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A little More about China Health and Wenzhou

A little More about China Health and Wenzhou. Industry Structure Current Status Opportunities Reform Investment Development Foreign Investment Private Hospitals Taxes and Laws Capital Markets Market Entry Barriers Problems Development Trends Wenzhou - location Wenzhou Economy

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A little More about China Health and Wenzhou

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  1. A little More about China Health and Wenzhou • Industry Structure • Current Status • Opportunities • Reform • Investment Development • Foreign Investment • Private Hospitals • Taxes and Laws • Capital Markets • Market Entry Barriers • Problems • Development Trends • Wenzhou - location • Wenzhou Economy • Wenzhou Upper Income Group • Wenzhou Health Industry Refer to HBP_08Market.doc for details Ver 11

  2. a) Industry Structure • State-owned hospitals - half of the total number of hospitals, but with a revenue of about 97% of the total national healthcare output • Not-for-profitable hospitals account for 99% of the total number of hospitals, investor-owned only 1% • Among the 3.2 million beds, 98.6% of them belong to the not-for-profitable hospitals, the rest of 1.4% go to profitable hospitals Ver 11

  3. b) Current Status (1/3) • 2005 China’s medicare expenditure: 830+ billion accounting for 5.6% of GDP (US: 14%, Sweden: 9%, Japan 7%) increasing at more than 10% a year, 1.2 times that of the GDP growth • 2005 China per capita medicare fees: RMB 630 or USD 80 (about 1/40-1/90 of the developed countries such as the U.S., Sweden, Japan; about 1/10-1/16 of the four Asian tiger countries of Singapore, Korea etc, and even only ½ of Malaysia.) • 2005 single medicare fee of a person: RMB 126.9, inpatient fee: RMB 4661.5, increased about 30-150 fold over the last 25 years (1980-2005) • 2005 outpatient medicare fees: 52.5% for medicine, 29.8% for inspection; inpatients: medicine 43.9%, inspection and surgery 36.0% • 2003 government paid 17%, patients 55% of the medicare bills (low-income country average: 27%, USA: 45%) Refer to HBP_08Market.doc Ver 11

  4. b) Current Status (2/3) • 2004: total 3.27 million beds, per capita bed: 2.4 (target 4-7) • 2004: 1.7 hospital visits per capita • 2004: total in-patients of 66.7 million where 97.5% went to non-profitable hospitals • 2004: 52.6 out of 1000 people were hospitalized with an average stay of 10.9 days where non-profitable 11 days, profitable 7.8 days • 2004: bed vacancy 38.7% • Most of the top class hospitals enjoyed a revenue of RMB 500+ million a year Ver 11

  5. b) Current Status (3/3) • Death causes: 1) malignant tumour, 2) cerebrovascular diseases, 3) heart diseases, 4) respiratory diseases, 5) trauma and toxicosis 6) digestive disease 7) Internal system, nutrition, metabolite and immunity diseases 8) urinary disease 9) neuropathy and 10) perinatal period diseases • Lack of commercial medical insurances in China: about 40% of the urban and 80% of the rural population are not medical insured, and those with insurance are only covered with the very basic treatment • Technology level: the top level hospitals own the latest medical equipments compared with the developed countries, and are therefore no less advanced than the best international hospitals, while the 2nd level hospitals are in short of medical equipment as well as skilled medical personnel Ver 11

  6. c) Opportunities (1/4) Demand Nationwide • The medical reform leads to more privatization, more service needs, and more freedom – more demand • Many patients are not treated due to various reasons, particularly in rural areas. About 60-70% people don’t go to hospitals in case of falling ill • China has a huge medical market potential, its growth rate is above GDP growth rate and the trend will continue in the future • When the economy develops fast (9%/a), people have more purchasing power and are more health-conscious and hence are willing to pay more for their health – better technology, better services, better hospital environment, better medicines, and as a result, an advanced medical system • The medical industry pays more attention to quality and process Ver 11

