Key Points:

  • Greater market access to health care service providers under CEPA program supporting Hong Kong and Macau operators
  • Application procedures outlined in newly adopted regulations provide greater detail on the approval process
  • Investment thresholds and registered capital outlined in the new measures

While wholly foreign-owned hospitals are still prohibited in China, as of May 2010 – when China entered into Supplement VII to the Closer Economic Partnership Arrangement (CEPA) with Hong Kong and Macau, respectively – China allows a qualified Hong Kong or Macau “service provider” to set up wholly owned hospitals in five provinces or municipalities in mainland China. Those include Shanghai, Fujian, Guangdong, Hainan and Chongqing. To implement Supplement VII, the Ministry of Health (MOH) and the Ministry of Commerce (MOFCOM) on 22 December 2010 jointly promulgated the Interim Measures for Establishment of Wholly Owned Hospitals in the Mainland by Hong Kong and Macau Service Providers (the Measures), which went into effect on 1 January 2011.

According to the CEPA, a qualified service provider in Hong Kong or Macau must satisfy, among others, the following conditions:

  • The provider must have been incorporated pursuant to the applicable laws in Hong Kong or Macau and obtained a valid business registration certificate, as well as special licenses or permits for providing the services concerned if required by law; and
  • It must have been engaged in substantive business operations, which must encompass the services to be provided in the mainland, in Hong Kong or Macau for three years or more.

With such restrictions, a holding company established by a foreign enterprise in Hong Kong for the purpose of investing in the mainland would not qualify as a service provider. In addition to the foregoing requirements, the Measures require that a service provider that wishes to establish a wholly owned hospital in the mainland should be equipped with advanced hospital management experience and management and service methods, and should be able to offer global advanced medical skills that are supported by documentary evidence. There is, however, no clear definition of such terms as “advanced hospital management experience” and “global advanced medical skills” under the Measures. As a result, the applicable authorities – i.e., the MOH and the MOFCOM – are left with full discretion to determine whether a given applicant meets the foregoing requirements.

Apart from the requirements for a service provider, the Measures also set forth detailed requirements for the wholly owned hospital to be established in the mainland, including:

  • Such hospital must reach the standards for a Class II hospital with respect to its facilities, medical devices, physicians and management systems; and
  • The total investment for such hospital must be at least RMB 50 million in the case of a Class III hospital or RMB 20 million in the case of a Class II hospital, with certain exceptions applicable for hospitals in boundary or poverty areas.

The application for the formation of a wholly owned hospital by a Hong Kong or Macau service provider should be submitted first to the local counterpart of the MOH in the city where the hospital is to be located. The city-level health authority will evaluate whether the proposed hospital conforms with the local hospital formation plan and, if satisfied, will submit the application to the provincial-level counterpart of the MOH for review. The MOH will make the final decision based on the opinion of both its city-level and provincial-level counterparts. It is noteworthy that the hospital formation plan developed by the local government, which as noted above is a significant factor considered by local authorities, is not always publicly available; even worse, some cities have not developed their plans at all. Consequently, an applicant may face substantial uncertainties in determining whether the proposed hospital is encouraged or discouraged by the local government.

Upon the approval of the MOH, an applicant needs to seek the approval of the MOFCOM for the formation of a for-profit wholly owned hospital, whereas only a simple registration with the MOFCOM is required for a non-profit hospital. With the MOFCOM’s approval, a for-profit hospital will become a foreign-invested enterprise and therefore should also perform company registration formalities with the local AIC. Any change in the founder or equity of a wholly owned hospital, whether for-profit or non-profit, is subject to the approval of both the MOH and the MOFCOM.

The recent health care system reform in mainland China, especially the policies that encourage the flow of non-governmental funds into the medical institution industry, has intrigued many foreign investors targeting the surging health care market in China. Supplement VII together with the Measures create an advantageous position for service providers in Hong Kong and Macau. The potential challenges, however, cannot be overlooked. As an example, whether a wholly owned hospital may be designated as a social insurance-covered hospital could affect whether it can attract sufficient patients.