With the world’s spotlight on China as the upcoming Olympics host in 2008 and site of the World Expo in 2010, companies around the world are pumping billions of dollars into improving the nation’s infrastructure and social services. In fact, the Chinese have earmarked US$85 billion for improving their life sciences industry (the environmental, pharmaceutical, and healthcare sectors) by 2008. As a result of this–and the fact that new Chinese regulations now allow hospitals and clinics opportunities for joint ventures with foreign investors–China may have an entirely new healthcare system by 2008.
That’s what Gary Wolfson, Chief Executive Officer at Genesis Technology Group (a business development firm that fosters bilateral commerce between companies in the West with those in China), predicts. And the new system may include outsourcing. However, Dr. Shaohua (Joshua) Tan, Chairman of Beijing Epic Software Technology (a software company providing hospital information systems and solutions), thinks there is such a high degree of change required that it cannot happen by 2008.
Analyst and provider firms studying upcoming outsourcing opportunities in China recognize the new regulations should form a gateway for Chinese medical entities to outsource ITO and BPO processes to expert service provider firms. Foreign medical institution investors, after all, will want to ensure a significant return on their investment and will be looking at the bottom line, focusing on ways to leverage resources and competencies to be more competitive and cost-effective while increasing the quality of services. Such a scenario begs for outsourcing as the solution in much of the world, but perhaps not in China.
Foreign Investment Opportunities
Overview of China’s Hospital/Clinics
Three years ago, all Chinese hospitals were government (or military) hospitals, and healthcare treatment was free. China discontinued free medical care in July 2002 when the government turned from its former socialist benefits; access to healthcare is now governed by the ability of a consumer to pay for services.
In October 2002, the Chinese government issued a resolution to reform its healthcare services sector. Goals included attracting foreign investments to develop non-government-owned medical institutions and to provide better training to China’s two million doctors, one million nurses, and thousands of clinicians and medical management personnel. The resolution was touted as a way to create a more competitive environment and speed up medical reform.
Genesis’ CEO Wolfson, who has served as an advisor on China for more than 30 Western companies for the past 12 years, predicts the Chinese will be working hard for the next 20 years to attract Western investors. The government admits it needs Western healthcare management models, improved quality of service, and advanced technology. It also acknowledges that allowing consumer (patient) choice in medical services should increase competition, improve services, and lower costs. Thus, China’s Ministry of Health has been gradually segregating medical service institutions into for-profit and non-profit entities and allowing patients to choose where their medical treatment is administered.
For-profit institutions can include foreign joint venture partners; however, China still forbids hospitals that are solely funded by and managed by foreigners and also prevents foreign investors from holding more than a 70 percent share in a healthcare joint venture. For-profit institutions are allowed to treat only self-funded patients; must offer services not offered by other local hospitals; and, unlike non-profit institutions, must pay taxes. According to Genesis Technology Group’s report (“The Healthcare Industry in China, 2003”), among the 66,000 hospitals and clinics in China are at least 200 joint or cooperative venture hospitals or clinics.
Wolfson cites the 2400-bed Peking University International Hospital, currently under construction in Beijing and due for completion in 2007, as a prime example of healthcare reform and the foreign investment strategy. The hospital–China’s first digital hospital–will provide medical services for the 2008 Olympic Games. Its Web site states that objectives include customer-oriented healthcare services and market-oriented management. Foreign investors are involved in the hospital’s construction and, to an extent, will be involved in the hospital’s management.
Sweet and Sour
While the opportunities for foreign investment in China’s hospital sector appear to be sweet, a look behind the scenes is somewhat sour. Although the Chinese now welcome foreigners to build and partly own/partly operate medical facilities, there are certain restrictions in the prices a hospital or clinic may charge.
Because of the government’s efforts in cost containment, physicians and medical institutions are forced to deliver basic services at below-cost prices. Nevertheless, medical providers have developed a way to recover their lost revenue–through charges for medicines and high-tech tests. In these two areas, the government allows medical providers to charge prices that exceed costs. So the price of physician consultation is extremely low, but medications and tests are overpriced. As a result, China’s medicine industry thrives; indeed, China is the world’s second largest medicine producer. Internal pharmacies are hospitals’ bread and butter.
Medical services pricing is a very politically sensitive issue. Increasing the cost of physician consultations from one yen to ten, for example, in order to pay the actual cost of services rendered, would make systems appear to be unstable or out of control. So the government–acting on China’s cultural mindset to “save face”–does not raise the prices.
China’s current approach to hospital management definitely beckons to Western business practices and outsourcing. Chinese hospitals are run by medical specialists who are politically appointed to management positions. They may be good at surgical procedures or X-rays but have no qualifications as an enterprise manager. Wolfson says, “They are now putting a real premium on US physicians and management as well as US medical equipment.”
But there are problems with the Westernization of China’s hospitals and clinics. China is still a secretive, closed culture. The government still conceals inconvenient information. For example, a lack of resources caused the medical staff in several Chinese hospitals to become infected with SARS; the inadequate resources were later determined to be the result of the government wanting to save face and, thus, significantly underreporting the numbers of infections. There also are a lot of hidden elements in the healthcare system.