  7. c) Opportunities (2/4) Demand in Wenzhou • People of Wenzhou are willing to undertake their own responsibilities in taking care of their own health and that of their family members, rather than waiting for government care. Wenzhou people are seeking for better and more personalized medical services, an attitude quite different from much of the country , leading to the beneficial development environment of private healthcare. • The Wenzhou medical and healthcare expenditure has been expanding steadily, where the medical spending has been extremely growing. In 2005, an average citizen has spent RMB 742 on his/her medical and healthcare, an increase of 5.6% over 2004. • Living environment and habitats are getting closer to that of the developed countries, pushing up better and more medical services • Higher natural birthrate and longer life expectancy also maintain a higher demand on medical services. Citizens desire of high quality, secure, personalized services with privacy • Consumers demand of advanced medical technology Ver 11

  8. c) Opportunities (3/4) Supply: • Lack of medical facilities compared with other regions, for example bed/1000 people only 2.2 in Wenzhou, others: Nationwide:3.1; Shanghai: 5.5; Beijing: 6.5; Suzhou: 5.1; Hangzhou: 2.4; Ningbo: 3.3; Zhejiang: 2.7; Doctors per 1000 people: Wenzhou: 1.6, nationwide: 1.7; Shanghai: 3.8; Beijing: 4.6; Suzhou: 1.8;Hangzhou: 1.5; Ningbo: 2.4;Zhejiang: 1.8; • Large gap of bed availability: 2.2 against 4-7 of the government target by 2010 • Private hospitals increase rapidly in Wenzhou, but they are of small scale, limited functions and low service quality. Some of them are of bad reputation and hence are affecting the healthy development of that part of the health industry . • New technologies are coming up rapidly • Low coverage of state-run medical insurance in Wenzhou • Lack of medical personnel. Clinic and research people rely largely on the specialists from outside regions Ver 11

  9. c) Opportunities (4/4) Government plan: • Wenzhou defines it as the secondary medical center of Zhejiang province in its 2005-2015 Development Plan, as well as the medical center of north Fujian • By 2010, the total bed availability shall reach 28.540 or 3.8 beds per 1000 people. Per bed construction area shall reach 80-90 m2, that of land are 106-117 m2. Medical doctor Per 1000 people shall be increased to 2.0. • Community resident wholly medical insurance coverage shall be increased to 60%, while the urban and rural basic medical insurance shall be increased to 90%. • Local government promotes multilevel and multi-sourced investment policy. The government plans for several high level, high quality general acute and special hospitals in areas with sufficient client base • Local government spend more in public health program, while the public health administration authorities will turn from managing hospitals to administering the hospitals. • Government particularly support the construction of large hospitals in track with international medical services and will provide taxation and land use favorable policies and treatment, as well as special approval treatment. • The government also encourages those state-owned hospitals outside the basic medical services to be transferred to private hospitals through various options Ver 11

  10. d) Reform (1/3) • Reform direction is not yet fixed. The Ministry of Health (MOH) is working on the detailed plan, but there is no schedule for the issuance of the new regulations. However, it is very likely that government will still be the predominant force in the health industry with introduction of marketization and will shift its focus onto the public and community health and sanitation, basic health and rural health, leaving the high end healthcare and the vast amount of medium-sized hospitals at the district and county levels to private investors. • Thus a multileveled and rational healthcare system will be formed, where the government will take care of the fundamental healthcare in rural and urban communities and some of the top hospitals in the metropolises. The entire health system will be split up to three tiers - public sanitation and health, basic medical and non-basic medical and healthcare services. Ver 11

  11. d) Reform (2/3) • MOH will take over the overall administration of all the hospitals across the industries. The government will be the planning body for the overall development and plans for the healthcare system. It will also work out details about the number and size of the public hospital system to be retained in government control and the rest will be turned to for-profit or not-for-profit hospitals in the near future • Aim of the new reform is to cover 90% of basic health insurance to the population and to pay half of the medical fees for them. The trial will first start from countryside and those with urgent needs and then spread across the nation. Ver 11

  12. d) Reform (3/3) • Hospitals will be re-categorized to three types: not-for-profit state-owned hospital, not-for-profit private hospital and for-profit private hospitals. • Government encourages the investment in not-for-profit private hospitals, but will control the number and scale of the for-profit private hospitals. • The government will take various measures to reduce the medicine prices, while at the same time, will increase the prices of medical services, thus the medicine price ratio in the total medical cost will be likely be reduced • This creates a large space for private and foreign investments in the middle (2nd class) and the high level (3rd class and higher) hospitals, and special hospitals or special healthcare services for the targeted clients Ver 11

