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How Investment Bankers Can Save Chinese Hospitals

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Hospitals are the great exception to the China success story. The private ones are mostly small and appropriately distrusted. The public ones are usually like time traveling back to 1980. While more trusted in terms of actual care, they are operational chaos. And despite lots of recent hype and hope, neither appear to be going anywhere terribly fast. In terms of service, cost and quality, not much has really changed in Chinese hospitals in decades. Progress is very slow compared to the rest of China.

There are lots of reasons for this situation. But let me suggest three and suggest a “simple stupid“ way forward – which ironically depends not on doctors or on policy-makers but on investment bankers.

Problem #1: The doctors and nurses are still mostly in the public hospital system and they mostly want to stay there.

While about 10,000 of the existing 24,000 hospitals are private, this is actually only about 11% of patient flow and beds. Most private hospitals are pretty small – effectively clinics. Chinese doctors today are almost all in the public system. And there is no indication (yet) of a large scale migration of hospital staff to the private sector.

In fact, most physicians are fairly wary of such a move. They overwhelmingly want to stay in the security of the public system (lots of polling data support this). However, they would like more money and to move up to the Tier 3 hospitals if possible.

Problem#2: Patients still don’t trust much the existing private hospitals.

In a 2012 McKinsey patient and physician survey, patients overwhelmingly preferred public hospitals. When asked about “value for money”, 53% of affluent consumers thought the private hospital were worse than the public. And only 11% thought it was better.

By about the same numbers, they also thought the clinical skills of the doctors and the quality of medical devices were better in public hospitals. And, most importantly, the public hospitals were much more trusted. Private hospitals scored very low on patient safety and doctor’s ethical standards.

Basically, people trust the public system far more that the current private hospitals.

Problem#3: The public hospital infrastructure and insurance system are difficult for private hospitals to compete with.

You already have hospitals in every city in China. They blanket the country. There are about 24,000 of them and they already handle about 190M inpatient admissions per year.

Any new private hospital system is going to have to compete with this existing system. Plus, this system is reimbursed by the government insurance system. Private hospitals are still struggling with insurance. Private insurance is mostly non-existent and public insurance is only just starting to cover private facilities.. Also, the public system is politically strong.

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So think about what it would take to build a private hospital chain in China today: you would have to overcome consumers’ opinion about private care, convince doctors and nurses to change their careers, build lots of large hospitals without access to much insurance reimbursement – and then compete with the public hospitals (both in the government and in the marketplace). It means fighting the entire system.

Given all this, I think progress will continue to be slow. However, I do have a “simple stupid” solution to accelerate all this – and that is to let a couple of big SOEs create several large SOE hospital chains. Each of these super hospital SOEs would have 100-200 hospitals and 15,000-20,000 beds.

Large modern hospital chains are what you see in India and the US today. Fortis in India has 75 hospitals and 12,000 beds. HCA in the US has 165 hospitals. IHH out of Malaysia has 5,000 beds in 33 hospitals. Ideally, China wants 10-20 of such large hospital chains. They could make a big difference and accelerate the process. Such hospital chains would also break you out of the current system which is still mostly small, stand-alone (and badly-run) public hospitals.

At scale, each hospital chain would have the management depth, capital and operational scale necessary to modernize. You could see system-wide improvements and upgrades in services, facilities and technology. For me, this is the mechanism that could change things rapidly.

I argue the shortest path to this situation is to merge 200 existing small public hospitals under a large and well-run commercial SOE. Hence my argument for investment bankers.

We let the M&A bankers start rolling up smaller public hospitals into 5-10 big SOE hospital chains. Pull 100-200 small state-owned (and not particularly well-run) hospitals together under one well-managed commercially-focused SOE (there are several). And then let that group knit the hospital mix together into a functioning and modern chain.

One SOE that comes to mind for this type of SOE consolidation strategy is China Resources. They have done exactly this in other sectors (beer, retail). This approach would also create a clear role for private money in public hospitals: to finance the deals, provide incentives and upgrade facilities. Nobody is going to invest private money in today’s small, stand-alone SOE hospitals. But a larger the SOE M&A roll-up could attract private capital.

And my biggest argument for this approach is it doesn’t require fighting or replacing the entire existing system. Private hospitals and insurance can then develop slowly in parallel.

Just my two cents. Note: I used to be a hospital CEO and I still fly from Beijing to Singapore for my own care.

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Thanks for reading. My writing (and speaking) are on how rising Chinese consumers are changing the world. (#ConsumerChina). This also includes work on:

  • China 2025″ – what a region transformed by Chinese consumers, companies and capital is going to look like. (#China2025)

Top photo by Paul Kretek, Creative Commons license with link here.

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