Eyeing China’s changes

There is plenty of opportunity in the world’s most populous country for Nashville-based health care players, but don’t expect a land grab

April 18, 2012 By Philip Nannie
Nashville Post

As strong as China’s economy is these days relative to most of the rest of the world, the Middle Kingdom faces an issue the United States know all too well. Its health care system is struggling to properly serve a growing population.

To that end, China’s State Council — essentially the country’s cabinet — in December established new regulations to promote and encourage foreign investment in Chinese hospitals. Foreign companies can now own 100 percent of a China venture and are no longer required to partner with Chinese firms to buy or manage health care facilities.

The changes are monumental in a country that has long been very conservative about foreign ownership of important assets.

“I think this is great news for a city like Nashville,” said Gray Sasser, a Nashville-based attorney and former Export-Import Bank executive who specializes in trade issues involving China. “Our health care management expertise and talent could go a long way toward establishing a beachhead for us.”

Under the old rules, a minimum 30 percent Chinese stake was required and a joint venture needed for foreign companies to own health care interests there. At least one local company has worked with Chinese officials under these rules: Nashville-based China Healthcare Corp. last year completed a $120 million hospital in the city of Cixi and owns a 70 percent stake in the project. The Cixi municipality owned the other 30 percent.

Chuck Elcan is the chief executive officer of China Healthcare but could not be reached for comment.

The rule change is part of a larger Chinese government initiative begun in 2009, according to a story on the website of the state-run China Daily. This program, dubbed an economic stimulus plan, is slated to last through 2011 and is designed to pump 850 billion yuan ($125 billion) into the country’s fractured health care system.

The central government also is providing universal accessto basic health insurance and has launched a plan to improve existing health care facilities and implement pilot reforms of state-run hospitals. Those reforms are where the relaxed ownership rules come into play.

If a local health care company were to purchase a hospital or other facility in China, it would be considered a “wholly owned foreign entity” under the new rules. A WOFE could formulate its own pricing for services and be allowed to participate in China’s medical insurance reimbursement system. The company also would be eligible for tax exemptions during the first three years of its facility’s operation.

But despite the economic possibility and staggering growth potential of breaking into a market of 1.4 billion people. According to several local sources, no Nashville-based health care company is planning a 100 percent ownership foray into China. Significant obstacles to their doing so remain.

John Scannapieco (pictured) is a partner and China practice team leader at Nashville-based law firm Bradley Arant Boult Cummings. He said little is known about the new rules from his sources in China — including some people involved in health care businesses. But Scannapieco isn’t surprised.

“There are many layers to this issue — not the least of which is the provincial aspect, which gives a whole new level of complexity to the problem,” said Scannapieco.

Scannapieco said his sources tell him there is a mechanism in place for the 100 percent ownership. But the implementation is strictly controlled through pilot programs handed down by the central government to the provinces. In short, there is a national mandate administered by the provinces and subject to provincial government interpretation.

“I talked to both government people and industry people about this and both indicated this rule change was neither well-known nor widespread,” Scannapieco said.

That should soon change. The Chinese are in the middle of a national health care crisis. Local experts say the massive country does not have the resources to provide basic primary care to its citizens. The need is great and meeting demand will be difficult.

Investment in Chinese hospitals may not be all that attractive to companies based here —regardless of the rule change. Many investors are skittish about foreign investment in general and, given the political dimension and traditions, the risk in China is exacerbated.

“Chinese officials who oversee health care regulation only think in three- to five-year time frames,” Scannapieco said. This means investors seeking a longer-term return would be less inclined to participate.

Additionally, and perhaps further influencing local participation, is the fact that the United States is already late to the game. Companies such as India-based Fortis Healthcare and Parkway Holdings out of Singapore have had ownership stakes in China for years.

“We’re not even with the first group,” Scannapieco said.

Even veterans can have it rough. Ron Marston, chairman and CEO of Franklin-based HCCA Management Co., said only a few health care companies have survived in China and those companies have been conducting business there for years.

“It’s a very difficult environment and you have to be cautious,” Marston said.

Marston, former senior executive with HCA and an expert in international health care management, says the 100 percent ownership idea isn’t what it seems.

“I can’t think of very many companies who would want a 100 percent ownership stake in China,” Marston said, adding that the need for local business acumen and customs would be substantial. Local government decision makers seem to always be in a state of flux in China, he said, so when progress is finally made, communication channels have to be quickly re-established.

Others say working in China versus the United States is a case of apples and oranges. The expectation levels are different, especially when timeframes are truncated by western standards. So having a Chinese partner mandated by earlier health care ownership rules might not be a bad thing after all.

“The good news about working in China is that you have a Chinese partner,” Sasser said. “The bad news is...”