  13. e) Investment Development (1/2) • At least RMB 20 billion has been injected into the Chinese healthcare industry, with only few from foreign investors • Among the 300+ hospital investment companies, about 100 are currently developing their projects • Non-government. Not-for-profit hospitals are the main targets of investors. Second class hospitals are the main merger and acquisition targets • 2006 might be the best time for investing in hospitals, as the reform has gone enough far, the policy changes and market demands have resulted in variety of results, such as corporatization, M&A, sales and transfer, leasing and agglomeration • Although the new regulations about the second round of reform are not issued, outsiders from the real estates, medical equipments and IT industries are rushing to the healthcare industry; investment in healthcare comes into an explosive period. At the moment however, many investments are of trial nature, large scale investment has not yet begun. Ver 11

  14. e) Investment Development (2/2) • Nevertheless, the uncertainty in policy and public views has not impeded the investors’ enthusiasm. However, more are still waiting and observing … • On the other hand, once in the business and the brand is well established, investors are able to enjoy high and stable return. In China, investment return in class three (the best) general acute hospital is about 15%, that in special hospital is about 20~25%. Thus the investment in a class three general acute hospital can be recovered in 8-10 years with proper management, while the investment in special hospitals can even be repaid in 5-6 years. • 15% is the current average of the healthcare industry investment return rate • For those willing to enter the general hospitals, it is proposed to select the higher end of the sector, inject higher investment, apply the most advanced technology and serve the wealthiest clients, otherwise it’s hard to compete with the state-owned hospitals. Ver 11

  15. f) Foreign Investment • In May 2002, the Ministry of Health together with the former Ministry of Foreign Economy & Trade (now Ministry of Commerce) issued the “Transitional Regulations about the Administration of Joint and Co-operational Hospitals”, which allows foreign investors to share 70% of the JV hospitals. Minimum investment: RMB 20 million. • Currently there are 200 JV hospitals, but generally they are of small size and are limited to specific clinics such as Oncology, stomatology, obstetrics and gynecology • At the moment, many are observing the Chinese health industry, only few are actually engaged, but most of them are preparing for the next actions. They mostly plan to wait for another 1 to 2 years, before the reform program is clearly determined • Investment returns in hospitals are higher than in the funds and banks • At least 6 billion US Dollars are waiting at China’s door to acquire Chinese hospitals. • Experts forecast, the Chinese health industry will soon witness an explosive growth similar to that of the U.S. in the 70’s. Ver 11

  16. g) Private Hospitals (1/2) • Currently there are about 4000 private hospitals with an investment of ca. 10 billion Yuan and 5% shares of the total market. They are mainly concentrated in Shanghai, Beijing, Shenzhen, Guangzhou, Jiangsu and Zhejiang. In the next 5 years, about 50 hospitals will go IPO. In the end, the private hospitals will account for 30% of the total market • Currently the profit-earning, balanced and profit-loosing private hospitals are equally divided, and small and medium hospitals are witnessing a declining profitability • The number of private hospitals makes already half of the total hospitals, but only shares 2.7% of the number of patients treated Ver 11

  17. g) Private Hospitals (2/2) • Private hospitals are not fairly treated in a number of issues such as grant of designated medical insurance, hospital categorization evaluation and certification, human resource, title evaluation and license of the medical staff, policy information, purchase of large medical equipments, land use, bank loans etc. • Government provides almost no supports and protections in the development of private hospitals, imposes higher entry restrictions. As a result, applying for license is difficult, with more complications. • Private hospitals can not enjoy the same treatment in taxation, fees, client resources and the welfare of the medical personnel as the state-owned • Lack of supporting administration policies. For example there is no regulation for the encouragement of investing in profitable hospitals, nor is there any supervision mechanism and system to the private hospitals already in operation Ver 11

