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Why Everything You Know about Health Care in China Is Wrong

Two announced hospital deals — Fosun Pharma’s (复星医药) announced acquisition of Chindex International, Ltd., and a partnership between Evergrande Real Estate Group (恆大集團)  and Harvard’s Brigham and Women’s Hospital– have generated much discussion in niche investors and analyst communities about how much, or how little, investors should be excited about the possibility that China’s healthcare service sector is open to investment.

In point of fact, these two deals are not cause for optimism. Rather, they are the story of the inability of healthcare services in China to make a profit writ large.

With few very minor exceptions, and the reputations of Chindex and Harvard notwithstanding, no single institution in China has yet figured out how to make hospitals, and more generally, healthcare services, profitable in China in the long term[1]; not the Chinese government, not private Chinese firms, not the semi-foreign companies from Taiwan-Macao-Hong-Kong, and certainly not truly foreign firms from other Western countries.

Moreover, it is very unlikely that a sustainable profit model is a real possibility in the short to mid-term. China’s mix of government policies and ministry regulations disadvantage private health service institutions in the marketplace through discriminatory tax treatment relative to public hospitals, market entry limitations that force private hospitals into underdeveloped population zones and stall expansion projects, as well as various other acts that make it difficult for private health providers to compete with public hospitals in the recruitment of capital and medical staff.

Until last week at least, despite these challenges, the United States could claim one successful and prominent entry in China’s private healthcare arena – the United Family Care family of hospitals and clinics, run by Chindex International, Inc. Chindex opened Beijing United Family Hospital in 1994, and since then opened up several more clinic branches across China, including the United Hospital in Shanghai [2].

However, when Shanghai Fosun Pharmaceautical Group Co Ltd (from here on out “Fosun Pharma”) announced that it was partnering with equity house TPG Capital to acquire Chindex in a deal valued at $369 million, the United States lost this single claim to success in China’s healthcare services market.

The deal, when finalized, will give Fosun Pharma majority ownership of Chindex, result in Chindex becoming a private company, and will turn the beacon of American success in the Chinese healthcare industry into a subsidiary of a Chinese conglomerate.

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