Timely reform – former SOE hospitals meet deadline for reboot

When thousands of hospitals were told to wean themselves off financial support from state-owned enterprises, a free-for-all kicked off. Ten years on, the plan have worked, though it was not easy.

Photo from CFP

Photo from CFP

By HUANG Hua, ZHU Xinxin


In October 2011, ZHANG Haipeng, better known by his pen name Feng Tang, was trekking in the Gobi when he got a phone call. The novelist had a new job. 

At the time, China was in the middle of full-blown healthcare reform. Physician Feng was then in charge of the investment arm of China Resources, a business spanning everything from beer to property development. He was appointed to lead a new company unit, and build a healthcare empire. 

‘Everyone bid for everything’

Specifically, Feng was tasked with acquiring hospitals affiliated to state-owned enterprises (SOEs). Many were founded decades ago in factory towns to serve workers and were ill-adapted to the market economy, and, in many cases, woefully inadequate. In the early 2000s, China began looking for ways to slim down the state sector and make these SOE hospitals self-sustaining.

The State Council decided SOEs must end support for affiliated hospitals by 2019, a deadline later extended to 2021. More than 200 were taken over by local governments, and almost all (1149 of 1154) SOE hospitals have weaned themselves off their parents. More than half became independent hospitals or were acquired by companies like China Resources. The rest closed down.

In the first three years, China Resources committed 10 billion yuan toward its goal of hospitals with 20,000 beds. Feng’s team prioritized control during the negotiations, allowing China Resources to lay off staff and upgrade services once in charge.

Around the same time, another conglomerate, Founder Group, also started buying up hospitals. Founder Group already controlled 30 percent of PKU International Hospital, a top healthcare institution, and was soon to acquire a long list of pharmaceutical companies, nursing homes and specialty hospitals: PKU Healthcare Group.

YANG Xiao, former executive of PKU Healthcare Group, said it was a slow process. Every institution was different. Scaling up was difficult. PKU did a good job in R&D by consolidating expertise in acquired hospitals, but could have done a lot more in insurance and digital services. None of that happened when four Founder Group executives were convicted of fraud, insider trading and embezzlement in 2015. PKU Healthcare does not make a profit.

These hospitals were not going to be for sale again. China Resources focused on big, general hospitals. Money was flying around everywhere.

“Everyone bid for everything,” Feng said. It was only after the acquisitions operational challenges emerged and, in any case, in 2014, CR was hit by its own corruption problems. Feng’s team disintegrated and he resigned.

Arguably, neither company actually fell afoul of the market, but the reality is that most hospitals in China are nonprofits. And even they find the going tough. Large conglomerates that own many hospitals used to get volume discounts for drugs, but this advantage is quickly vanishing as the government expands its bulk-buying program, making drugs less costly for everyone.

Strange bedfellows

Some hospitals have partnered with real estate developers, but the real estate sector is now a quagmire of bad debt and bankruptcy. Some specialty hospitals try to become franchises, but this takes a long time. A new trend is to combine medical care with private insurance, but the path is still untested. More fundamentally, the questions of whether hospitals should make a profit, and if so, how much, remains hugely contentious.

“SOE hospitals used to be charity-like organizations funded by the government and run by decree, insulated from market forces. Now they were suddenly left to fend for themselves in the open market, “said LIN Yanglin, CEO at New Journey Healthcare Group.

Inflated valuations eventually scared investors away, especially those looking for quick returns. “It was mostly large conglomerates experienced in slow, steady, long-term projects that remained,” said Lin.

Successful or not, everyone knew private takeovers were a painful necessity. The new parent companies wrestled with the bottom line to mixed success. The invest-operate-transfer model fell at a regulatory hurdle. Hospital staff also pushed back. They wanted better jobs, with better pay, not to be laid off to pay shareholders instead.

What more can you be?

More consolidation is to come. Healthcare is on the front line in the face of population aging. Existing institutions must be made fit for purpose. Building new hospitals is expensive and slow. Hospitals will be compelled to merge for economies of scale.

The giant institutions of the future will be more specialized, which calls for management and supply chain innovation. “Everyone is trying to be a hospital and something else to stay competitive. In the future simply being a hospital will not be enough,” said Lin.