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POLICY EXPLANATION : Latest Developments on Foreign Investment in the Medical Care Industry in China
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Healthcare expenditures in China have been growing steadily over the years, with annual growth rates of up to 20 %. Moreover rising income among the population and growing social security coverage throughout the country have fuelled investments in the industry which forecasts for an expanding market. By 2015, the beds and medical treatment provided by non-public hospitals will account for 20 % of total medical services, according to the China Ministry of Health (MOH). The entire medical services market is expected to reach USD 500 billion by 2015, offering great opportunities for private and foreign companies in medical service industries. Many investors are keeping a close watch on the huge potential in the Chinese healthcare industry with the gradual loosening of policies and growing demand for high-end medical services by China’s growing middle and upper classes. 
Background of Legislation on Foreign Investment in Medical Services 
In July of the year 2000, MOH issued the Interim Measures for the Administration of Sino-foreign Equity and Cooperative Joint Medical Institutions, allowing a foreign equity share of up to 70% within a joint venture.
 
In 2007, the Chinese government promulgated a revised Foreign Investment Industrial Guidance Catalogue, (2007 Catalogue) which further opened many industries for foreign capital and encouraged medical services for elderly and disabled patients in healthcare, sports and social welfare. It also allowed pharmaceutical manufacturing on ordinary products, but still restricted investment in medical service.
In November of 2010, Opinions on Further Encouraging and Guiding the Establishment of Medical Institutions by Non-public Capital (Circular No. 58) issued by the National Development and Reform Commission (“NDRC”), MOH and Ministry of Human Resources provides measures for opening the market for privately-funded capital, and encourages foreign capital in investing in the medical service industry and even commits to gradually loosening the equity proportion requirement for foreign investment and completely lift restrictions in the long-run. It expressly indicates that foreign investment in medical service industry shall be categorised as ’permitted’.
 
Circular No. 58 provides measures to further expand the scope of market entry and the opening-up of medical establishments for private and foreign investment in the form of joint venture or cooperative joint venture. It allows local authorities to carry out the pilot programs of wholly foreign-owned (WFOE) medical institutions in China by qualified overseas capital. The Circular simplifies the procedure by delegating the examination and approval power for establishment of Sino-foreign joint venture and cooperative joint venture medical institutions to the of provincial health and commercial authority. Meanwhile, the establishment of WFOE medical establishments shall be subject to the approval of MOH and the Ministry of Commerce (MOFCOM). 
 
In December of 2011, the new Foreign Investment Industrial Guidance Catalogue was released by NDRC and MOFCOM (2011 Catalogue), which became effective on 30 January, 2012. ’Medical Treatment Establishments’ was one of the ’restricted’ industries in the 2007 Catalogue. But in the revised 2011 Catalogue,  Medical  Treatment  Establishments was removed from the ’restricted’ list. Therefore, it is clear that this area is now permitted. Medical Treatment Establishments generally include hospitals, clinics, nursing homes, emergency centres, rehabilitation establishments etc. 
 
Furthermore, investors from Hong Kong and Macau, who have already enjoyed benefits of being able to invest in designated provinces in mainland China in the form of WFOE, are allowed, as of 1 April 2012, to expand their business in all municipalities directly under the Central Government and cities of provincial capital instead of only in Shanghai, Chongqing, Guangdong, Fujian, and Hainan as previously restricted, thanks to the implementation of CEPA (Closer Economic Partnership Arrangement signed between mainland and Hong Kong and Macao).
 
On 13 April, the MOH promulgated the Notice on Definition of the Nature of Medical Institutions Funded by Non-public Capital (Circular 26). Circular 26 states that privately funded medical establishments could be either for profit or nonprofit, according to the nature of their business, by repealing a previous regulation that categorised almost all medical establishments set up by non-public funds as for-profit hospitals.
 
The Implementation Plan for Deepening the Reform on Medical and Healthcare System During the 12th Five-year Period was issued by the State Council in April 2012. The Plan intended to further loosen the entry policy for private funding, such as charity institutions funds and commercial insurance companies from home and abroad, and to encourage qualified individuals to open private clinics. It also aims to allow access to the social security reimbursement system by those qualified non-public hospitals and pharmacies. 
 
More specific implementing regulations from the MOH and MOFCOM, and other administrative authorities are expected to be rolled out in the near future in order to further implement the strategy of opening up medical care industries to private and foreign investors. New regulations will be needed to clarify and delineate the specifics of regulatory landscape for foreign investors. 
 
Outlook for Foreign Investment in Medical Care Industry 
In spite of the ongoing major shifts of legislation and government policy from a predominately publicly-owned industry towards a more private and foreign investment-friendly regulatory and market environment, the total proportion of Sino-foreign joint-ventures or wholly foreign-owned hospitals to state-owned ones remains very small. The fact speaks for itself: the prospect for foreign-invested hospitals remains challenging. The reasons are many-fold. First of all, medical facilities require a huge amount of investment with complicated and time-consuming approval processes by various government authorities, while the entry threshold for establishing medical establishments is rather stringent. Secondly, the lack of qualified doctors and experienced management personnel, as well as restrictions on the practice of doctors employed at State-owned hospitals, presents a major hindrance for foreign hospitals to operate competitively in Chinese market. It is only recently that doctors employed at State-owned hospitals have been allowed to practice concurrently at different hospitals. In practice, there are still many practical obstacles for that to happen. Thirdly, it remains difficult for foreign-invested or private hospitals to be able to offer patients the benefit of reimbursing expense from social insurance. Lastly, the pricing mechanism of medical service is largely determined and heavily regulated by the government which could pose a big obstacle for foreign-invested hospitals to compete effectively on the market as they tend to be much more expensive for the large majority of the population.
 
As a result, before the reform of China’s social insurance policy and complete overhaul of legislation on medical services, such as pricing regulation in order to create a level-playing fields for all market players, foreign investment aimed at medical service industry might have to seek more real opportunities in niche areas or specialist services such as dentistry, ophthalmology maternity care, health examinations and elderly care and paediatrics where quality services are in short supply and which have a higher technical barrier with a higher profit margin. Moreover, China’s growing middle and upper classes with more disposable income are the best target customers for foreign-invested medical service establishments rather than general public with lower income. In light of the huge demand for quality medical service and size of the population, there is no doubt that opportunities for foreign investors will increase in the industry which is anticipated to be fully open soon.
 
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