Entrepreneurs looking to invest in or build private hospitals in China should look to avoid the mistakes of traditional American care and emulate instead the exemplars of the American healthcare system, organized healthcare delivery organizations like the Mayo Clinic, Kaiser Permanente, Geisinger Health System, HealthCare Partners, and others. Not only will this approach benefit China’s growing population of middle class patients eager to access more responsive service, but it may actually make it easier to build a successful healthcare business in China’s unique healthcare space by creating organizations largely insulated from the uncertainties and inadequacies of China’s public healthcare infrastructure, while simultaneously strengthening the Chinese healthcare system and opening up new opportunities for American investors. The biggest challenge is to enter into the market in a way that offers the flexibility necessary to fit into the existant Chinese healthcare system. If this sounds like a contradictory proposition at the outset, please read on and let me explain.
Ask anyone who knows why the American healthcare system needed to be reformed and you are sure to hear that for too long care in the united states has been fragmented and lacking in coordination. In turn, this has made care on the whole inefficient, led to poor patient outcomes and suboptimal patient care, and has driven up costs without regard to improvements in individual or population health. Arguably, this is due in large part to the predominance of two traditional models of care in the US: stand alone cottage-industry physicians or physician groups, and the hospitals with whom they often contract and refer patients to but do very little otherwise in terms of coordination. These industries tend to foster competition rather than collaboration, have little incentive to work together if care is paid for on a fee-for-service basis, and suffer from the traditional downfalls of fee-for-service systems.
By contrast, there is a corresponding dearth of organized healthcare delivery in the US, something that PPACA aims to change with its built in carrot and stick incentives for the formation of accountable care organizations (ACOs). (While it is true that the Big Health hospital consolidations, driven by health reforms and the need to expand geographic reach in order to capture insured patients, have begun to reduce the number of physicians working in private practice, cottage industry care is still the dominant form of care in the US. When we talk about care delivery and cost problems like the absence of longitudinal care, fragmented patient records, the predominance of fee-for-service systems, etc., we are really talking about industry fragmentation. It is also not certain that the current rate consolidation of healthcare will continue at the current pace, nor is it certain that healthcare organizations will retain the assets they are currently buying up. This is the lesson of the HMO years in the 1990s. It is, however, more likely that the consolidation will persist if the new consolidations result in a greater number of PPACA governed ACOs, the complexity of which will quickly foster great interdependence between groups of bonded physicians and healthcare organizations.)
Over the past twelve years, the Commonwealth Fund Commission of a High Performance Health System (2007), the Medicare Payment Advisory Commission (2009), and the Institute of Medicine (2001) have all recommended that the United States begin organizing care in order to reduce the impact of fragmentation and care delivery problems. As alluded to, these recommendations were more or less implemented within various parts of PPACA. But to understand the import of these recommendations, it is first important to know what is meant by the term organized health care delivery. Douglas McCarthy of the Commonwealth Fund defines organized health care delivery “to mean that care providers have established relationships and mechanisms for communicating and working to coordinate patient care across health conditions, services, and care settings over time.” McCarthy also tacks on to this definition that these components include “any or all of the care system redesign imperatives identified by the Institute of Medicine (2001): the development of effective teams, redesign of care processes, effective us of information technologies, management of knowledge and skills…use of performance and outcome measurement for continuous quality improvement and accountability…[and possibly also]…payment mechanisms for sharing risk that foster greater accountability for clinical and financial outcomes over the continuum of care.” McCarthy, D. (2011) “Integrative Models of Performance.” In Jonas and Kovner’s Health Care Delivery in the United States. Tenth Edition, p 206.
In other words, the main idea behind an organized care organization is to design a -
1) transparent organization, both within and outside of the organization (so both internal and public transparence)
2) focused on maximizing outcomes by keeping patients out of the hospital through both preventive and follow-up care, rather than focusing on revenue maximization which tends to favor bringing patients into the hospital and focuses only on acute care,
3) that makes use of enabling communication technologies like telemedicine and electronic health records to better coordinate care and administration, and
4) that has the ability, in some cases, to provide its own insurance function, which in turn will allow the organization to more easily align healthcare provider incentives with the organization’s mission.
Typically, smaller non-networked hospitals do not have the financial ability nor the patient pool needed to transform their organization to seriously make good on these goals. A chart by Douglas McCarthy illustrates:
The bigger and more organized a delivery system, the greater it’s ability to bundle payments and be its own insurer, and the greater its ability to focus on outcome measures.
Therefore, if I am in the position of a China entrepreneur wanting to cater to the middle class market, these principles are making me think about a few things.
