HCA founders build in China

HCA founders look to nascent Chi­nese mar­ket

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The team be­hind one of the largest and most suc­cess­ful hospi­tal chains in the U.S. is get­ting closer to break­ing into new ter­ri­tory 10,000 miles away in what could be a sign of things to come. Chi­naco Health­care Corp.—the Nashville­based com­pany started by mem­bers of the Frist fam­ily, in­clud­ing Dr. Thomas Frist Jr., who founded hospi­tal gi­ant HCA with his fa­ther, Dr. Thomas Frist Sr., in 1968—is get­ting ready to open the doors of its first hospi­tal in the Chi­nese city of Cixi in Au­gust.

While other health­care com­pa­nies have been in China for years serv­ing ex­pa­tri­ate pa­tients, CHC is lead­ing a wave of com­pa­nies look­ing to serve Chi­nese pa­tients in a mar­ket that’s in­creas­ingly open to for­eign en­trepreneurs.

CHC holds a 70% stake in a joint ven­ture with the mu­nic­i­pal government of Cixi to build and op­er­ate CHC In­ter­na­tional Hospi­tal, a 500-bed fa­cil­ity that will serve as a re­place­ment for 150-bed Sec­ond Peo­ple’s Hospi­tal.

CHC’s in­vest­ment has topped $140 mil­lion. The hospi­tal will serve pub­lic- and pri­vate-pay pa­tients and of­fer all ma­jor spe­cial­ties. Charles El­can, pres­i­dent and co-founder of CHC, said the group sees a rel­a­tively clear path to ad­mit­ting its first pa­tients this year. “It’s just a mat­ter of con­struc­tion,” he said.

David Ste­wart, an ar­chi­tect over­see­ing the project at Nashville-based Gre­sham, Smith and Part­ners, de­scribed the hospi­tal as a mod­ern build­ing of “nearly all glass” and some stone. Rooms can be adapted to fit one to three beds, in or­der to ac­com­mo­date VIP as well as pub­lic­pay pa­tients. “There’s a lot of flex­i­bil­ity in terms of us­ing the fa­cil­i­ties,” he said. “One of the chal­lenges was know­ing what kind of pay­ment peo­ple will be bring­ing with them.”

China’s fast-grow­ing econ­omy has lured in­ter­na­tional in­vestors for sev­eral years now, but un­til re­cently, health­care was not at the top of the agenda. Although U.S. in­vestors kept a close eye on the sec­tor, they saw too much un­cer­tainty in re­im­burse­ment and reg­u­la­tory con­straints. Yet a 2009 health­care re­form package—which aims to pro­vide near-uni­ver­sal in­surance cov­er­age, in­crease spend­ing and up­grade health­care fa­cil­i­ties over a num­ber of years—has cre­ated new in­ter­est in the Chi­nese health­care sec­tor.

A 2010 report from McKin­sey & Co. sug­gested that pri­vate health­care providers stand to ben­e­fit from new reg­u­la­tions that al­low doc­tors to prac­tice at more than one med­i­cal cen­ter and re­move re­im­burse­ment re­stric­tions on pri­vate hos­pi­tals. As a re­sult, the con­sult­ing firm es­ti­mated that pri­vate hospi­tal op­er­a­tors could move be­yond the VIP and ex­pa­tri­ate mar­ket they cur­rently serve.

While pri­vate hos­pi­tals rep­re­sented only 6.5% of the mar­ket in 2010, the government has set a goal to pri­va­tize as many as 20% of hospi­tal beds by 2015. In ad­di­tion, the government last year re­moved the 70% cap on for­eign own­er­ship of health­care fa­cil­i­ties.

“Un­til 2009, the hospi­tal in­dus­try was a non­chang­ing in­dus­try,” said Shel­don Doren­fest, founder of the Doren­fest China Health­care Group, an in­vest­ment and con­sult­ing firm. “The only change made was in IT.”

Th­ese days, how­ever, “the growth is un­lim­ited; the in­fra­struc­ture is state-of-the-art,” he said. “The op­por­tu­nity is so great … in­vestors are say­ing, now is the time.”