  18. h) Taxes and Laws (1/3) • New or re-structured for-profit hospitals will be waived business taxes in the first 2 years and in the next 3 years they pay only half the business taxes • According to the “Tax Regulations of the Medical Organizations” issued by the Ministry of Finance and the State General Tax Bureau : • The drug store, if it is separated from the hospitals, shall pay normal taxes, mainly VAT, income tax and other fees • Housing tax, land tax, ship tax shall be paid after three years • After three years, for-profit-hospitals shall pay VAT for their own medicines Ver 11

  19. h) Taxes and Laws (2/3) • Taxation policies between the health authorities and the tax agencies are not identical. If hospitals are to be taxed as an enterprise, they have to pay 5.5% income tax, and they have to pay the other 16 types of taxes, which are beyond their payment capacity • Tax exemption policies are also not well defined. In early 2000, the central government issued rules that grant three year taxation favorite treatment after the hospital operation registration is completed: free of medical services business taxes, free of VATs to the products made by and for the hospital itself, free taxes for hospital properties, land and vehicles and boats. Three years after, these taxes will be levied. • However, some local governments define the date of tax levy differently. Some start levying the taxes once the categorized registration is completed, some from the date of the hospital foundation. Many of the hospitals won’t start operation after obtaining the business license, rather, they have to spend upto two years to make the operation possible. As such, the private hospitals are not benefiting much from the favorable tax treatment – possibley only for one year period. Ver 11

  20. h) Taxes and Laws (3/3) • Zhejiang: newly established private hospitals, incl JV hospitals will be categorized as for-profit hospital in principle, where some of them can also be classified as not-for-profit hospitals if they meet the criteria. They both can apply for the qualified hospitals for the insured employees. Private not-for-profit hospitals abide by the government-regulated prices and at the same time enjoy taxation favorable treatment. For-profit private hospitals determine their own prices and pay relevant taxes. If their earnings are reinvested in the hospitals, taxes will be deducted correspondingly. Construction of private hospitals shall be enrolled in the urban development plan. Private hospitals will also enjoy the same treatment in land acquisition and tax deduction, and construction fees for supporting facilities etc. • Zhejiang allows the not-for –profit private hospitals for the five-year free development. After five years, if they want to change to profitable hospitals, all the profits earned during the five years will belong to the investors • Not only that, Zhejiang provincial government has assigned the approval right to the city and county level governments and at the same time, endorse the same policy treatment as the state-owned hospitals. Ver 11

  21. i) Capital Market • Not-for-profit hospitals are not allowed to go IPO • Insufficient earning ability hinders the direct IPO in the short term • Currently there are only four companies on the Chinese stock market that are involved in the healthcare industries – Huayuan Group (华源集团), Wanjie High-Tech (万杰高科), Changan Info (长安信息), and Sanjiu Pharmaceuticals (三九医药) Ver 11

  22. j) Market Entry Barrier There are lots of market entry barriers, much higher than other industries, incl.: • Larger capital investment • High level management personnel, clinic specialists and skilled labors. Higher density of skilled personnel, leading to higher operation cost • Longer government approval procedure Ver 11

  23. k) Problems (1/2) • In general, there is shortage of healthcare and medicare resources nationwide • The medical and healthcare industries are behind the economic development • Irrational distribution of medical and healthcare resources: most of the high quality facilities, equipments, technologies and personnel are amassed in large hospitals, and metropolises • Difficulty for private capital to enter the healthcare market. The government restricts the profitable investment of the private capital since long. That leads to the government monopoly, the lack of supply of medical services, the capital investment, the human resource market, the development of the large healthcare groups and as a result, the high costs of the medical treatment Ver 11

  24. k) Problems (2/2) • Incomplete medical insurance system. In 2005, only 200 million, or half of the urban population are covered, while in rural areas, only 170 million are covered, about 15% of the rural population, with very limited insurance – 30 Yuan for each insured. • Difficult to access to the medical services. Only 50-60% (70.4% in urban and 35% in rural areas) of the ills are treated by doctors, and only 30% of those choose not to go hospitalized even if they shall do so. Reason: too high prices • Medicine cost take too high portion of the total medical fees. In China, that’s more than 50%, while in the outside world, that’s about 20% Ver 11

