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A little More about China A little More about China Health and WenzhouHealth and Wenzhou

a)a) Industry StructureIndustry Structureb)b) Current StatusCurrent Statusc)c) OpportunitiesOpportunitiesd)d) ReformReforme)e) Investment DevelopmentInvestment Developmentf)f) Foreign InvestmentForeign Investmentg)g) Private HospitalsPrivate Hospitalsh)h) Taxes and LawsTaxes and Lawsi)i) Capital MarketsCapital Marketsj)j) Market Entry Barriers Market Entry Barriers k)k) ProblemsProblemsl)l) Development TrendsDevelopment Trendsm)m) Wenzhou - locationWenzhou - locationn)n) Wenzhou EconomyWenzhou Economyo)o) Wenzhou Upper Income GroupWenzhou Upper Income Groupp)p) Wenzhou Health IndustryWenzhou Health Industry

Refer to HBP_08Market.doc for details

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a) Industry Structure a) Industry Structure

• State-owned hospitals - half of the total State-owned hospitals - half of the total number of hospitals, but with a revenue of number of hospitals, but with a revenue of about 97% of the total national healthcare about 97% of the total national healthcare output output

• Not-for-profitable hospitals account for Not-for-profitable hospitals account for 99% of the total number of hospitals, 99% of the total number of hospitals, investor-owned only 1% investor-owned only 1%

• Among the 3.2 million beds, 98.6% of them Among the 3.2 million beds, 98.6% of them belong to the not-for-profitable hospitals, belong to the not-for-profitable hospitals, the rest of 1.4% go to profitable hospitalsthe rest of 1.4% go to profitable hospitals

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b) Current Status (1/3)b) Current Status (1/3)• 2005 China’s medicare expenditure: 830+ billion accounting 2005 China’s medicare expenditure: 830+ billion accounting

for 5.6% of GDP (US: 14%, Sweden: 9%, Japan 7%) increasing for 5.6% of GDP (US: 14%, Sweden: 9%, Japan 7%) increasing at more than 10% a year, 1.2 times that of the GDP growthat more than 10% a year, 1.2 times that of the GDP growth

• 2005 China per capita medicare fees: RMB 630 or USD 80 (abo2005 China per capita medicare fees: RMB 630 or USD 80 (about 1/40-1/90 of the developed countries such as the U.S., Swedut 1/40-1/90 of the developed countries such as the U.S., Sweden, Japan; about 1/10-1/16 of the four Asian tiger countries of en, Japan; about 1/10-1/16 of the four Asian tiger countries of Singapore, Korea etc, and even only ½ of Malaysia.) Singapore, Korea etc, and even only ½ of Malaysia.)

• 2005 single medicare fee of a person: RMB 126.9, inpatient fee:2005 single medicare fee of a person: RMB 126.9, inpatient fee: RMB 4661.5, increased about 30-150 fold over the last 25 years RMB 4661.5, increased about 30-150 fold over the last 25 years (1980-2005) (1980-2005)

• 2005 outpatient medicare fees: 52.5% for medicine, 29.8% for i2005 outpatient medicare fees: 52.5% for medicine, 29.8% for inspection; inpatients: medicine 43.9%, inspection and surgery nspection; inpatients: medicine 43.9%, inspection and surgery 36.0% 36.0%

• 2003 government paid 17%, patients 55% of the medicare bills 2003 government paid 17%, patients 55% of the medicare bills (low-income country average: 27%, USA: 45%)(low-income country average: 27%, USA: 45%)

Refer to HBP_08Market.doc

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b) Current Status (2/3)b) Current Status (2/3)• 2004: total 3.27 million beds, per capita bed: 2.4 2004: total 3.27 million beds, per capita bed: 2.4

(target 4-7)(target 4-7)• 2004: 1.7 hospital visits per capita2004: 1.7 hospital visits per capita• 2004: total in-patients of 66.7 million where 97.5% 2004: total in-patients of 66.7 million where 97.5%

went to non-profitable hospitalswent to non-profitable hospitals• 2004: 52.6 out of 1000 people were hospitalized 2004: 52.6 out of 1000 people were hospitalized

with an average stay of 10.9 days where non-with an average stay of 10.9 days where non-profitable 11 days, profitable 7.8 daysprofitable 11 days, profitable 7.8 days

• 2004: bed vacancy 38.7%2004: bed vacancy 38.7%• Most of the top class hospitals enjoyed a revenue Most of the top class hospitals enjoyed a revenue

of RMB 500+ million a yearof RMB 500+ million a year

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b) Current Status (3/3)b) Current Status (3/3)• Death causes: 1) malignant tumour, 2) cDeath causes: 1) malignant tumour, 2) cerebrovascularerebrovascular

diseases, 3) heart diseases, 4) respiratory diseases, 5) diseases, 3) heart diseases, 4) respiratory diseases, 5) ttrauma and toxicosis rauma and toxicosis 6) d6) digestive disease igestive disease 7) 7) Internal Internal system, nutrition, metabolite and immunity diseases system, nutrition, metabolite and immunity diseases 8) urinary disease 9) neuropathy and 10) perinatal 8) urinary disease 9) neuropathy and 10) perinatal period diseases period diseases

• Lack of commercial medical insurances in China: about Lack of commercial medical insurances in China: about 40% of the urban and 80% of the rural population are no40% of the urban and 80% of the rural population are not medical insured, and those with insurance are only covt medical insured, and those with insurance are only covered with the very basic treatmentered with the very basic treatment

• Technology level: the top level hospitals own the latest Technology level: the top level hospitals own the latest medical equipments compared with the developed counmedical equipments compared with the developed countries, and are therefore no less advanced than the best itries, and are therefore no less advanced than the best international hospitals, while the 2nternational hospitals, while the 2ndnd level hospitals are i level hospitals are in short of medical equipment as well as skilled medical n short of medical equipment as well as skilled medical personnelpersonnel