Chi­naco Health­care Corp. has at least three other projects in the pipe­line, El­can said, in­clud­ing plans to take a ma­jor­ity in­ter­est in other hos­pi­tals. He also con­ceded that the mar­ket ap­pears to be get­ting more com­pet­i­tive. “There are peo­ple ask­ing ques­tions, pok­ing around,” he said. “We’re see­ing more peo­ple look­ing at China.”

One other or­ga­ni­za­tion that’s set­ting up shop in China is the Univer­sity of Pitts­burgh Med­i­cal Cen­ter sys­tem, which re­cently opened a Bei­jing of­fice. Yet Charles Bo­gosta, pres­i­dent of UPMC’s in­ter­na­tional and com­mer­cial ser­vices di­vi­sion, noted that the sys­tem is tak­ing an “in­cre­men­tal ap­proach” to en­ter­ing the mar­ket.

“Our ap­proach in China has been ex­tremely cau­tious,” he said, adding that re­im­burse­ment

for an of­fice visit can be as low as $2.

Still, Bo­gosta said, the long-term re­turn on in­vest­ment is likely to be “sig­nif­i­cant” over time. “We be­lieve that the mar­ket will change,” he said.

UPMC has three joint ven­ture agree­ments in place with Chi­nese firms to de­velop can­cer cen­ters. It also pro­vides con­sult­ing and sec­ond-opin­ion ser­vices.

The sys­tem, which has an ed­u­ca­tional af­fil­i­a­tion with the Univer­sity of Pitts­burgh School of Medicine, also brings med­i­cal stu­dents to China for train­ing—and UPMC hopes to help guide the coun­try through the changes oc­cur­ring in health­care. “This is very mis­sion-driven,” Bo­gosta said.

Ben­jamin Shobert, founder of Ru­bi­con Strat­egy Group, a con­sult­ing firm for com­pa­nies look­ing at emerg­ing mar­kets, said that the re­turn on in­vest­ment may be as far as five or six years out.

A host of chal­lenges face hospi­tal op­er­a­tors such as how to han­dle un­der­per­form­ing em­ploy­ees in a coun­try where doc­tors and nurses are con­sid­ered pub­lic ser­vants, as well as gen­er­at­ing re­fer­ral net­works and com­pet­ing with pub­lic hos­pi­tals that have VIP wings.

As a re­sult, Shobert said, U.S. hospi­tal chains are likely to wait at least an­other year or two be­fore en­ter­ing the mar­ket, though they might find other ways to par­tic­i­pate. Op­por­tu­ni­ties ex­ist for U.S. hos­pi­tals to run a spe­cialty prac­tice, such as can­cer care, at an es­tab­lished Chi­nese fa­cil­ity. “On­col­ogy’s go­ing to be a core growth op­por­tu­nity,” Shobert said.

Most of the new pri­vate hos­pi­tals will fo­cus first on the up­per mid­dle class be­fore trick­ling down to the mid­dle class, Shobert said. “The ex­pat mar­ket is pretty much gone,” he said, as com­pa­nies such as pub­licly traded Chin­dex In­ter­na­tional have sat­u­rated the mar­ket for ex­pa­tri­ate pa­tients.

Chin­dex, which op­er­ates health­care fa­cil­i­ties through its United Fam­ily Health­care di­vi­sion, did not re­spond to a re­quest for com­ment.

Doren­fest noted that the first U.S. ven­tures in China are likely to be learn­ing ex­pe­ri­ences. He pointed to cul­tural dif­fer­ences— such as the Chi­nese de­sire to be treated by “fa­mous doc­tors” who may be hard to at­tract from their cur­rent hos­pi­tals—as well as fi­nan­cial is­sues in a mar­ket where pa­tients pay more out of pocket than any­where else in the world.

Still, in­vestors are likely to be drawn by the bur­geon­ing op­por­tu­ni­ties, es­pe­cially as the U.S. mar­ket reaches its peak.

“The op­por­tu­nity for peo­ple coming—take my word for it—is not very clear,” Doren­fest said. “They’re giv­ing birth in China, where in the U.S., they’re grand­fa­thers.”

Chi­naco Health­care Corp. is get­ting ready to open its first Chi­nese hospi­tal, CHC In­ter­na­tional Hospi­tal, in Au­gust.

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