  25. l) Development Trends (1/2) • With the improvement of living standards and quality, people are expecting to enjoy better healthcare • And people are also desirous of a differential medical services, catering the needs of the different social classes. • The medical industry has gradually becoming the investment hot spots for both domestic and foreign investors • Domestic and international financial institutions are paying close attention to the trends of the medical investment development. Several well-known medicare institutions are granted with large international financial credit. German, Singaporean and other governments are promoting the investment in the Chinese health industry. There are ca 60 billion US Dollar of capital waiting at China’s door, ready to move in any time. Ver 11

  26. l) Development Trends (2/2) • Development trends: the development trends of this section seems in the better service, better care, more privacy, more openness and transparency etc • Development concentration: • Major driving forces and determination factors: • Technology evaluation: roles of innovation and technology progress in the development of the industry • Price trends • Influence of the economic development on the industry • Government influence • Market changes by capital injection and reforms • Problems that restrict the market expansion Ver 11

  27. m) Wenzhou Location (1/3) Map of Zhejiang Zhejiang Shanghai Wenzhou Map of China Ver 11

  28. m) Wenzhou Location (2/3) Wenzhou Municipal City Downtown Cangnan Ver 11

  29. m) Wenzhou Location (3/3) N W E Hospital Ver 11 See also the wall map

  30. n) Wenzhou Economy (1/2) • Wenzhou is one of the most competitive cities in China, ranking no.19 in 200 cities nationwide (2004). The ranking in 2005 dropped to 27. Wenzhou is relatively strong in enterprise management, human resource awareness and commercial operation. Wenzhou has also sound education, entertainment and shopping environment, but is relatively weak in technology innovation, infrastructure, environment, legal system, and world business connections. • Wenzhou is the birthplace of private economy of China. The private economy dominates the local economy and industry by a factor of over 96%. • Wenzhou boosts of a strong capital competitiveness, capital increases rapidly, but its investment efficiency is not high, financing controllability is also weak. But Wenzhou has an active private financing sector, that makes the easy access to investment capital • Wenzhou has formed a relatively comprehensive industry chain with high flexibility and industry agglomeration. Enterprise-government relations are also highly adjustable and responsive. However, the industry is structured at the lower end, urban infrastructure construction also lacks behind the industry development. Ver 11

  31. n) Wenzhou Economy (2/2) • Total population about 10 million, where 7.5 million are permanent residents. 4 million people live in urban areas, the rest 6 million in countryside. There are about 2.5 million socalled “exterior people” or immigrants from outside Wenzhou. • The municipal city of Wenzhou comprises of three districts – Lucheng (鹿城), Longwan (龙湾) and Yuehai (瓯海), two cities – Ruian (瑞安) and Yueqing (乐清) and six counties – Yongjia (永嘉), Pingyang (平阳), Cangnan (苍南), Dongtou (洞头), Wencheng (文成), and Taoshun (泰顺). • In 2005, Wenzhou has generated a GDP of 160 billion RMB (predicted), where 80% of them were contributed by downtown Wenzhou, and cities of Yueqing and Ruian. • In 2005, per capita net income in urban areas was RMB 19805 Yuan in, in rural area RMB 6845, thus the weighted per capita GDP was 12029 Yuan. • Over 1.6 million Wenzhou people are doing business nationwide. They have invested more than 100 billion across the country in the past • Over 400,000 Wenzhou people are doing business in 65 countries and have built up a business network across the globe Ver 11

  32. o) Wenzhou Upper Income Group (1/3) • Population structure: businessmen+ share holders+ high salary people (salespersons) account for about 2/3 of the local workforce, i.e. the social structure is of flat type, and is a businessman economy. Relatively fewer low income employees. • The White Collar Class: the white collar class accounts for 11.9% of the national population according to a recent statistics. Considering the wealthier fact of Wenzhou, this ratio shall be doubled to 24%, that is, there is 2.4 million of white collar class. They are typically those: monthly incomes or salary 5000 RMB or above, profession of management, technical staff, government officials or clerks, private entrepreneurs, and are of high education. Ver 11