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c) Opportunities (1/4)c) Opportunities (1/4)Demand NationwideDemand Nationwide• The medical reform leads to more privatization, more The medical reform leads to more privatization, more

service needs, and more freedom – more demandservice needs, and more freedom – more demand• Many patients are not treated due to various reasons, Many patients are not treated due to various reasons,

particularly in rural areas. About 60-70% people don’t go particularly in rural areas. About 60-70% people don’t go to hospitals in case of falling illto hospitals in case of falling ill

• China has a huge medical market potential, its growth China has a huge medical market potential, its growth rate is above GDP growth rate and the trend will rate is above GDP growth rate and the trend will continue in the futurecontinue in the future

• When the economy develops fast (9%/a), people have When the economy develops fast (9%/a), people have more purchasing power and are more health-conscious more purchasing power and are more health-conscious and hence are willing to pay more for their health – and hence are willing to pay more for their health – better technology, better services, better hospital better technology, better services, better hospital environment, better medicines, and as a result, an environment, better medicines, and as a result, an advanced medical systemadvanced medical system

• The medical industry pays more attention to quality and The medical industry pays more attention to quality and processprocess

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c) Opportunities (2/4)c) Opportunities (2/4)

Demand in WenzhouDemand in Wenzhou• People of Wenzhou are willing to undertake their own People of Wenzhou are willing to undertake their own

responsibilities in taking care of their own health and that of responsibilities in taking care of their own health and that of their family members, rather than waiting for government care. their family members, rather than waiting for government care. Wenzhou people are seeking for better and more personalized Wenzhou people are seeking for better and more personalized medical services, an attitude quite different from much of the medical services, an attitude quite different from much of the country , leading to the beneficial development environment of country , leading to the beneficial development environment of private healthcare. private healthcare.

• The Wenzhou medical and healthcare expenditure has been The Wenzhou medical and healthcare expenditure has been expanding steadily, where the medical spending has been expanding steadily, where the medical spending has been extremely growing. In 2005, an average citizen has spent RMB extremely growing. In 2005, an average citizen has spent RMB 742 on his/her medical and healthcare, an increase of 5.6% over 742 on his/her medical and healthcare, an increase of 5.6% over 2004. 2004.

• Living environment and habitats are getting closer to that of the Living environment and habitats are getting closer to that of the developed countries, pushing up better and more medical developed countries, pushing up better and more medical servicesservices

• Higher natural birthrate and longer life expectancy also Higher natural birthrate and longer life expectancy also maintain a higher demand on medical services. Citizens desire maintain a higher demand on medical services. Citizens desire of high quality, secure, personalized services with privacyof high quality, secure, personalized services with privacy

• Consumers demand of advanced medical technologyConsumers demand of advanced medical technology

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c) Opportunities (3/4)c) Opportunities (3/4)Supply:Supply: • Lack of medical facilities compared with other regions, for Lack of medical facilities compared with other regions, for

example bed/1000 people only example bed/1000 people only 2.2 in Wenzhou2.2 in Wenzhou, others: , others: Nationwide:Nationwide:3.1; Shanghai: 5.5; Beijing: 6.5; Suzhou: 5.1; 3.1; Shanghai: 5.5; Beijing: 6.5; Suzhou: 5.1; Hangzhou: 2.4; Ningbo: 3.3; Zhejiang: 2.7; Doctors per 1000 Hangzhou: 2.4; Ningbo: 3.3; Zhejiang: 2.7; Doctors per 1000 people: people: Wenzhou: 1.6, Wenzhou: 1.6, nationwide: 1.7; Shanghai: 3.8; Beijing: nationwide: 1.7; Shanghai: 3.8; Beijing: 4.6; Suzhou: 1.8;Hangzhou: 1.5; Ningbo: 2.4;Zhejiang: 1.8; 4.6; Suzhou: 1.8;Hangzhou: 1.5; Ningbo: 2.4;Zhejiang: 1.8;

• Large gap of bed availability: 2.2 against 4-7 of the Large gap of bed availability: 2.2 against 4-7 of the government target by 2010 government target by 2010

• Private hospitals increase rapidly in Wenzhou, but they are Private hospitals increase rapidly in Wenzhou, but they are of small scale, limited functions and low service quality. of small scale, limited functions and low service quality. Some of them are of bad reputation and hence are affecting Some of them are of bad reputation and hence are affecting the healthy development of that part of the health industry .the healthy development of that part of the health industry .

• New technologies are coming up rapidly New technologies are coming up rapidly • Low coverage of state-run medical insurance in Wenzhou Low coverage of state-run medical insurance in Wenzhou • Lack of medical personnel. Clinic and research people rely Lack of medical personnel. Clinic and research people rely

largely on the specialists from outside regionslargely on the specialists from outside regions

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c) Opportunities (4/4)c) Opportunities (4/4)

Government plan:Government plan:• Wenzhou defines it as the secondary medical center of Zhejiang province in Wenzhou defines it as the secondary medical center of Zhejiang province in

its 2005-2015 Development Plan, as well as the medical center of north its 2005-2015 Development Plan, as well as the medical center of north Fujian Fujian

• By 2010, the total bed availability shall reach 28.540 or 3.8 beds per 1000 By 2010, the total bed availability shall reach 28.540 or 3.8 beds per 1000 people. Per bed construction area shall reach 80-90 m2, that of land are people. Per bed construction area shall reach 80-90 m2, that of land are 106-117 m2. Medical doctor Per 1000 people shall be increased to 2.0. 106-117 m2. Medical doctor Per 1000 people shall be increased to 2.0.

• Community resident wholly medical insurance coverage shall be increased Community resident wholly medical insurance coverage shall be increased to 60%, while the urban and rural basic medical insurance shall be to 60%, while the urban and rural basic medical insurance shall be increased to 90%.increased to 90%.

• Local government promotes multilevel and multi-sourced investment policy. Local government promotes multilevel and multi-sourced investment policy. The government plans for several high level, high quality general acute and The government plans for several high level, high quality general acute and special hospitals in areas with sufficient client base special hospitals in areas with sufficient client base

• Local government spend more in public health program, while the public Local government spend more in public health program, while the public health administration authorities will turn from managing hospitals to health administration authorities will turn from managing hospitals to administering the hospitals. administering the hospitals.

