arrangement is "significant because it puts into practice the brilliant idea of reinvigorating a State-run hospital with an injection of private capital," says Cai Renhua, president of the Health Economy Research Institute, a Ministry of Health think-tank.

For AMS, this is simply good business. The group is planning to open a Sunshine Obstetric Centre in Beijing this year and another nine such establishments in other cities before 2006.

In Shanghai, the State-run Shanghai Punan Hospital, which is nationally renowned for brain surgery, signed a management contract in December 2003 with Shanghai Blue Cross Hospital Management and Investment, a unit of the international health insurance company. This was the first such contract between a Chinese State-owned hospital and a foreign management group.

The contract allows Shanghai Blue Cross to manage Punan as a private enterprises in price setting and personnel management. Shanghai Blue Cross is also responsible for raising funds to finance the development of the hospital.

This arrangement is widely seen in the medical profession as some kind of a breakthrough. Healthcare experts say that the introduction of foreign management expertise and funding capabilities can help expedite the modernization of State-owned hospitals without putting too much of a strain on the public coffers.

"The participation of domestic and foreign investors in the medical services sector introduces the flexibility of a market-oriented approach to the rigid and, in some cases, archaic healthcare system that offers little choices to the increasingly prosperous public," Cai says.

At present, the competition among joint venture and private hospitals focuses mainly on pricing, facilities and services. These establishments are putting great care and attention into hardware, especially the design and furnishing of the premises. For example, the main entrance at the SK Hospital in Beijing looks almost as grand as the main lobby of an up-market hotel in the city.

But as the healthcare market matures, the focus is expected to shift more to the quality of services provided, industry sources say. This would create a strong demand for medical specialists.

The expected rivalry for medical talent could lead to a drain of qualified professionals to the better-funded and more flexibly managed joint venture and domestic private hospitals from the more rigid State establishments.

Already, some public hospitals are feeling the heat of competition. Dai Shiming, president of the Beijing Tongren Hospital, one of the largest public hospitals in the nation, says that his "biggest headache" is the combination of funding shortage and staff turnover.

"We hope that the reform of the medical system can progress at a much faster pace," he says. What Dai is hoping for is a clearer line drawn between profit and non-profit-making medical institutions. A clear distinction between the two types of institution, he says, "could extricate us from our dilemma," he adds.

Meanwhile, the private hospitals continue to enjoy growing popularity among the relatively higher income groups in the cities. Zhang Xuemin, a 46-year-old manager at a foreign-owned company earning a monthly salary of 15,000 yuan (US$1,807), insists on going to the Sino-US Jiamei Dental Hospital for treatment instead of a neighbourhood public clinic.

"I can't afford the long wait at public clinics," Zhang says. "Here (at Jiamei) the service is prompt and efficient," he adds.

Like new mother Fan Xiaoyi, Zhang says he doesn't "mind paying more for that."

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