On August 27 2014, China announced a pilot programme allowing foreign investors to establish wholly foreign-owned hospitals in seven cities and provinces across China.

This is a major breakthrough for healthcare services in China and is a particularly welcome development for foreign investors who wish to benefit from China’s booming healthcare sector. Previously, foreign investors (excluding Hong Kong, Macanese and Taiwanese investors) were only permitted to set up joint venture hospitals with Chinese partners .

The pilot programme reflects the Chinese government’s goal of having private hospitals contribute 20% of the nation’s hospital bed capacity by 2015 and arrives two months after the announcement of reduced restrictions on medical institutions in the 2014 Negative List administered by the Shanghai Free Trade Zone.

However, it should be noted that the pilot programme is limited to hospitals rather than other medical institutions such as clinics, which are also in high demand. Moreover, there  is also the possibility of inconsistent guidelines – while existing regulations will govern these newly established wholly owned foreign hospitals, provincial governments have also been invited to promulgate their own rules.

We believe that the pilot programme may be the first step in introducing a more comprehensive set of regulations.

The Pilot Notice

The Chinese Ministry of Commerce (MOFOCM) and the National Health and Family Planning Commission (NHFPC, the successor to the previous Ministry of Health) jointly announced the Notice on the Implementation of Pilot Work for Establishment of Wholly Foreign Owned Hospitals (Guo Wei Yi Han (2014) No. 244, thePilot Notice). The Pilot Notice is effective on the date of promulgation, which has been dated back to July 25, 2014.

According to the Pilot Notice, the pilot programme will operate in seven cities and provinces (Beijing, Tianjin, Shanghai, Jiangsu, Fujian, Guangdong and Hainan) and will allow foreign investors to set up wholly foreign owned hospitals by way of greenfield establishments or through the acquisition of existing hospitals.

Prior to the Pilot Notice, foreign investors were only permitted to set up Sino-foreign joint venture hospitals, with the exception of qualified service providers from Hong Kong, Macau and Taiwan who are permitted to set up wholly owned hospitals in certain places in China.

Under the Closer Economic Partnership Agreements (CEPA) between Mainland China and Hong Kong and Macau respectively, qualified investors from Hong Kong and Macau can set up wholly owned hospitals first in Shanghai, Chongqing, Guangdong, Fujian and Hainan, and later in the capital of each province or municipality under the direct control of the central government (i.e. Beijing, Tianjin, Shanghai and Chongqing). Under the Economic Cooperation Framework Agreement between Mainland China and Taiwan, qualified investors from Taiwan can set up wholly owned hospitals in Shanghai, Jiangsu, Guangdong, Fujian and Hainan.

Requirements under the Pilot Notice

According to the Pilot Notice, a foreign investor of wholly foreign owned hospitals in China is required to meet the following standards:

  • it must be a legal person (excluding individual investors) capable of bearing civil liabilities;
  • it must have direct or indirect experience in the investment and management of healthcare industries; and
  • it must be able to (1) provide internationally advanced management ideas, models and service patterns; (2) provide internationally advanced medical technology and equipment; and (3) supplement or improve the inefficiencies in the location of investment in terms of medical service capability, medical technology, financing and medical facilities.

Wholly foreign owned hospitals will have to meet the national standards set by the State. In cases where there is a gap in the national standards, they will be required to abide by the provisions set out in the Notice of the Ministry of Health on the Approval of Establishment of Specialty Hospitals (2011).

Under the Pilot Notice, the establishment of wholly foreign owned hospitals will be approved by the provincial counterpart of NHFPC first and then by the provincial counterpart of the MOFCOM. The timeline and procedure will follow the Regulations on Medical Institutions and its implementing rules as well as the Regulations on Foreign Investment in the Commercial Sectors.

The Pilot Notice is an exciting development for foreign investors who wish to benefit from the booming healthcare service sector in China. It follows both the updated version of the negative list of the Shanghai Free Trade Zone published two months before (when wholly foreign owned hospitals were permitted (see our briefing in July 2014)) and the State Council’s opinion on the promotion of health service industries (Guo Fa 2013 No. 40) published 11 months before.

Interestingly, the Pilot Notice seems more lenient towards investors from other parts of the world since it does not include certain requirements imposed on Hong Kong, Macanese and Taiwanese investors. For example, under the Hong Kong CEPA, the hospital must, as a minimum, meet the standards of a Class 2 hospital, a sub-category of general hospitals which must have between 100 and 499 beds. Furthermore, while Class 3 and Class 2 hospitals in China must have a total investment amount of RMB50,000,000 (approximately USD8 million) and RMB 20,000,000 (approximately USD3.2 million), respectively. Such requirements do not exist in the Pilot Notice.

Impact of the Pilot Notice

The Pilot Notice indicates the Chinese government’s determination to achieve the goal of having private healthcare providers contribute 20% of the total beds and services in the healthcare system in China by 2015 (as set out in the Healthcare Reform Plan released in 2012).

However, the Pilot Notice has left certain questions unanswered, and it is possible that these might pose challenges for both regulators and investors in practice.

First, the Pilot Notice only applies to hospitals and not the other types of medical institutions under the Regulations on Medical Institutions (such as township and community health care centers, outpatient stations clinics, disease and cure centers/stations, emergency/first aid centers/stations, nursing centers/stations). Thus, the Pilot Notice does not cover primary clinics, which are an important component of general healthcare reform in China.

Second, the Pilot Notice refers to certain other regulations which were issued a few years ago and do not specifically address the establishment of wholly foreign owned hospitals. The regulators, especially those at the local level, may face challenges due to inconsistencies with respect to the documents required and the procedures to follow.

Third, the Pilot Notices allows the provincial counterparts of NHFPC and MOFCOM to pass detailed rules and guidelines for the establishment of wholly foreign owned hospitals. In our experience, this may lead to inconsistent practices across different regions.

Finally, from a practical standpoint, wholly foreign owned hospitals will still be subject to existing restrictions such as the lack of tax reliefs, qualified doctors, and the availability of private healthcare insurance.

One should not expect the Pilot Notice to address the entirety of the problems facing the Chinese healthcare sector or foreign healthcare investors. On the contrary, we believe the main purpose of Pilot Notice is to introduce the pilot programme, to gather experience and comments and lay the groundwork for a more comprehensive regulation for foreign investment in the healthcare sector in China. Norton Rose Fulbright is tracking these developments in this field and would be pleased to discuss them with interested parties.

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