• Government particularly support the construction of large hospitals in track Government particularly support the construction of large hospitals in track with international medical services and will provide taxation and land use with international medical services and will provide taxation and land use favorable policies and treatment, as well as special approval treatment.favorable policies and treatment, as well as special approval treatment.

• The government also encourages those state-owned hospitals outside the The government also encourages those state-owned hospitals outside the basic medical services to be transferred to private hospitals through various basic medical services to be transferred to private hospitals through various optionsoptions

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d) Reform (1/3)d) Reform (1/3)• Reform direction is not yet fixed. The Ministry of Health Reform direction is not yet fixed. The Ministry of Health

(MOH) is working on the detailed plan, but there is no sch(MOH) is working on the detailed plan, but there is no schedule for the issuance of the new regulations. However, it edule for the issuance of the new regulations. However, it is very likely that government will still be the predominanis very likely that government will still be the predominant force in the health industry with introduction of marketit force in the health industry with introduction of marketization and will shift its focus onto the public and communzation and will shift its focus onto the public and community health and sanitation, basic health and rural health, leity health and sanitation, basic health and rural health, leaving the high end healthcare and the vast amount of medaving the high end healthcare and the vast amount of medium-sized hospitals at the district and county levels to privium-sized hospitals at the district and county levels to private investors.ate investors.

• Thus a multileveled and rational healthcare system will bThus a multileveled and rational healthcare system will be formed, where the government will take care of the fune formed, where the government will take care of the fundamental healthcare in rural and urban communities and damental healthcare in rural and urban communities and some of the top hospitals in the metropolises. The entire some of the top hospitals in the metropolises. The entire health system will be split up to three tiers - public sanitathealth system will be split up to three tiers - public sanitation and health, basic medical and non-basic medical and ion and health, basic medical and non-basic medical and healthcare services. healthcare services.

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d) Reform (2/3)d) Reform (2/3)• MOH will take over the overall administration MOH will take over the overall administration

of all the hospitals across the industries. The of all the hospitals across the industries. The government will be the planning body for the government will be the planning body for the overall development and plans for the overall development and plans for the healthcare system. It will also work out details healthcare system. It will also work out details about the number and size of the public about the number and size of the public hospital system to be retained in government hospital system to be retained in government control and the rest will be turned to for-profit control and the rest will be turned to for-profit or not-for-profit hospitals in the near futureor not-for-profit hospitals in the near future

• Aim of the new reform is to cover 90% of basic Aim of the new reform is to cover 90% of basic health insurance to the population and to pay health insurance to the population and to pay half of the medical fees for them. The trial will half of the medical fees for them. The trial will first start from countryside and those with first start from countryside and those with urgent needs and then spread across the urgent needs and then spread across the nation.nation.

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d) Reform (3/3)d) Reform (3/3)• Hospitals will be re-categorized to three types: not-for-Hospitals will be re-categorized to three types: not-for-

profit state-owned hospital, not-for-profit private profit state-owned hospital, not-for-profit private hospital and for-profit private hospitals.hospital and for-profit private hospitals.

• Government encourages the investment in not-for-profit Government encourages the investment in not-for-profit private hospitals, but will control the number and scale private hospitals, but will control the number and scale of the for-profit private hospitals.of the for-profit private hospitals.

• The government will take various measures to reduce The government will take various measures to reduce the medicine prices, while at the same time, will the medicine prices, while at the same time, will increase the prices of medical services, thus the increase the prices of medical services, thus the medicine price ratio in the total medical cost will be medicine price ratio in the total medical cost will be likely be reducedlikely be reduced

• This creates a large space for private and foreign This creates a large space for private and foreign investments in the middle (2investments in the middle (2ndnd class) and the high level class) and the high level (3(3rdrd class and higher) hospitals, and special hospitals or class and higher) hospitals, and special hospitals or special healthcare services for the targeted clientsspecial healthcare services for the targeted clients

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e) Investment e) Investment Development (1/2)Development (1/2)

• At least RMB 20 billion has been injected into the Chinese healthAt least RMB 20 billion has been injected into the Chinese healthcare industry, with only few from foreign investorscare industry, with only few from foreign investors

• Among the 300+ hospital investment companies, about 100 are cAmong the 300+ hospital investment companies, about 100 are currently developing their projectsurrently developing their projects

• Non-government. Not-for-profit hospitals are the main targets of Non-government. Not-for-profit hospitals are the main targets of investors. Second class hospitals are the main merger and acquiinvestors. Second class hospitals are the main merger and acquisition targets sition targets

• 2006 might be the best time for investing in hospitals, as the refo2006 might be the best time for investing in hospitals, as the reform has gone enough far, the policy changes and market demandrm has gone enough far, the policy changes and market demands have resulted in variety of results, such as corporatization, M&s have resulted in variety of results, such as corporatization, M&A, sales and transfer, leasing and agglomeration A, sales and transfer, leasing and agglomeration

• Although the new regulations about the second round of reAlthough the new regulations about the second round of reform are not issued, outsiders from the real estates, medicform are not issued, outsiders from the real estates, medical equipments and IT industries are rushing to the healthcaal equipments and IT industries are rushing to the healthcare industry; investment in healthcare comes into an explosre industry; investment in healthcare comes into an explosive period. At the moment however, many investments are ive period. At the moment however, many investments are of trial nature, large scale investment has not yet begun. of trial nature, large scale investment has not yet begun.

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e) Investment e) Investment Development (2/2)Development (2/2)• Nevertheless, the uncertainty in policy and public views Nevertheless, the uncertainty in policy and public views

has not impeded the investors’ enthusiasm. However, has not impeded the investors’ enthusiasm. However, more are still waiting and observing …more are still waiting and observing …

• On the other hand, once in the business and the brand is On the other hand, once in the business and the brand is well established, investors are able to enjoy high and well established, investors are able to enjoy high and stable return. In China, stable return. In China, investment returninvestment return in class in class three (the best) general acute hospital is about three (the best) general acute hospital is about 15%,15%, that in special hospital is about that in special hospital is about 20~25%.20~25%. Thus the Thus the investment in a class three general acute hospital can investment in a class three general acute hospital can be recovered in be recovered in 8-10 years8-10 years with proper management, with proper management, while the investment in special hospitals can even be while the investment in special hospitals can even be repaid in repaid in 5-6 years5-6 years. .

