The details of a policy that aims to encourage private investment in Beijing's medical care sector are expected to be effective by the end of this month.

Issued by the Beijing municipal government at the end of August, the details reflect a new and long-anticipated development of the country’s medical reform.

In early August, Wenzhou, in Zhejiang province, developed new plans to offer incentive policies for investors which could establish the city as the private medical capital of China.

Like Beijing and Wenzhou, several other local governments are competing to lure private, including foreign, capital into their healthcare regimes.

It’s sure to be a favorable environment for private investors in China. However, a report conducted by McKinsey & Co said it is a complex set of opportunities and challenges for existing private hospitals, as well as for potential investors in this sector.

According to the report, private hospitals in China offer promising opportunities for patients, operators and investors along with benefits to the healthcare system. They give patients the chance to enjoy better care and service and give operators and investors the opportunity to capture a share of an immense and growing market.

They also benefit the overall healthcare system by relieving some of the burden on public facilities. In 2011, there were about 100 million inpatient discharges from both public and private hospitals in addition to 2 billion outpatient visits. The contribution of the private sector is set to double over the next five years, said Alexander Ng, an associate partner in McKinsey’s Hong Kong office.

The Ministry of Health has set a target that, by 2015, private hospitals should be managing 20 percent of China’s bed and inpatient and outpatient volume, which is an increase from 11 percent of beds and around 8 percent of inpatient and outpatient activities now.

However, due to inadequate policies and incentives, private operators and investors have been faced with a series of challenges. For example, reputable physicians have been reluctant to practice in local or foreign-invested private hospitals and, until this year, the government restricted foreign investors to a 70 percent ownership share in such facilities.

Foreign investors aiming to establish successful joint ventures have struggled because of the staffing problems and investment restrictions, as well as burdensome government approval procedures, said Claudia Suessmuth Dyckerhoff, a partner at McKinsey Shanghai.

To get rid of such obstacles, the local governments have formulated a series of incentive policies on land use, taxation and favorable payback conditions for investors. Foreign investors are no longer restricted to operating through 70-30 joint ventures with local partners. Pilot projects under way in specific provinces, including Guangdong, Yunnan, Sichuan, Henan and Hainan, allow doctors to practice in multiple locations, including private hospitals.

These projects aim to make it easier for private hospitals to recruit reputable physicians, whose highest priority is to maintain their professional ranking in the public system. Under previous regulations, doctors lose their professional title and ranking in the public hospital system if they work even part-time at a private hospital.

Favorable tax policies have been implemented, such as business tax exemption for the first three years of a private hospital’s existence and an income tax exemption on the pretax profits that companies invest in medical services.

Given the favorable policies and government’s determination, private operators and investors should jump at the opportunity while being careful and clever in dealing with the challenges, said the report, which offers certain imperatives for success in this market.

The current value-proposition and perceived competitive edge of private hospitals lie in the provision of patient-centered services. It will be crucial for private hospitals to continue to deliver better patient service in order to draw patients from the public system and also compete against each other.

Clinical quality and patient safety need to be at the top of any hospital chief’s agenda, with clear metrics and reporting mechanisms put into place. This will require a cultural change in most hospitals, including more public disclosure about medical incidents and outcomes rather than simple activity-based reporting.

The crucially important matter of reputation must be managed not only by hiring excellent medical practitioners but also by making parallel changes in the organization’s communication strategy and culture.

Physicians are willing to work part time at private hospitals, where compensation is higher, if they can secure the time and approval from their public hospital employers. Those private hospitals that can sign up physicians who are opinion leaders will enjoy both reputational benefits and additional referrals from these physicians’ patient bases at public hospitals.

Patients seeking medical care at private hospitals make clear distinctions among different specialties and select their hospitals accordingly. In addition, what may be an attractive specialty to patients in one city may not be attractive or a significant need for patients in another city.

It is critical to identify the most specific and promising opportunities at a city level so that the private facility can find its "sweet spots" in the market, rather than applying a generalized approach that does not make use of market research.

International collaboration as well as high-end imported drugs, devices and technologies are highly attractive to upper middle class patients. Foreign investors and joint ventures should place these highly valued attributes at the core of their value proposition.

"So far, many of the skills and capabilities required to be successful in operating private hospitals in China, such as business-minded physicians, are not readily available, thus private hospital investors and operators will need to take an open approach to building partnerships with the public hospitals to develop and access the necessary skills and capabilities," said Dyckerhoff.

Private hospital operators must also take a longer-term perspective by investing in building their reputations, as this is critical to promote growth in a market where patients still choose and decide mainly on the basis of reputation.

"In a developing market, the well-managed intangibles that define ‘reputation’ will be based on the quality of treatment and, as consumers become wealthier and more demanding, the quality of service," added Ng.

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