Copyright © 2017 DHR International, Inc. All Rights Reserved. China's coming healthcare crunch • 1

WHITE PAPER • MARCH 2017

China’s coming healthcare crunch

BY STEVE STINE, MANAGING PARTNER, APAC

A. CLANCEY HOUSTON, SENIOR HEALTHCARE ADVISOR, CHINA

Copyright © 2017 DHR International, Inc. All Rights Reserved. China's coming healthcare crunch • 2

Private sector healthcare is booming in China. The floodgates

have been officially opened and with each passing week, the

government is clarifying its position, giving rise to a wave of

domestic, overseas and private equity investment.

Healthcare privatization – whether it be in the form of greenfield hospitals and clinics or

the privatization and expansion of public facilities - is a central tenet of the government’s

promise to provide its citizens with broader and more sophisticated healthcare coverage.

It’s a tectonic shift for a country that for decades was centered around government-funded

healthcare for its 1.4 billion citizens.

While building, buying up, overhauling and outfitting thousands of hospitals has its own set

of challenges, the larger and looming issue revolves around the effective recruitment of

quality hospital management, physicians, and allied health professionals. One foreign

investor in the healthcare space puts it this way: “How do you take a community of public

healthcare workers and government doctors who’ve mastered the government healthcare

bureaucracy, then suddenly throw them in the deep end and say it’s now medical

excellence and quality patient care that matter most?”

The Evolution of

China’s Healthcare

System

To this end, China is facing a

particularly sticky situation. For the

past 60 years, the country has

struggled to build and operate a

healthcare system that provides all

citizens with affordable access to

basic care. Between 1965 and

1981, legions of so-called

“barefoot doctors,” were trained

and sent to the countryside to care

for the rural poor. Even today,

upwards of 1 million “village

doctors and assistants” are part of

the national healthcare

infrastructure1.

Fast forward to the present day

where rapid urbanization and

shifting demographics have resulted in massive government investment in public hospitals

of increasingly large scale primarily in urban areas. Yet the country is still grappling with a

public healthcare system that’s lost the ability to keep pace with demand.

Copyright © 2017 DHR International, Inc. All Rights Reserved. China's coming healthcare crunch • 3

China spent CNY 4 trillion (approximately USD 594 billion), or 5.98% of its total GDP as of

20152 to keep its population healthy. If compared to the 16.9% of total GDP spent in the

U.S.3 on a far smaller population, the shortfall in China’s healthcare spend becomes all the

more apparent.

As the population continues to both expand and age, total healthcare spend is expected to

grow to 6.5% or US$1.1 trillion by 2020 as a result of healthcare reform and government

promotion of the "Healthy China" movement under the current 13th Five-Year Plan.6 Some

experts say government estimates on healthcare inflation are too conservative as

modernization brings with it higher incidence of heart disease, diabetes, and cancer – all

of which require more sophisticated and higher cost forms of treatment.

In response to these

pressures - among

others - the

government has

further eased

restrictions on private

investment in and the

operation of hospitals

and significantly

increased the appeal

for foreign investors.

The first clear sign

came in January 2012

when the government

released the so-called

Notice on Establishing Wholly Foreign-Owned Hospitals (WFOH) in China’s Foreign

Investment Catalogue. This move openly permitted foreign investors to independently

construct and establish new hospitals. What followed was a three-year buying binge with

US$355 million in private healthcare investments in the first half of 2016 alone.7

In 2015, China’s private hospitals outnumbered public hospitals for the first time with

15,470 vs. 12,871 facilities, respectively, according to the National Health and Family

Planning Commission (NHFPC)8. This is a massive increase from the 3,220 private

hospitals which were supposedly operating in China in 2005, according to a Boston

Consulting Group (BCG) report. NHFPC data indicate that more than two thousand private

medical institutions, of varying sizes, were established in the 12 months from July 2015 to

July 2016 alone.

Though public hospitals still dominate in total number of beds and services provided (an

estimated 80.6% of all beds and 87% of all outpatient services per NHFPC data), the trend

to expand the total number of beds in private medical institutions is clear. The highest

proportion of investment has occurred in major cities that today house 56.1% of the total

population.

Copyright © 2017 DHR International, Inc. All Rights Reserved. China's coming healthcare crunch • 4

The Shortage of

Professional

Healthcare Talent is

Real

While this all sounds quite promising, it belies an underlying problem that no one has

entirely addressed: A dire shortage of qualified medical and technical as well as

healthcare management professionals. “It’s hardware without the software,” said one

investor who openly decried the rush of capital to hospital properties. Near- to medium-

term efforts to train and develop the next generation of medical and healthcare

management talent are adjusting the basis for medical training, but a significant hole still

exists in professional training of hospital operators and managers.