• 15% is the current average of the healthcare industry 15% is the current average of the healthcare industry investment return rateinvestment return rate

• For those willing to enter the general hospitals, it is For those willing to enter the general hospitals, it is proposed to select the higher end of the sector, inject proposed to select the higher end of the sector, inject higher investment, apply the most advanced technology higher investment, apply the most advanced technology and serve the wealthiest clients, otherwise it’s hard to and serve the wealthiest clients, otherwise it’s hard to compete with the state-owned hospitals.compete with the state-owned hospitals.

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f) Foreign Investmentf) Foreign Investment• In May 2002, the Ministry of Health together with the former MinistIn May 2002, the Ministry of Health together with the former Minist

ry of Foreign Economy & Trade (now Ministry of Commerce) issued ry of Foreign Economy & Trade (now Ministry of Commerce) issued the “Transitional Regulations about the Administration of Joint anthe “Transitional Regulations about the Administration of Joint and Co-operational Hospitals”, which allows foreign investors to shad Co-operational Hospitals”, which allows foreign investors to share 70% of the JV hospitals. Minimum investment: RMB 20 million.re 70% of the JV hospitals. Minimum investment: RMB 20 million.

• Currently there are 200 JV hospitals, but generally they are of small Currently there are 200 JV hospitals, but generally they are of small size and are limited to specific clinics such as Oncology, stomatologsize and are limited to specific clinics such as Oncology, stomatology, obstetrics and gynecology y, obstetrics and gynecology

• At the moment, many are observing the Chinese health industry, oAt the moment, many are observing the Chinese health industry, only few are actually engaged, but most of them are preparing for thnly few are actually engaged, but most of them are preparing for the next actions. They mostly plan to wait for another 1 to 2 years, befe next actions. They mostly plan to wait for another 1 to 2 years, before the reform program is clearly determinedore the reform program is clearly determined

• Investment returns in hospitals are higher than in the funds and baInvestment returns in hospitals are higher than in the funds and banksnks

• At least 6 billion US Dollars are waiting at China’s door to acquire At least 6 billion US Dollars are waiting at China’s door to acquire Chinese hospitals.Chinese hospitals.

• Experts forecast, the Chinese health industry will soon witness an eExperts forecast, the Chinese health industry will soon witness an explosive growth similar to that of the U.S. in the 70’s. xplosive growth similar to that of the U.S. in the 70’s.

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g) Private Hospitals (1/2)g) Private Hospitals (1/2)• Currently there are about 4000 private hospitals Currently there are about 4000 private hospitals

with an investment of ca. 10 billion Yuan and 5% with an investment of ca. 10 billion Yuan and 5% shares of the total market. They are mainly shares of the total market. They are mainly concentrated in Shanghai, Beijing, Shenzhen, concentrated in Shanghai, Beijing, Shenzhen, Guangzhou, Jiangsu and Zhejiang. In the next 5 Guangzhou, Jiangsu and Zhejiang. In the next 5 years, about 50 hospitals will go IPO. In the end, years, about 50 hospitals will go IPO. In the end, the private hospitals will account for 30% of the the private hospitals will account for 30% of the total markettotal market

• Currently the profit-earning, balanced and profit-Currently the profit-earning, balanced and profit-loosing private hospitals are equally divided, and loosing private hospitals are equally divided, and small and medium hospitals are witnessing a small and medium hospitals are witnessing a declining profitabilitydeclining profitability

• The number of private hospitals makes already The number of private hospitals makes already half of the total hospitals, but only shares 2.7% of half of the total hospitals, but only shares 2.7% of the number of patients treatedthe number of patients treated

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g) Private Hospitals (2/2)g) Private Hospitals (2/2)• Private hospitals are not fairly treated in a number of Private hospitals are not fairly treated in a number of

issues such as grant of designated medical insurance, issues such as grant of designated medical insurance, hospital categorization evaluation and certification, human hospital categorization evaluation and certification, human resource, title evaluation and license of the medical staff, resource, title evaluation and license of the medical staff, policy information, purchase of large medical equipments, policy information, purchase of large medical equipments, land use, bank loans etc. land use, bank loans etc.

• Government provides almost no supports and protections Government provides almost no supports and protections in the development of private hospitals, imposes higher in the development of private hospitals, imposes higher entry restrictions. As a result, applying for license is entry restrictions. As a result, applying for license is difficult, with more complications.difficult, with more complications.

• Private hospitals can not enjoy the same treatment in Private hospitals can not enjoy the same treatment in taxation, fees, client resources and the welfare of the taxation, fees, client resources and the welfare of the medical personnel as the state-owned medical personnel as the state-owned

• Lack of supporting administration policies. For example Lack of supporting administration policies. For example there is no regulation for the encouragement of investing there is no regulation for the encouragement of investing in profitable hospitals, nor is there any supervision in profitable hospitals, nor is there any supervision mechanism and system to the private hospitals already in mechanism and system to the private hospitals already in operationoperation

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h) Taxes and Laws (1/3)h) Taxes and Laws (1/3)• New or re-structured for-profit hospitals will be New or re-structured for-profit hospitals will be

waived business taxes in the first 2 years and in waived business taxes in the first 2 years and in the next 3 years they pay only half the business the next 3 years they pay only half the business taxestaxes

• According to the “Tax Regulations of the Medical According to the “Tax Regulations of the Medical Organizations” issued by the Ministry of Finance Organizations” issued by the Ministry of Finance and the State General Tax Bureau :and the State General Tax Bureau :– The drug store, if it is separated from the The drug store, if it is separated from the

hospitals, shall pay normal taxes, mainly VAT, hospitals, shall pay normal taxes, mainly VAT, income tax and other feesincome tax and other fees

