China's Coming Healthcare Crunch
White Papers | March, 2017
By Asia Pacific
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 infrastructure.1
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.
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.
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.
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.
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.
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.
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.
China National Bureau of Statistics’ China Statistical Yearbook 2015 (Employed Persons in healthcare Institutions)
China National Bureau of Statistics’ China Statistical Yearbook 2015 (Principle Aggregate Indicators)
OECD (2015 data excluding China)
Economist Intelligence Unit
Source: PwC industry forum
Source: China National Bureau of Statistics’ China Statistical Yearbook 2015 (Population and Its Composition)
The Lancet, ”Doctors in China: improving quality through modernization of residency education,” June 20, 2016.