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New Trends for Healthcare in China

White and Williams Healthcare and China Practice News Alert | May 20, 2013
By: Zhihui (Julie) Guo

This Alert addresses recent legislation and trends for healthcare in China. Effective January 30, 2012, the Foreign Direct Investment Industry Guidelines were updated so that foreign direct investment in medical institutes was moved from the category of “restricted” to “permitted”, which means it is now possible for foreign companies to fully fund private healthcare services in China.

Over the past several years, spending on healthcare in China has grown considerably, reaching a compound annual growth rate of almost 19%, according to the Beijing office of the business consulting firm Frost and Sullivan. By 2015, it is estimated that total healthcare spending in China will exceed $705 billion[i]. For years, China’s public healthcare has experienced significant growing pains and the nation’s emerging middle class is seeking better healthcare from private medical institutions.  These trends present unique opportunities for US hospitals and providers of health care related services.

In response to increasing pressures on the public healthcare system and the middle class’s desire for more private healthcare, restrictions on foreigner funding for medical institutions have been lifted gradually. Since 2000, when China joined the WTO, the amount of foreign funding for joint venture medical institutions has increased by 70%.

In December 2010, the State Council issued "Notice of the General Office of the State Council on Forwarding the Opinions of the National Development and Reform Commission, the Ministry of Health and Other Ministries on Further Encouraging and Guiding the Establishment of Medical Institutions by Social Capital”, which (i) allows foreign investors to establish medical institutions, (ii) moves medical institutions from the category of restricted to permitted, (iii) lifts restriction on the percentage of foreign equity interest in joint venture medical institutions, step by step, (iv) establishes pilot projects to allow qualified foreign investors to open wholly-owned medical institutions and (v) expands the pilot projects gradually and encourages foreign investors to open medical institutions in middle and western parts of China.

Additionally, the “Notice of expansion of geographical scope of wholly-owned medical institutions by Hong Kong and Macao investors”, issued by the Ministry of Health on March 29, 2012 and effective on April 1, 2012, provides that the Hong Kong and Macao investors can now set up wholly-owned medical institutions in all municipalities directly under the Central Government and capital cities of all provinces. Taiwan investors also are included in this program. For example, on June 26, 2012, the first wholly-owned foreign medical institution, Landseed Hospital, opened in Shanghai was funded by Taiwan investors.

About 30 joint venture private medical institutions now operate in the large cities of China[ii].  Chindex International Inc, which was responsible for opening China’s first private hospital, Beijing United Family Healthcare (UFH) in 1997, is now one of the leading premium healthcare providers in China, with income of about $114 million in 2011 and a 23% annual growth rate in the past few years.[iii]  However, experts believe there remains significant room for growth as Chinese patients are quite eager to see expansion in quality healthcare, particularly if the providers have a nexus to the United States.

Although there have been a number of efforts over the past several years by the government to encourage foreign investment in healthcare, challenges remain, such as obtaining local permits and approvals, and identifying doctors with credentials acceptable to US standards. Accordingly, many foreign parties continue to enter the China market by ways of the joint venture model, working with local Chinese partners in the healthcare industry. For example, Wolters Kluwer Health Clinical Solutions recently entered a joint venture with Medicom, one of China’s leading drug information providers.[iv]  Through the joint venture, the CEO of Wolters Kluwer Health Clinical Solutions said, the company has managed not only to better understand operating a business in China, but has also gained access to Medicom's list of clients, while providing financial backing and enabling Medicom to expand its services[v].

The China Practice Group at White and Williams LLP is experienced in structuring and documenting healthcare ventures in China.  For more information, please feel free to contact: Gary P. Biehn (215.864.7007; biehng@whiteandwilliams.com), Zhihui (Julie) Guo (212.631.4412; guoz@whiteandwilliams.com), or Chunsheng (Tony) Lu(215.864.7006; luc@whiteandwilliams.com)

[i] Balazovic ,Todd, Policy injects life to private hospitals, see http://www.chinadaily.com.cn/china/2012-02/27/content_14696368.htm.

[ii] See id.

[iii] See id.

[iv] See id.

[v] See id.

IRS Circular 230 Notice: To ensure compliance with certain regulations promulgated by the U.S. Internal Revenue Service, we inform you that any federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code, or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein, unless expressly stated otherwise.

 
This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
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