– Housing tax, land tax, ship tax shall be paid Housing tax, land tax, ship tax shall be paid after three yearsafter three years

– After three years, for-profit-hospitals shall pay After three years, for-profit-hospitals shall pay VAT for their own medicinesVAT for their own medicines

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h) Taxes and Laws (2/3)h) Taxes and Laws (2/3)

• Taxation policies between the health authorities and the tax agencieTaxation policies between the health authorities and the tax agencies are not identical. If hospitals are to be taxed as an enterprise, they s are not identical. If hospitals are to be taxed as an enterprise, they have to pay 5.5% income tax, and they have to pay the other 16 types have to pay 5.5% income tax, and they have to pay the other 16 types of taxes, which are beyond their payment capacityof taxes, which are beyond their payment capacity

• Tax exemption policies are also not well defined. In early 2000, the cTax exemption policies are also not well defined. In early 2000, the central government issued rules that grant three year taxation favoritentral government issued rules that grant three year taxation favorite treatment after the hospital operation registration is completed: fre treatment after the hospital operation registration is completed: free of medical services business taxes, free of VATs to the products ee of medical services business taxes, free of VATs to the products made by and for the hospital itself, free taxes for hospital properties,made by and for the hospital itself, free taxes for hospital properties, land and vehicles and boats. Three years after, these taxes will be le land and vehicles and boats. Three years after, these taxes will be levied.vied.

• However, some local governments define the date of tax levy differeHowever, some local governments define the date of tax levy differently. Some start levying the taxes once the categorized registration is ntly. Some start levying the taxes once the categorized registration is completed, some from the date of the hospital foundation. Many of tcompleted, some from the date of the hospital foundation. Many of the hospitals won’t start operation after obtaining the business licehe hospitals won’t start operation after obtaining the business license, rather, they have to spend upto two years to make the operationse, rather, they have to spend upto two years to make the operation possible. As such, the private hospitals are not benefiting much frn possible. As such, the private hospitals are not benefiting much from the favorable tax treatment – possibley only for one year period. om the favorable tax treatment – possibley only for one year period.

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h) Taxes and Laws (3/3)h) Taxes and Laws (3/3)• Zhejiang: newly established private hospitals, incl JV hospitals will bZhejiang: newly established private hospitals, incl JV hospitals will b

e categorized as for-profit hospital in principle, where some of them e categorized as for-profit hospital in principle, where some of them can also be classified as not-for-profit hospitals if they meet the critecan also be classified as not-for-profit hospitals if they meet the criteria. They both can apply for the qualified hospitals for the insured eria. They both can apply for the qualified hospitals for the insured employees. Private not-for-profit hospitals abide by the government-rmployees. Private not-for-profit hospitals abide by the government-regulated prices and at the same time enjoy taxation favorable treatmegulated prices and at the same time enjoy taxation favorable treatment. For-profit private hospitals determine their own prices and pay ent. For-profit private hospitals determine their own prices and pay relevant taxes. If their earnings are reinvested in the hospitals, taxes relevant taxes. If their earnings are reinvested in the hospitals, taxes will be deducted correspondingly. Construction of private hospitals will be deducted correspondingly. Construction of private hospitals shall be enrolled in the urban development plan. Private hospitals wshall be enrolled in the urban development plan. Private hospitals will also enjoy the same treatment in land acquisition and tax deductiill also enjoy the same treatment in land acquisition and tax deduction, and construction fees for supporting facilities etc. on, and construction fees for supporting facilities etc.

• Zhejiang allows the not-for –profit private hospitals for the five-year Zhejiang allows the not-for –profit private hospitals for the five-year free development. After five years, if they want to change to profitabfree development. After five years, if they want to change to profitable hospitals, all the profits earned during the five years will belong tle hospitals, all the profits earned during the five years will belong to the investors o the investors

• Not only that, Zhejiang provincial government has assigned the apprNot only that, Zhejiang provincial government has assigned the approval right to the city and county level governments and at the same toval right to the city and county level governments and at the same time, endorse the same policy treatment as the state-owned hospitals.ime, endorse the same policy treatment as the state-owned hospitals.

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i) Capital Marketi) Capital Market

• Not-for-profit hospitals are not allowed to go Not-for-profit hospitals are not allowed to go IPOIPO

• Insufficient earning ability hinders the direcInsufficient earning ability hinders the direct IPO in the short termt IPO in the short term

• Currently there are only four companies on tCurrently there are only four companies on the Chinese stock market that are involved in he Chinese stock market that are involved in the healthcare industries – Huayuan Group the healthcare industries – Huayuan Group ((华源集团华源集团 ), Wanjie High-Tech (), Wanjie High-Tech (万杰高科万杰高科 ), C), Changan Info (hangan Info (长安信息长安信息 ), and Sanjiu Pharmac), and Sanjiu Pharmaceuticals (euticals (三九医药三九医药 ))

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j) Market Entry Barrierj) Market Entry Barrier

There are lots of market entry barriers, There are lots of market entry barriers, much higher than other industries, incl.: much higher than other industries, incl.:

• Larger capital investment Larger capital investment • High level management personnel, High level management personnel,

clinic specialists and skilled labors. clinic specialists and skilled labors. Higher density of skilled personnel, Higher density of skilled personnel, leading to higher operation costleading to higher operation cost

• Longer government approval procedureLonger government approval procedure

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k) Problems (1/2)k) Problems (1/2)• In general, there is shortage of healthcare and medicare reIn general, there is shortage of healthcare and medicare re

sources nationwidesources nationwide• The medical and healthcare industries are behind the econThe medical and healthcare industries are behind the econ

omic development omic development • Irrational distribution of medical and healthcare resources:Irrational distribution of medical and healthcare resources:

most of the high quality facilities, equipments, technologi most of the high quality facilities, equipments, technologies and personnel are amassed in large hospitals, and metres and personnel are amassed in large hospitals, and metropolisesopolises

