On September 8, the Ministry of Commerce, the National Health Commission, and the State Food and Drug Administration jointly issued the Notice on Carrying out Pilot Work on Expanding Opening-up in the Medical Field (hereinafter referred to as the "Notice"). It is proposed to allow the establishment of wholly foreign-owned hospitals (except for traditional Chinese medicine, excluding mergers and acquisitions of public hospitals) in Beijing, Tianjin, Shanghai, Nanjing, Suzhou, Fuzhou, Guangzhou, Shenzhen and Hainan. This is undoubtedly a bold innovation to the existing healthcare system. Previously, foreign investment was limited to joint venture hospitals, and there were many restrictions such as shareholding ratio. With the relaxation of policy restrictions and the introduction of foreign-funded medical institutions, as more high-end medical institutions enter the Chinese market, while diverting some high-end patients, it may also improve the development and progress of the overall medical level in China.

There are two main points of the Circular, one of which is the opening of the gates of wholly foreign-owned hospitals. The restriction on "foreign-funded medical services" can be traced back to the 80s of the last century. In 1997, United Family settled in China, and the first Sino-foreign joint venture hospital was established in China. Since then, there have been many regulatory restrictions on foreign investment in the establishment of hospitals. It's not hard to understand. The establishment of foreign-funded hospitals may pose challenges to existing public hospitals, reduce the dimensionality of private hospitals, and may also bring concerns about the security of medical data. As a field of strong regulation, regulators have always been very cautious about this.

At present, although the specific conditions, requirements and procedures for the establishment of wholly foreign-owned hospitals have not yet been promulgated, this policy undoubtedly conveys to the outside world the determination to deepen the reform of the medical system. And this time, the logic of allowing pilots to be carried out in 9 places such as Beijing, Shanghai and Guangzhou is also clearly visible. On the one hand, these cities have developed economies, high incomes, and the ability to pay for high-quality medical services. On the other hand, these cities already have relatively advanced medical resources and strong service capabilities, and the introduction of foreign-funded hospitals will not have too much impact on the local medical market. Regarding the reform, proponents believe that some international medical technology, talents, nursing models, service concepts and management can be introduced "in the original way", and in filling the gap in public hospitals, the introduction of new medical technology may provide new ideas and new hope for the treatment of certain diseases. Of course, more importantly, the market believes that this may mean that China's medical system may enter a real era of dual-track development.

If we combine the policy of independent medical service by foreign investors and the promotion of Sanming medical reform, it is not difficult to find that with the advancement of reform, the domestic medical market is moving towards a dual-track system: a low-level public system with wide coverage, and a high-level self-pay system. Another piece of news that has been swiped in the past few days is that "it is difficult for hospitals to prescribe imported medicines". Similar news has been going on in recent years. The core reason behind this is a series of medical reform measures implemented since the establishment of the National Health Insurance Administration in 2018. To put it simply, the National Health Insurance Bureau, as a "big buyer", relies on the dominant position of medical insurance expenditure accounting for nearly half of the total health expenditure in the country, negotiates with pharmaceutical companies to promote a significant price reduction (centralized drug procurement), and standardizes the treatment methods of hospitals (DRG/DIP medical insurance payment method reform), so as to control medical insurance expenditure in a two-pronged manner, so as to maintain the long-term stable operation of the public medical system.

Health care reform is a worldwide problem. The model of domestic medical reform must be the Sanming medical reform, the main purpose of which is, in a word, to use medical insurance payment means to force medical services to comply, so that drugs can return to the function of treating diseases, and doctors can return to the role of seeing patients. In fact, this is also the overall goal of the country's medical reform. In June this year, the General Office of the State Council issued the "Key Work Tasks for Deepening the Reform of the Medical and Health System in 2024" (hereinafter referred to as the "Tasks"). The "Mission" mentions that it is necessary to further promote the experience of Sanming medical reform, deepen the reform of public hospitals oriented by public welfare, and promote the transformation of disease treatment as the center to people's health as the center.

The implementation of any policy naturally has advantages and disadvantages. But on the whole, if we look at the original intention of medical reform - adhere to the basic positioning of public welfare of public hospitals, then Sanming medical reform is fully in line with the original intention of the policy. Lowering drug prices and standardizing treatment methods are all good things, and they have effectively reduced the burden of medical treatment on the broad masses of the people. For middle-class and high-income groups, the policy does not restrict the choice of patients, who are not willing to use domestic generic drugs that have passed the consistency evaluation, they can buy imported drugs in pharmacies and e-commerce platforms, or they can buy commercial insurance by themselves, and go to the international department of public hospitals or private high-end hospitals to see a doctor. After all, it is difficult for public hospitals to fully meet all the medical needs of middle- and high-income earners.

At the end of the 90s, these foreign high-end medical institutions such as United Family entered China and set up joint ventures with domestic hospitals, meeting the needs of some domestic patients for high-end medical resources. However, these high-end private hospitals mainly rely on service to attract patients, and there are still many restrictions on the introduction of experts, technology and drugs, and many domestic patients still seek relevant medical services overseas. With the entry of more high-end medical institutions into the Chinese market, it may also improve the development and progress of the overall medical level in China while diverting some high-end patients.

It is not difficult to guess that once the detailed rules are issued and can be implemented, wholly foreign-owned hospitals will take the high-end market route, that is, high-end medical services for "high-net-worth individuals". With the launch of the pilot, this also means that the domestic hospital camp is likely to evolve from public and private hospitals in the past to a three-legged triumph of public, private and foreign capital.