Bottom-line: From hospital CEOs to lab technicians, China is facing a healthcare talent

crunch. It’s a fact that’s not immediately apparent if looking at the statistics. Indeed,

government data suggests that China’s healthcare workforce is actually expanding in

terms of the number of medical and technical staff. Government figures show the total

volume of healthcare workers rising from 6.9 million in 2000 to 10.7 million in 2015. Yet,

only 2.5 million of these workers are licensed doctors and 3 million are licensed assistant

doctors.10 With a total population of nearly 1.4 billion people, this holds China well below

the government’s 13th Five Year Plan goal of 2.5 registered practitioners per 1,000

people. Overlay this with the education levels of China’s registered physicians – only 10%

with a Master’s degree or doctorate, 38% with a Bachelor’s degree and a whopping 52%

with a mere vocational diploma as of 201411 - and the problem of qualified doctors looms

large.

Beyond constraints on the sheer numbers of doctors in the system, private hospital

investors and operators in China also say there’s “a very limited choice for qualified

professional hospital managers, especially in the areas of operations and finance.” This

shouldn’t be all that surprising given that until recently, most hospitals were government

owned, and therefore, not-for-profit. “Taking a public sector bureaucrat and throwing him

or her into a private sector, private-equity backed environment…well…you see the

problem…” said one investor with hospital interests in the greater Shanghai municipal

area.

Copyright © 2017 DHR International, Inc. All Rights Reserved. China's coming healthcare crunch • 5

Current Limitations

in Healthcare

Sector Leadership

and Physician

Recruitment

The current recruitment model puts the onus on a new private hospital’s CEO to locate,

entice and retain top physicians. The same goes for department heads, who are often also

responsible for not only operating, but also recruiting and staffing their respective

departments. And like the CEO, they too are largely dependent on their own immediate

networks. Indeed, all investors and operators interviewed for this report agreed: Finding

the right CEO or General Manager is singularly their most difficult task. Identify and

position the right CEO, and all other operational and recruitment gains flow from this

individual’s centralized leadership role.

This traditional and largely “informal” approach to recruitment has clear limitations. “One is

de facto, limited by one’s own small and oftentimes biased circle of contacts,” said one

former CEO. “It defies ‘best practice’ recruitment.” Too often, according to one seasoned

China investor, private hospitals “are willing to take whatever doctors they can get,”

leaving their organizations short-handed when it comes to delivering on the promise of

higher-quality, improved-service care. Layer on the wave of new competition from private

sector players, and the doctor shortage problem begins to look insurmountable.

While physicians have not been historically a mobile talent pool, the implementation of

multi-site practice policies and the progressive reform of China’s physician allocation and

tenure (bianzhi) system are giving more doctors an opportunity to work outside the public

sector, if only on a part-time basis at first as the wary dip their toes into the private sector.

To some extent, this should ease the pain for new private hospitals attempting to attract

the best medical talent. It also means coming up with creative new platforms that give top

physicians some say and flexibility in how, where and when they work within the private

sector.

Aligning Private

Hospital and China

Healthcare Talent

Interests

Even so, for many medical practitioners, technicians and nurses, moving from public to

private is still seen as risky. China’s physicians and healthcare specialists want to know:

Are the investors truly committed to supporting the hospital over the long-term? Is there a

clear platform for professional growth? Is there income stability and growth potential? Are

hospital CEOs capable of blending commercial success with medical quality? Are there

corporate culture issues that could impose themselves on the practice of medicine? Will

patients make the jump from public to private care and pay out-of-pocket for better

service?

Investors in China’s healthcare sector wrongly assume that compensation is the most

important factor in a physician’s decision to move from public to private. In fact, there are

a suite of issues in the areas of collaboration, academic affiliations, accreditation, training,

and teams that often take precedent.

Copyright © 2017 DHR International, Inc. All Rights Reserved. China's coming healthcare crunch • 6

A New Approach in

Uncovering and

Recruiting Hospital

Management and

Healthcare

Specialists

It’s a needle in a haystack trying to find someone who has combined skills in finance,

operations and hospital management and the EQ to work within a private, for-profit

environment. To manage this problem, some hospital investors are prepared to gamble on

executives with commercial and leadership experience, who are otherwise untested in a

hospital environment. “It took our CEO six months to win over the physician community

before they were ready to let him lead,” said one private equity player.

Others will scrounge for commercially-minded administrators in China’s opaque public

sector; identifying, training and empowering a new generation of hospital leaders capable

of taking China’s healthcare to the next level.

In some cases, reaching outside China will be a necessity. China is not the first country to

shift the emphasis from public to private healthcare investment. Throughout parts of

Europe, the Middle East, and across Asia, governments have opened the door to private

healthcare alternatives and within hundreds of newly appointed private hospitals there

reside medical leaders, hospital operators, finance directors and technicians who have

learned to adapt to a more nimble, faster moving, and service-oriented culture. Identifying,

recruiting and incentivizing these individuals to surrender their current positions for a

leadership role in China requires finesse.

Underpinning success for private healthcare organizations in China today means ensuring

maximum levels of quality, efficiency, accountability, and customer service, all of which

have profound implications for the identification and management of talent.