• Difficulty for private capital to enter the healthcare market.Difficulty for private capital to enter the healthcare market. The government restricts the profitable investment of the The government restricts the profitable investment of the private capital since long. That leads to the government mprivate capital since long. That leads to the government monopoly, the lack of supply of medical services, the capital onopoly, the lack of supply of medical services, the capital investment, the human resource market, the development investment, the human resource market, the development of the large healthcare groups and as a result, the high costof the large healthcare groups and as a result, the high costs of the medical treatments of the medical treatment

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k) Problems (2/2)k) Problems (2/2)• Incomplete medical insurance system. In 2005, Incomplete medical insurance system. In 2005,

only 200 million, or half of the urban population only 200 million, or half of the urban population are covered, while in rural areas, only 170 millioare covered, while in rural areas, only 170 million are covered, about 15% of the rural population,n are covered, about 15% of the rural population, with very limited insurance – 30 Yuan for each i with very limited insurance – 30 Yuan for each insured. nsured.

• Difficult to access to the medical services. Only Difficult to access to the medical services. Only 50-60% (70.4% in urban and 35% in rural areas) 50-60% (70.4% in urban and 35% in rural areas) of the ills are treated by doctors, and only 30% oof the ills are treated by doctors, and only 30% of those choose not to go hospitalized even if they f those choose not to go hospitalized even if they shall do so. Reason: too high pricesshall do so. Reason: too high prices

• Medicine cost take too high portion of the total Medicine cost take too high portion of the total medical fees. In China, that’s more than 50%, medical fees. In China, that’s more than 50%, while in the outside world, that’s about 20%while in the outside world, that’s about 20%

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l) Development Trends l) Development Trends (1/2)(1/2)

• With the improvement of living standards and quality, peWith the improvement of living standards and quality, people are expecting to enjoy better healthcare ople are expecting to enjoy better healthcare

• And people are also desirous of a differential medical serAnd people are also desirous of a differential medical services, catering the needs of the different social classes. vices, catering the needs of the different social classes.

• The medical industry has gradually becoming the investThe medical industry has gradually becoming the investment hot spots for both domestic and foreign investorsment hot spots for both domestic and foreign investors

• Domestic and international financial institutions are payiDomestic and international financial institutions are paying close attention to the trends of the medical investment ng close attention to the trends of the medical investment development. Several well-known medicare institutions adevelopment. Several well-known medicare institutions are granted with large international financial credit. Germre granted with large international financial credit. German, Singaporean and other governments are promoting tan, Singaporean and other governments are promoting the investment in the Chinese health industry. There are che investment in the Chinese health industry. There are ca 60 billion US Dollar of capital waiting at China’s door, a 60 billion US Dollar of capital waiting at China’s door, ready to move in any time.ready to move in any time.

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l) Development Trends l) Development Trends (2/2)(2/2)

• Development trends: the development trends of this Development trends: the development trends of this section seems in the better service, better care, section seems in the better service, better care, more privacy, more openness and transparency etc more privacy, more openness and transparency etc

• Development concentration:Development concentration:• Major driving forces and determination factors:Major driving forces and determination factors:• Technology evaluation: roles of innovation and Technology evaluation: roles of innovation and

technology progress in the development of the technology progress in the development of the industryindustry

• Price trendsPrice trends• Influence of the economic development on the Influence of the economic development on the

industryindustry• Government influenceGovernment influence• Market changes by capital injection and reformsMarket changes by capital injection and reforms• Problems that restrict the market expansionProblems that restrict the market expansion

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m) Wenzhou Location m) Wenzhou Location (1/3)(1/3)

Map of China

Map of ZhejiangZhejiang

Wenzhou

Shanghai

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m) Wenzhou Location m) Wenzhou Location (2/3)(2/3)

Wenzhou Municipal City

Downtown

Cangnan

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m) Wenzhou Location m) Wenzhou Location (3/3)(3/3)

Hospital

See also the wall map

EW

N

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n) Wenzhou Economy n) Wenzhou Economy (1/2)(1/2)• Wenzhou is one of the most competitive cities in China, ranking no.19 in Wenzhou is one of the most competitive cities in China, ranking no.19 in

200 cities nationwide (2004). The ranking in 2005 dropped to 27. 200 cities nationwide (2004). The ranking in 2005 dropped to 27. Wenzhou is relatively strong in enterprise management, human Wenzhou is relatively strong in enterprise management, human resource awareness and commercial operation. Wenzhou has also sound resource awareness and commercial operation. Wenzhou has also sound education, entertainment and shopping environment, but is relatively education, entertainment and shopping environment, but is relatively weak in technology innovation, infrastructure, environment, legal weak in technology innovation, infrastructure, environment, legal system, and world business connections.system, and world business connections.

• Wenzhou is the birthplace of private economy of China. The private Wenzhou is the birthplace of private economy of China. The private economy dominates the local economy and industry by a factor of over economy dominates the local economy and industry by a factor of over 96%. 96%.

• Wenzhou boosts of a strong capital competitiveness, capital increases Wenzhou boosts of a strong capital competitiveness, capital increases rapidly, but its investment efficiency is not high, financing controllability rapidly, but its investment efficiency is not high, financing controllability is also weak. But Wenzhou has an active private financing sector, that is also weak. But Wenzhou has an active private financing sector, that makes the easy access to investment capital makes the easy access to investment capital

• Wenzhou has formed a relatively comprehensive industry chain with Wenzhou has formed a relatively comprehensive industry chain with high flexibility and industry agglomeration. Enterprise-government high flexibility and industry agglomeration. Enterprise-government relations are also highly adjustable and responsive. However, the relations are also highly adjustable and responsive. However, the industry is structured at the lower end, urban infrastructure industry is structured at the lower end, urban infrastructure construction also lacks behind the industry development. construction also lacks behind the industry development.

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n) Wenzhou Economy n) Wenzhou Economy (2/2)(2/2)

• Total population about 10 million, where 7.5 million are permanent rTotal population about 10 million, where 7.5 million are permanent residents. 4 million people live in urban areas, the rest 6 million in coesidents. 4 million people live in urban areas, the rest 6 million in countryside. There are about 2.5 million socalled “exterior people” or untryside. There are about 2.5 million socalled “exterior people” or immigrants from outside Wenzhou. immigrants from outside Wenzhou.

