Greenfield Establishment or Acquisition

Since the National Health and Family Planning Commission (“NHFPC”) and the Ministry of Commerce (“MOFCOM”) jointly released the Circular on Carrying out the Pilot Program Establishing Wholly Foreign Owned Hospitals (the “Circular”), which was effective on 25 July 2014, the seven cities and provinces where the pilot program is being operated, i.e. Beijing, Tianjin, Shanghai, Jiangsu, Guangdong, Fujian and Hainan, have seen booming foreign investment to set up wholly foreign owned hospitals either by way of greenfield establishments or through the acquisition of existing facility hospitals.

Following the signing of a framework agreement last July, Artemed Hospital, the first foreign wholly-owned hospital to be established in Shanghai Pilot Free Trade Zone, has recently updated its progress in the start-up phase. Artemed Group, the German-based medical and healthcare provider, had signed a customised leasing framework agreement with Shanghai Waigaoqiao FTZ 3U-Development Co., Ltd¹.

Almost simultaneously, Columbia Pacific Management (“CPM”), a Seattle-based healthcare firm, acquired Kaiyuan Orthopedic Hospital, a local hospital in Shanghai, according to a media report. The hospital is located in Pudong New District but outside the Shanghai Pilot Free Trade Zone. As shown on the official website of Shanghai Administration of Industry and Commerce, the change of shareholders has been completed in May 2015. It is said to be the first hospital that CPM will operate in China².

China’s upcoming medical reform will further add to the appeal of the Chinese market. For government-controlled hospitals, the 15% drug mark-up will be eliminated while the fees for medical services will be increased.

Considering the cost increase in government-funded hospitals, it is expected that foreign-invested medical facilities could offer more competitive services in this sector, which are generally known for high quality services and pleasant hospital environment.

So which is the more efficient and appropriate approach to set up a wholly-owned hospital, by way of greenfield establishment or through acquisition, this has become a critical question for foreign investors to contemplate, especially when taking into account the fact that the central government has been speeding up relevant policy development to encourage the market growth.

Greenfield Establishment

Building a brand new hospital is undoubtedly more time consuming compared to acquiring an existing hospital. A foreign investor shall first decide what type of medical facility to be adopted and at what level, i.e. a clinic, an outpatient department, a specialised hospital or a general hospital. The requirements to be met by foreign investors to establish different types of medical facilities are largely different, therefore the total investment can vary greatly. For example, a clinic or outpatient department is not allowed to provide inpatient services. Among general hospitals, a Class I hospital shall have a capacity of at least 20 inpatient beds, and a Class III hospital 500 inpatient beds.

Another key factor to take into consideration is the geographic location of the hospital, not only due to the fact that the location of a hospital is subject to special requirement, although such restriction tends to be eliminated, but also for the benefit of business activities in the future. It is strongly recommended that a foreign investor shall consult upon the local health and family planning administrative authorities about the location of a medical facility and make in-depth study of the commercial needs in the area for hospital establishment before making any investment.

Land use and building is another concern unable to shy away from when setting up a new medical facility. Foreign investors will find it hard to push forward the project without obtaining the land proper and exclusive for the use of healthcare services. Therefore, they shall engage in face-to-face discussion with the local NHFPC, lobbying for an approval of a medical facility to be established at such site, and urging them to work with the local land or housing administrative departments to make changes to their urban planning with respect to the medical facility project in particular.

A foreign investor shall apply for the permit for establishing a new medical facility and the license for operating a medical facility, which may take 3 to 4 months at least. The approval procedures not only involve an examination process on paper but also on-site inspection by the local NHFPC, which will further extend the approval timeline.

Last but not least, foreign investors need consider how to promote their hospitals so as to generate new patient leads since they lack existing patient pool.

Greenfield investment also has evident advantages. Undisputably, new establishments can make a clean start from the very beginning. There will be no integration of existing resources with foreign standards, nor any existing or potential liabilities to be borne by foreign investors.

Acquisition

Compared with greenfield establishment, it will be more time efficient to set up a hospital through acquisition. Foreign investors can utilise the existing resources of a target hospital. In addition, the licenses of an existing hospital may also be transferred to the foreign investor through share transfer. With the appropriate structuring for acquisition, the approval timeline can be greatly shortened with less documents to be submitted.

Moreover, the concerns with respect to the set-up of a new hospital, e.g. the planning, land use, environmental impact assessment, are almost unnecessary in the case of acquisition, or the procedures are much more simplified compared with greenfield establishment.

Foreign investors can make quick access to the healthcare service market in China by way of acquisition, obtaining the necessary resources and playing a role in this booming market.
On the other hand, it takes longer time and more intelligence to integrate the resources of existing hospitals with the professional standards and management practices of foreign investors. More seriously, acquisition may also be exposed to commercial, regulatory or tax risks due to lack of knowledge of what liabilities the existing hospitals are bearing.

As we noticed, the central government encourages the hospitals, especially those owned by SOEs³ to be acquired by private companies. Nevertheless, the key concerns will be how to split such from the SOEs and how to evaluate the risks of such hospitals.

For a foreign investor, it is always appealing to seek a share of pie of China market while facing all kinds of difficulties, especially in the healthcare service sector. A foreign investor shall develop its own investment strategy by achieving a balance among the amount of time invested, liabilities to be borne, patient pool and investment margin, and meanwhile follow up closely with the ongoing progress of the medical reform which may present new challenges for a foreign-invested medical facility.

¹ See http://www.china-ftz.com/show_news.asp?id=230, dated 11 September 2015. ² See http://www.haiwaibudongchan.com/news/Content.aspx?id=6703, dated 11 September 2015³ Several Policy Measures for Promoting the Accelerated Development of Privately-funded Hospitals effective as of 11 June 2015