  33. o) Wenzhou Upper Income Group (2/3) • There are about 1.2 million private entrepreneurs of various types. Their average asset falls within 0.5 to 5 million RMB, the socalled medium to small businessmen. These businessmen account for the most part of the 1.2 million population. This is proven by the 2005 statistics that indicated that in Wenzhou, there were 234,000 independent businessmen and women (个体工商户) and 41,000 private enterprises. • According to the national average ratio of government official/clerks to the entire population of 26:1, and considering the fact that Wenzhou is featured of small government, there are about 130,000 government clerks and officials in Wenzhou • There are currently 4 private enterprise groups with over RMB 1 billion of assets. They are: Delixi Group (德力西集团), CHINT Group (正泰集团), Huafeng Group (华峰集团) and Ruili Group (瑞立集团). Ver 11

  34. o) Wenzhou Upper Income Group (3/3) • The hidden or underground economy accounts for about 50% of the total regional revenues • By end 2005, the private banking industry has reached about RMB 40 to 42 billion • According to the data released by the Wenzhou subsidiary of China People’s Bank, there are about 300 billion of bank deposits and cash in Wenzhou among the people – source Bank of China. • This money, according to the Golden Rule of 2:8 relationship, will be distributed in the following way: • 8 million people with an average deposit of over RMB 7500Yuan • 2 million people with an average deposit of over RMB 120,000 Yuan • 0.4 million people with an average deposit of over RMB 480,000 Yuan • 80,000 people with an average deposit of over RMB 1.92 million Yuan • 16,000 people with an average deposit of over RMB 7.68 million Yuan • 3200 people with an average deposit of over RMB 30.72 million Yuan • 640 people with an average deposit of over RMB 122.875 million Yuan • 128 people with an average deposit of over RMB 491.5 million Yuan • Total assets of the above people will very likely be doubled, with consideration of houses, cars, antiques, jewelery, stocks and other valuables. Ver 11

  35. By end 2004, there were about 71 hospitals with 16309 beds. There were also many hundreds of smaller clinics By end 2005, there were about 30 private hospitals with 1488 beds. There were also 160+ private clinics. In 2004, Wenzhou hospitals treated 18.37 million cases of illnesses, with a per capita illness of 2 a year By end 2002, average outpatient fee was RMB 94 Yuan (that of general hospitals was RMB 120).Bed vacancy rate of hospitals of 2nd class and above was 78%. Average hospitalization duration was 11 days. Cost of per bed per day was RMB 472 Yuan. Average cost for an inpatient was RMB 5178 Yuan. Medicine cost took 53.5% of the total medical fees. Comparison with other regions Bed number per 1000 people: nationwide: 3.1; Shanghai: 5.5; Beijing: 6.51; Suzhou: 5.14; Hangzhou: 2.4; Ningbo: 3.32; Zhejiang: 2.69; Wenzhou: 2.19 Doctors per 1000 people: nationwide: 1.67; Shanghai: 3.8; Beijing: 4.64; Suzhou: 1.79;Hangzhou: 1.5; Ningbo: 2.37;Zhejiang: 1.81; Wenzhou: 1.59 The four major death causes: circulatory diseases, neoplasms, trauma and toxicosis and perinatal period diseases p) Wenzhou Health Industry (1/2) Ver 11

  36. p) Wenzhou Health Industry (2/2) • In January 2004, Wenzhou government released the “Transitional Regulations about the Approval Administration of Private Medical Organizations”. This regulation aims to introduce private and foreign investment, to open up the medical market and to build up a new healthcare investment landscape. The regulation sets no restrictions on investor origins, hospital types, number and location, but also provides a number of favorable policies. For example, those of private or foreign hospitals are able to apply for designated hospitals for the people with medical insurance; land will be freely transferred. They will enjoy the same treatment in hospital accreditation, participation in academic organizations and events, policy information notification etc as the public hospitals • China sets the requirement for the hospital beds per 1000 persons for county or above cities at 4-7. There were 7.77 million of permanent residents in Wenzhou, and with the immigrants, the total population might be well above 10 million. Accordingly, 40,000 to 70,000 beds shall be provided. However, there were only 16300 beds at end 2004, and at end 2005, these were about 20,000, or 2.01 beds per 1000 persons, even below the moderate requirement of 2.41 beds/1000 persons set for 2005 by the government. Therefore, there are still short of 7800 beds even for the minimum requirement. Ver 11

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