In an optimistic scenario, this may be a real win-win for mahjong tables. At the level of medical insurance, with the diversion of high-end patients, the vigorous promotion of foreign-funded hospitals, and the cooperation with insurance companies to polish products, may be able to drive the development of commercial insurance. This can also alleviate the pressure on medical insurance to a certain extent. To put it simply, to see high-end medical care, not only needs to provide good service, but also needs to be equipped with high-end medical equipment and more expensive imported drugs to meet the medical needs of patients. From past experience, it is difficult for high-priced drugs to obtain medical insurance support. Because the national medical insurance is positioned to protect the basics, we insist on doing our best and doing what we can. However, high-end private medical institutions focus on self-financed and commercial insurance, and patients can afford these drugs. In fact, in recent years, under the pressure of centralized procurement, the cooperation between imported original drugs and high-end medical institutions has also deepened. For example, on March 8 this year, the innovative drug for migraine, Remegapam, was launched at Beijing United Family Hospital, and the product was approved in January this year. After the approval of Roche's Sufuda, it also reached a strategic cooperation with United Family Care.

At the pharmaceutical level, assuming that foreign-funded hospitals develop well, it also means that innovative drugs, high-end consumables, and medical equipment will also gain a certain amount of room for growth. This can be compared to the development of innovative pharmaceutical devices in United States with the blessing of commercial insurance. The reason why United States has become a paradise for innovative drugs is that in addition to policy and institutional factors such as encouraging innovation, commercial insurance is also one of the core elements. As for the doctor and patient level, they can also "get their place". Doctors who want to make money strive to join foreign-funded hospitals, and patients who are not short of money can also get the ideal high-end medical resources in foreign-funded hospitals. Of course, the above is the most optimistic deduction, and the final development remains to be seen. Because foreign-funded hospitals are facing a huge cake at the same time, there are also many challenges.

The domestic high-end hospital market has shown a rapid growth trend in recent years. According to Frost & Sullivan's statistics, the total revenue of the mid-to-high-end private medical service market increased from 178.2 billion yuan in 2019 to 361.5 billion yuan in 2023, with a compound annual growth rate of 19.3%; It is expected to continue to grow at a CAGR of 14.8% from 2023 to 2028, reaching $722.1 billion by 2028.

Due to the considerable market size, top foreign medical institutions are also targeting China's high-end medical market. In June, Mayo Clinic, a leading United States medical institution, opened its first office in China, located at Shanghai United Family Hospital.

In fact, in recent years, the number of mid-to-high-end private medical service institutions has also grown rapidly, from 6,993 in 2019 to 10,007 in 2023. It is expected to grow further at a CAGR of 7.4% from 2023 to 2028, reaching 14,326 by 2028. This shows that despite the positive prospects of the industry, the market competition has been very fierce. It can also be seen from the profitability of some leading institutions that it is still a major challenge to continuously optimize the cost structure, improve operational efficiency, and expand revenue sources in the process of expansion, so as to achieve profitability. For example, Zhuozheng Medical, one of the largest private mid-to-high-end medical institutions in China, is positioned in the mid-to-high-end market, with a lot of cost for patients and a high return rate of patients, but its profitability is very limited, although the total revenue is increasing year by year, but the overall is still in a state of loss. According to the prospectus, from 2021 to 2023, the total number of visits to paying patients in Zhuozheng Medical's medical service institutions and/or online medical service platforms will be 470,900, 529,800 and 733,400 respectively, and the per capita cost will be 1,033 yuan, 1,014 yuan and 1,048 yuan. The return rates were 71.1%, 75.7% and 78.2%, respectively.

During the same period, the consolidated gross profit margin of Zhuozheng Medical was 11.9%, 9.3% and 19.3% respectively. According to the prospectus, administrative expenses, as a rigid cost, are continuing to compress the profitability of Zhuozheng Medical. This may also be a challenge for foreign-funded hospitals. It should be noted that although the establishment of wholly foreign-owned medical institutions means that the foreign party has the right to speak in the operation, and can introduce the entire system and concept, as well as cutting-edge technology and equipment into China. But opening up the market in China is not an easy task, and the core problem is twofold. On the one hand, there is the issue of talent acquisition. In China, the brand effect of public hospitals, especially tertiary hospitals, and the career development opportunities provided by the system have always been the main obstacles for private hospitals to attract excellent doctors. Foreign-funded hospitals will also face difficulties in attracting and retaining professional doctors, especially high-level specialists. On the other hand, it's about positioning, pricing, and making it clear who pays for it. At present, most Sino-foreign joint venture hospitals are positioned in the high-end market, and their main payers are usually high-end medical insurance or self-paying patients. It is foreseeable that wholly foreign-owned hospitals are likely to adopt a similar high-end market strategy. Despite the huge potential of the high-end market, there are two limitations. First of all, it is difficult for the number of high-end medical institutions on the demand side to grow explosively, while the high-end medical institutions on the supply side have more competitors, and the competition is becoming increasingly fierce; Second, at present, the service capacity of such hospitals is limited to outpatient clinics and simple surgeries, and truly complex treatments require referral to public hospitals. Cake and challenge coexist. For new foreign hospital investors, it is necessary to fully learn from the lessons of the high-end market to avoid repeating the mistakes of the past.

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