Copyright © 2017 DHR International, Inc. All Rights Reserved. China's coming healthcare crunch • 7

Having an effective system for obtaining, mobilizing, and motivating the organization's

most important assets – the human ones – is a critical source of competitive advantage.

This starts with how roles are designed, but centers on the manner in which healthcare

sector leaders are selected, recruited and retained.

A professional approach requires a professional team. It is often said that it takes

physicians to recruit physicians – how can anyone else garner the respect needed to

convince a top doctor to make a career change? For the very top physicians this may still

be true – one needs to “speak their language” and appeal to them from a commensurately

senior position to demonstrate respect. But as the sophistication of physicians as

candidates grows, so too does the need to employ professional skills in recruiting them –

and the tools and processes that come along with someone well versed in identifying and

qualifying talent.

Know who you are before you hunt. A defined purpose, a differentiated positioning and

a clear culture are essential if you are to attract talent at any level. Lack of a cultural fit,

often more so than challenges with the new operating environment, is seen as the biggest

reason for physician failure in the private sector. Physicians need time and help to

understand what they are getting into when moving from public into private otherwise they

don’t stick. Private investors in particular need to be sure that they build the platform and

product to differentiate their hospital and that everyone participating in the recruiting

process can explain its purpose to a candidate to ensure that a candidate is truly the right

fit.

Know what you need as well as what you seek. Given the vast differences in

expectations, operating environments, working styles and workflows, not to mention the

expectations of patients and a for-profit investor, one must go beyond the technical skills

and define the soft skills, which are essential to a physician’s success in a particular

hospital. This means employing proper assessment tools rather than applying “gut” feel to

identify healthcare specialists with the closest possible set of skills and competencies.

Build your optimal profile of employee attributes then test for this to ensure that every

manager, physician and healthcare technician recruited has the potential to thrive in your

environment.

Compensate well, but don’t break the bank. In any sector where talent is in short

supply, compensation is often used as the primary driver for recruitment. China’s public

sector doctors today exist in a highly opaque compensation environment. For many,

incomes can vary greatly. This means that consistency and transparency in compensation

schemes might be as important as the compensation levels themselves. Recognize the

endemic issues that exist in the public sector and then structure compensation and

incentive plans that addresses these issues, while at the same time shaping behaviors

that you deem critical to your private sector culture.

Copyright © 2017 DHR International, Inc. All Rights Reserved. China's coming healthcare crunch • 8

Paint the future, but don’t overpromise. Moving from a behemoth public hospital to a

smaller private or foreign-invested facility can mean relinquishing academic titles, clinical

research funding and overseas training opportunities, especially when a physician is mid-

career. Before even beginning the recruitment process, there needs to be clarity on the

future of the organization and the new hires’ potential career path within it. Understanding

the training and development motivations, in other words, can be as important as

compensation packages and other benefits. If you do invest the time to understand what

physicians or technical staff want and need for their career progression, make sure you

honor these commitments, before you lose them.

Put even more energy into retention. Recruitment is just the first step in the process of

building your organization. Integration and retention often pose the greatest challenge.

Doing both well is no easy task and rarely do organizations anticipate and plan for “tissue

reject.” Any successful recruitment effort must be accompanied by a retention plan.

Physicians moving from public to private need ongoing support. The demands in a private

sector environment are fundamentally different. Doctors and all healthcare support staff

must learn the fundamentals of customer care, patient engagement, collaboration and the

balance that exists between healthcare service and underlying costs. If yours is a single,

stand-alone operation, it will be harder to create the upward mobility offered by competing

hospitals with more facilities and broader platforms. But it is possible, through training,

exchanges, and the development of partnerships with academia and centers of

excellence, among other approaches.

The pace of change within China’s healthcare sector is a juggernaut of policy directives,

economic imperatives, rapidly shifting consumer demands, and onerous disease patterns.

It’s a dynamic moment in the country’s evolution laced with an imperative to

professionalize the private sector’s approach to medical and healthcare sector recruiting.

The private hospital operators who are prepared to address the talent bottleneck through a

more professional, and ultimately productive, approach will reap the rewards for years to

come.

1. China National Bureau of Statistics’ China Statistical Yearbook 2015 (Employed Persons in healthcare Institutions)

2. China National Bureau of Statistics’ China Statistical Yearbook 2015 (Principle Aggregate Indicators)

3. OECD (2015 data excluding China) 4. World Bank 5. China National Bureau of Statistics China Statistical Yearbook 2015 (China data) 6. Economist Intelligence Unit 7. Source: PwC industry forum 8. National Health and Family Planning Commission Statistics 9. Source: China National Bureau of Statistics’ China Statistical Yearbook 2015 (Population and Its

Composition) 10. China National Bureau of Statistics China Statistical Yearbook 2015 11. The Lancet, ”Doctors in China: improving quality through modernization of residency education,”

June 20, 2016.

Copyright © 2017 DHR International, Inc. All Rights Reserved. China's coming healthcare crunch • 9

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