• The municipal city of Wenzhou comprises of three districts – LuchenThe municipal city of Wenzhou comprises of three districts – Lucheng (g (鹿城鹿城 ), Longwan (), Longwan (龙湾龙湾 ) and Yuehai () and Yuehai ( 瓯海瓯海 ), two cities – Ruian (), two cities – Ruian ( 瑞瑞安安 ) and Yueqing () and Yueqing ( 乐清乐清 ) and six counties – Yongjia () and six counties – Yongjia ( 永嘉永嘉 ), Pingyang ), Pingyang ((平阳平阳 ), Cangnan (), Cangnan ( 苍南苍南 ), Dongtou (), Dongtou (洞头洞头 ), Wencheng (), Wencheng (文成文成 ), and Tao), and Taoshun (shun (泰顺泰顺 ). ).

• In 2005, Wenzhou has generated a GDP of 160 billion RMB (predicteIn 2005, Wenzhou has generated a GDP of 160 billion RMB (predicted), where 80% of them were contributed by downtown Wenzhou, and d), where 80% of them were contributed by downtown Wenzhou, and cities of Yueqing and Ruian. cities of Yueqing and Ruian.

• In 2005, per capita net income in urban areas was RMB 19805 Yuan in,In 2005, per capita net income in urban areas was RMB 19805 Yuan in, in rural area RMB 6845, thus the weighted per capita GDP was 12029 in rural area RMB 6845, thus the weighted per capita GDP was 12029 Yuan. Yuan.

• Over 1.6 million Wenzhou people are doing business nationwide. TheOver 1.6 million Wenzhou people are doing business nationwide. They have invested more than 100 billion across the country in the past y have invested more than 100 billion across the country in the past

• Over 400,000 Wenzhou people are doing business in 65 countries and Over 400,000 Wenzhou people are doing business in 65 countries and have built up a business network across the globehave built up a business network across the globe

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o) Wenzhou Upper o) Wenzhou Upper Income Group (1/3)Income Group (1/3)

• Population structure: businessmen+ share Population structure: businessmen+ share holders+ high salary people (salespersons) account holders+ high salary people (salespersons) account for about 2/3 of the local workforce, i.e. the social for about 2/3 of the local workforce, i.e. the social structure is of flat type, and is a businessman structure is of flat type, and is a businessman economy. Relatively fewer low income employees. economy. Relatively fewer low income employees.

• The White Collar Class: the white collar class The White Collar Class: the white collar class accounts for 11.9% of the national population accounts for 11.9% of the national population according to a recent statistics. Considering the according to a recent statistics. Considering the wealthier fact of Wenzhou, this ratio shall be wealthier fact of Wenzhou, this ratio shall be doubled to 24%, that is, there is doubled to 24%, that is, there is 2.4 million2.4 million of of white collar class. They are typically those: white collar class. They are typically those: monthly incomes or salary 5000 RMB or above, monthly incomes or salary 5000 RMB or above, profession of management, technical staff, profession of management, technical staff, government officials or clerks, private government officials or clerks, private entrepreneurs, and are of high education.entrepreneurs, and are of high education.

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o) Wenzhou Upper o) Wenzhou Upper Income Group (2/3)Income Group (2/3)

• There are about 1.2 million private entrepreneurs of various tyThere are about 1.2 million private entrepreneurs of various types. Their average asset falls within 0.5 to 5 million RMB, the spes. Their average asset falls within 0.5 to 5 million RMB, the socalled medium to small businessmen. These businessmen acocalled medium to small businessmen. These businessmen account for the most part of the 1.2 million population. This is count for the most part of the 1.2 million population. This is proven by the 2005 statistics that indicated that in Wenzhou, tproven by the 2005 statistics that indicated that in Wenzhou, there were 234,000 independent businessmen and women (here were 234,000 independent businessmen and women ( 个个体工商户体工商户 ) and 41,000 private enterprises. ) and 41,000 private enterprises.

• According to the national average ratio of government official/According to the national average ratio of government official/clerks to the entire population of 26:1, and considering the facclerks to the entire population of 26:1, and considering the fact that Wenzhou is featured of small government, there are abot that Wenzhou is featured of small government, there are about 130,000 government clerks and officials in Wenzhouut 130,000 government clerks and officials in Wenzhou

• There are currently 4 private enterprise groups with over RMB There are currently 4 private enterprise groups with over RMB 1 billion of assets. They are: Delixi Group (1 billion of assets. They are: Delixi Group (德力西集团德力西集团 ), CHIN), CHINT Group (T Group (正泰集团正泰集团 ), Huafeng Group (), Huafeng Group ( 华峰集团华峰集团 ) and Ruili Gro) and Ruili Group (up (瑞立集团瑞立集团 ). ).

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o) Wenzhou Upper o) Wenzhou Upper Income Group (3/3)Income Group (3/3)

• The hidden or underground economy accounts for about 50% of the total reThe hidden or underground economy accounts for about 50% of the total regional revenuesgional revenues

• By end 2005, the private banking industry has reached about RMB 40 to 42 bBy end 2005, the private banking industry has reached about RMB 40 to 42 billionillion

• According to the data released by the Wenzhou subsidiary of China PeoplAccording to the data released by the Wenzhou subsidiary of China People’s Bank, there are about 300 billion of bank deposits and cash in Wenzhoe’s Bank, there are about 300 billion of bank deposits and cash in Wenzhou among the people – source Bank of China. u among the people – source Bank of China.