First let’s talk about what I know as an entrepreneur going in. I know, for one thing, that China’s middle-class payers are not going to be paying for healthcare out-of-pocket in the same way that wealthy individuals in public hospital ‘VIP’ rooms do, meaning I’m going to have to depend on some type of private insurance if I want to invest in or buy a hospital. I probably will not depend on public insurance because I would effectively have to become a public hospital under current law, although if I invest in a hospital in a smaller city or rural area this may not be the case. Unfortunately, whether or not I can benefit from public insurance, I still need private insurance if I intend on being profitable, but I am faced with a highly underdeveloped Chinese private insurance industry. It exists mostly in the form of add-on plans bought along with broader life insurance or accident insurance policies.
To complicate matters, chances are that as a new entrant into the China healthcare space I will have to do a lot of work to prove myself before I am allowed to do anything too complicated in terms of the provision of care. As a consequence I can bet on a level 1 designation, which will allow me to do mostly outpatient procedures like gynecological examinations, and some very minor surgeries.
In sum then, as an entrepreneur going in, the challenge I am faced with just in terms of revenue generation rightly scares me. Not only will my scope of services be limited by my ability to make money on inpatient admissions, and my scope of practice be limited in way that will negatively impact my outpatient numbers, but the low numbers of patients with sophisticated private health insurance will torpedo any slim hope I had of attracting modest enough numbers to offer some sort of insurance product.
What do I then look to do? (Again, assuming I am here to build or invest in a hospital that will look to tap into the middle-class Chinese market.) The first answer that jumps off the page into most heads, but that we have cautioned against here and I will caution against again, is to go big. The thinking goes that if I cannot make it with a single level 1 hospital, then I should go with ten of them if I want to get the necessary patient flow and a big enough risk pool to offer insurance. The big issue that we’ve written about, which seems to derail this plan in the China context, is staffing. It is one thing to build ten hospitals, but another to find the necessary physicians, midlevel practitioners, and other clinical support staff. So big, while theoretically possible with enough money, seems untenable unless you have a really, really, really good, never been seen before recruitment plan.
So then, if one cannot go small, and one cannot go big, what’s left? The answer, whatever the right one(s) turn(s) out to be, will emerge through a thought process that searches for the solution within the context of a healthcare delivery system as a whole, and not just within the context of a single healthcare delivery organization.
Here is an example of one such thought process – shortened for the sake of brevity – that offers one possible solution.
Within the hospital system in China, there exist plenty of large capacity, tertiary care centers. But, the smaller walk in clinics, and community healthcare centers exist mainly within the grassroots system. In cities, especially, there seems to be a dearth of outpatient and emergency centers, outpatient/ambulatory center functions are all within the larger hospitals. Just like hospitals in the US have found that building outpatient and emergency centers help them bring in more patients for a lower overhead cost than building a new hospital does, the same eureka moment applies to hospital entrepreneurs.
If we consider the same benefits of scale considered in the big hospital example, then building ambulatory or emergency care centers en masse, and structuring operations in such a way that they become affiliated with certain hospitals in certain regions, would allow one to obtain the benefits of a large enough patient pool to offer insurance, and do so at a cost that would be dwarfed by the cost of building an equal number of hospitals with their costly inpatient facilities. In other words, we get the benefit of the big hospital model without at least one of its major downfalls – cost. The ambulatory model would also address the staffing shortfall of the Chinese healthcare system because these outpatient centers can use a staffing model that uses clinical support staff as a foundation, rather than physicians.
Thinking further, once I can capture enough patients to offer insurance, and therefore capture payment up-front, I can build up an organization that focuses on outcomes, rather than profits, which will in the long run, if I am persistent, allow me to build a cost-conscious, patient-centered organization that will be able to compete with other China health providers on price, and beat the pants off the competition on service.
If I am really savvy, I will also become a pioneer in offering access to the ambulatory center midlevel practitioners (nurse practitioners, physician assistants) through email, phone and whatever other means necessary 24/7. I will make publicly transparent all of my outcomes, my prices, my admissions, my wait times, and whatever other information will help my consumers compare me to their other available choices of care.
Over time I will become a leader in understanding the profile of the Chinese patient. My insurance product will allow me to understand them in a way that no other organization in China is able to match. This will open up roads to drug trials, leadership summits, and international recognition. It may also influence the Chinese partner hospital organizations to whom I refer patients.
Most obviously perhaps, by being a provider of comprehensive, coordinated care, that supplements rather than replaces China’s government run healthcare system, I will be one-step closer in familiarity to Chinese patients. Over time this too will drive change in other parts of the system, creating a more sophisticated market and then opening new opportunities. The key is that it will only happen if I fit within the system.
As with anything in life, this is easier said than done. But, any sort of project in China’s healthcare space comes with this same caveat. At least if you go in with a plan to provide organized care, you will be going in with a plan that brings over the future of American healthcare, rather than a traditional standard of American care that has proven itself to be a bad model of care. Start with the system and work on from there.