“The mentality here is different because of the pricing and other ways the hospitals are structured,” explains Dr. Tan. “They will hire foreigners to help with hospital management, but the hospitals definitely will keep key elements (like patient billing and medical transcription) in their control in order to keep their operations hidden.”
Outsourcing–well known for the transparency it causes in business operations–is not appropriate for such a scenario. Even a common strategy and benefit for outsourcing today–re-investing the savings achieved by outsourced information technology processes back into a hospital’s core services–would not work because the Chinese would not want the IT outsourcing company to have access to critical database information.
So contracting, rather than outsourcing, is likely to be the chosen solution–at least at the outset. Even though Chinese hospitals are being criticized for inadequate services, the need to retain control prevents management from being high on the idea of outsourcing. This can be a major roadblock for some potential foreign investors.
Nevertheless, Dr. Tan cites an example where outsourcing has taken hold in Chinese hospitals. Over a period of three years, a US-based outsourcing company managed to gather around 200 hospital customers for which it now provides cleaning services. Facilities cleaning, of course, is a much less critical function than a process that requires giving up control of information.
Outsourcing’s growth in the Chinese hospital sector will also be slowed by outsourcing companies’ pricing. The market for IT outsourcing in hospitals is currently too small to allow outsourcers to offer attractive prices. Currently, commercial viability is hindered by three factors. First, outsourcers lack clear understanding in how Chinese hospitals are run. The second hindrance, as Tan explains, is that in the United States and Europe, it is permissible for companies not to have personnel and payroll. But the legal system in China does not yet allow this to happen.” The third hindrance is the Chinese mindset toward its workers and technology. Most hospitals do not agree with the value proposition of investing in ERP software, for example, because even though it would provide efficiencies, it would also eliminate people’s jobs–not an ideal situation for a country with more than 1.3 billion people.
Wolfson says China has agreed to open its health insurance markets to foreign insurers by 2005 and has stated that companies and workers will be allowed to evaluate and select commercial health insurance that is appropriate and tailored to their needs. This will, undoubtedly, introduce international expertise, process efficiencies, operational best practices, and–eventually–outsourcing.
Outsourcing will also happen in Chinese hospitals eventually. But Tan states, from his experience in working with Chinese hospitals, “It will take longer than 2008 for it to happen. First, the for-profit hospitals will need to restructure themselves so that their operations can be more transparent.”
Growth will also be dependent on how much control the government retains over pricing for medical services. Although investors may purchase shares in Peking University International Hospital, for example, the hospital will still be impacted by government policies and be a non-profit institution (except for some “luxury medical services” open to investors that want to make a profit).
Similarly, it will take time to change the political-appointee management approach. Even though students graduating from Peking University today have fresh ideas and have been educated on the way the rest of the world does business, they will not be political appointees upon graduation and are not even likely to be given opportunities to work in positions where they can effect change. An early opportunity to see foreign management ideas in place will be Peking University International Hospital’s plan to “work with” a foreign management company once the hospital opens.
“China’s healthcare sector is a big system, and it will take time to make changes,” says Tan. “The next five years will bring dramatic changes for Chinese medical services because the government is restructuring policies toward healthcare. It is gradually shifting to legalizing self-management of hospitals in order to introduce new ideas. But they don’t want to have any uncertainties or something out of control. Any drastic change in this culture is not accepted. So it will take 10-15 years to see a real impact from a gradually changing mindset.”
Once it happens, the Chinese language will be a huge factor in where services are provided. Wolfson says his company is currently working with Peking University to localize a Western software product, and it’s a huge undertaking. He predicts that China’s outsourced back-office functions will one day be offshored to Singapore. Ethnic Chinese comprise 65 percent of Singapore’s population, and the nation’s predominant language is Chinese.
Undoubtedly, some American and Indian outsourcing companies providing healthcare services will be looking at strategic alliances and acquisitions in Singapore so they can pick up that business from China. After all, the twenty-first century will be the China century.
Lessons from the Outsourcing Journal:
- The growth rate in emerging markets for outsourcing depends on the degree of cultural change necessary.
- Outsourcing provides transparency into a buyer’s business operations. While this often provides significant value, it sometimes creates problems.
- As globalization continues to occur, the language capabilities of an outsourcing provider firm will be an important feature of its offering.
About the Author: Ben Trowbridge is an accomplished Outsourcing Consultant with extensive experience in outsourcing and managed services. As a former EY Partner and CEO of Alsbridge, he built successful practices in Transformational Outsourcing, BPO, Cybersecurity assessment, IT Outsourcing, and Cybersecurity Sourcing. Throughout his career, Ben has advised a broad range of clients on outsourcing and global business services strategy and transactions. As the current CEO of the Outsourcing Center, he provides invaluable insights and guidance to buyers and managed services executives. Contact him at [email protected].