• This money, according to the Golden Rule of 2:8 relationship, will be diThis money, according to the Golden Rule of 2:8 relationship, will be distributed in the following way: stributed in the following way: – 8 million people with an average deposit of over RMB 7500Yuan 8 million people with an average deposit of over RMB 7500Yuan – 2 million people with an average deposit of over RMB 120,000 Yuan2 million people with an average deposit of over RMB 120,000 Yuan– 0.4 million people with an average deposit of over RMB 480,000 Yuan0.4 million people with an average deposit of over RMB 480,000 Yuan– 80,000 people with an average deposit of over RMB 1.92 million Yuan80,000 people with an average deposit of over RMB 1.92 million Yuan– 16,000 people with an average deposit of over RMB 7.68 million Yuan16,000 people with an average deposit of over RMB 7.68 million Yuan– 3200 people with an average deposit of over RMB 30.72 million Yuan3200 people with an average deposit of over RMB 30.72 million Yuan– 640 people with an average deposit of over RMB 122.875 million Yuan640 people with an average deposit of over RMB 122.875 million Yuan– 128 people with an average deposit of over RMB 491.5 million Yuan128 people with an average deposit of over RMB 491.5 million Yuan

• Total assets of the above people will very likely be doubled, with considTotal assets of the above people will very likely be doubled, with consideration of houses, cars, antiques, jewelery, stocks and other valuables. eration of houses, cars, antiques, jewelery, stocks and other valuables.

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p) Wenzhou Health p) Wenzhou Health Industry (1/2)Industry (1/2)• By end 2004, there were about 71 hospitals with 16309 beds. There weBy end 2004, there were about 71 hospitals with 16309 beds. There we

re also many hundreds of smaller clinicsre also many hundreds of smaller clinics• By end 2005, there were about 30 private hospitals with 1488 beds. There By end 2005, there were about 30 private hospitals with 1488 beds. There

were also 160+ private clinics. were also 160+ private clinics. • In 2004, Wenzhou hospitals treated 18.37 million cases of illnesses,In 2004, Wenzhou hospitals treated 18.37 million cases of illnesses,

with a per capita illness of 2 a year with a per capita illness of 2 a year • By end 2002, average outpatient fee was RMB 94 Yuan (that of genBy end 2002, average outpatient fee was RMB 94 Yuan (that of gen

eral hospitals was RMB 120).Bed vacancy rate of hospitals of 2eral hospitals was RMB 120).Bed vacancy rate of hospitals of 2ndnd cl class and above was 78%. Average hospitalization duration was 11 dass and above was 78%. Average hospitalization duration was 11 days. Cost of per bed per day was RMB 472 Yuan. Average cost for aays. Cost of per bed per day was RMB 472 Yuan. Average cost for an inpatient was RMB 5178 Yuan. Medicine cost took 53.5% of the tn inpatient was RMB 5178 Yuan. Medicine cost took 53.5% of the total medical fees.otal medical fees.

• Comparison with other regionsComparison with other regions– Bed number per 1000 people: nationwide: 3.1; Shanghai: 5.5; Beijing: 6.51; Bed number per 1000 people: nationwide: 3.1; Shanghai: 5.5; Beijing: 6.51;

Suzhou: 5.14; Hangzhou: 2.4; Ningbo: 3.32; Zhejiang: 2.69; Suzhou: 5.14; Hangzhou: 2.4; Ningbo: 3.32; Zhejiang: 2.69; Wenzhou: 2.19Wenzhou: 2.19 – Doctors per 1000 people: nationwide: 1.67; Shanghai: 3.8; Beijing: 4.64; SuzDoctors per 1000 people: nationwide: 1.67; Shanghai: 3.8; Beijing: 4.64; Suz

hou: 1.79;Hangzhou: 1.5; Ningbo: 2.37;Zhejiang: 1.81; hou: 1.79;Hangzhou: 1.5; Ningbo: 2.37;Zhejiang: 1.81; Wenzhou: 1.59Wenzhou: 1.59 • The four major death causes: circulatory diseases, neoplasms, The four major death causes: circulatory diseases, neoplasms,

ttrauma and toxicosis and perinatal period diseasesrauma and toxicosis and perinatal period diseases

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p) Wenzhou Health p) Wenzhou Health Industry (2/2)Industry (2/2)

• In January 2004, Wenzhou government released the “Transitional In January 2004, Wenzhou government released the “Transitional Regulations about the Approval Administration of Private Medical Regulations about the Approval Administration of Private Medical Organizations”. This regulation aims to introduce private and Organizations”. This regulation aims to introduce private and foreign investment, to open up the medical market and to build up foreign investment, to open up the medical market and to build up a new healthcare investment landscape. The regulation sets no a new healthcare investment landscape. The regulation sets no restrictions on investor origins, hospital types, number and restrictions on investor origins, hospital types, number and location, but also provides a number of favorable policies. For location, but also provides a number of favorable policies. For example, those of private or foreign hospitals are able to apply for example, those of private or foreign hospitals are able to apply for designated hospitals for the people with medical insurance; land designated hospitals for the people with medical insurance; land will be freely transferred. They will enjoy the same treatment in will be freely transferred. They will enjoy the same treatment in hospital accreditation, participation in academic organizations and hospital accreditation, participation in academic organizations and events, policy information notification etc as the public hospitalsevents, policy information notification etc as the public hospitals

• China sets the requirement for the hospital beds per 1000 persons China sets the requirement for the hospital beds per 1000 persons for county or above cities at 4-7. There were 7.77 million of for county or above cities at 4-7. There were 7.77 million of permanent residents in Wenzhou, and with the immigrants, the permanent residents in Wenzhou, and with the immigrants, the total population might be well above 10 million. Accordingly, total population might be well above 10 million. Accordingly, 40,000 to 70,000 beds shall be provided. However, there were only 40,000 to 70,000 beds shall be provided. However, there were only 16300 beds at end 2004, and at end 2005, these were about 16300 beds at end 2004, and at end 2005, these were about 20,000, or 2.01 beds per 1000 persons, even below the moderate 20,000, or 2.01 beds per 1000 persons, even below the moderate requirement of 2.41 beds/1000 persons set for 2005 by the requirement of 2.41 beds/1000 persons set for 2005 by the government. Therefore, there are still short of 7800 beds even for government. Therefore, there are still short of 7800 beds even for the minimum requirement. the minimum requirement.