McDermott Will & Emery has a strategic alliance with MWE China Law Offices, a separate law firm based in Shanghai.  This China Law Alert was authored by MWE China Law Offices lawyers David DaiMolly Qin and Mandy Yang.

On 28 August 2014, the Ministry of Commerce (MOFCOM) and the National Health and Family Planning Commission (HFPC) jointly released the Notice of the National Health and Family Planning Commission and the Ministry of Commerce Regarding Launching a Pilot Scheme of Establishing Wholly Foreign Owned Hospitals (Notice).  According to the Notice, which took effect 25 July 2014, foreign investors are permitted to set up wholly foreign-owned hospitals in seven pilot cities and provinces.

In response to public demand for more and better health care services, China’s central government has been promoting health care sector reform in recent years by facilitating gradual and increased private and foreign participation in the medical service industry, which has long been dominated by state-owned hospitals.  According to the most recent Foreign Investment Industry Guidance Catalogue issued in 2011, foreign investors are permitted to invest in the medical service industry and establish foreign-invested hospitals without any restrictions on the equity ownership.  However, in practice, before the issuance of the Notice, foreign investors (except those from Hong Kong, Macau and Taiwan) were prohibited from setting up wholly foreign-owned hospitals (except those established in Shanghai Free Trade Zone) due to a lack of implementing regulations and policies.  The Notice lifts the limitation on foreign equity ownership for foreign-invested hospitals in the pilot areas for the first time.  Below is a general overview of the Notice.

Establishment of Wholly Foreign-Owned Hospitals in the Pilot Regions

Foreign investors will now be allowed to establish wholly foreign-owned hospitals in the cities of Beijing, Tianjin and Shanghai, and the provinces of Jiangsu, Fujian, Guangdong and Hainan.

However, it is specified that foreign investors, except for those from Hong Kong, Macau and Taiwan, are not allowed to set up hospitals featuring traditional Chinese medicine in the above pilot regions.

It should be noted that the Notice now allows foreign investors to set up a foreign-invested hospital by acquiring existing Chinese hospitals in addition to the green field investment permitted by previous Chinese laws and policies.  This will greatly facilitate foreign investment in existing Chinese hospitals.

Requirements on Foreign Investors

According to the Notice, a foreign investor applying for the establishment of a wholly foreign-owned hospital should be a legal entity with the ability to independently assume civil liabilities, and should have experience in direct or indirect investment and management in the health care industry.  Additionally, the foreign investor is required to meet one of the following requirements:

  1. Be able to convey advanced hospital management concepts, and advanced management and service models
  2. Be able to provide internationally leading medical technologies and equipment
  3. Be able to improve the medical services, medical technologies, sufficiency of funds and health care facilitie

Thus, a foreign investor that intends to set up a wholly foreign-owned hospital in the pilot regions may need to provide relevant supporting documents to the competent administrative authorities that demonstrate its previous experience in the health care industry and its capacity to meet the above requirements.

Requirements on Wholly Foreign-Owned Hospitals

Wholly foreign-owned hospitals set up by foreign investors should comply with the Chinese government’s basic standards for medical institutions, and should meet other relevant requirements from the local competent administrative authorities.

However, the Notice does not include any other requirements for the hospitals being established in the pilot regions, such as minimum registered capital and total investment.  In accordance with existing Chinese regulations on establishing foreign-invested health care institutions, the minimum total investment requirement for each joint venture medical institution is RMB 20 million (around US$3.15 million), of which US$2.1 million must be paid by the investors as the registered capital.  It is not clear if such existing minimum capital requirements may still be applicable to the wholly foreign-owned hospitals established in the pilot regions.  Therefore, local administrative authorities are expected to release further clarification on such important questions.

Quicker Approval Expected

Like foreign investment in other industries in China, a health care foreign-investment project will be subject to complicated layers of regulation on foreign-investment activities, which China established along with its rapid economic development.  The principal government agencies responsible for reviewing and approving a health care foreign-investment project may include the HFPC, MOFCOM, Ministry of Human Resources and Social Security, and the State Administrations of Industry and Commerce, of Foreign Exchange and of Taxation.  Navigating through red tape for a variety of approvals is never an easy task for a foreign investor; any projects subject to the approvals of China’s central government will generally take much longer.

According to the Notice, the administrative approval procedures of setting up a wholly foreign-owned hospital in the pilot regions will be handled by provincial-level authorities, which will thus greatly save time and costs for foreign investors.

Implementation of the Pilot Scheme

In accordance with the Notice, the provincial administrative authorities will be responsible for drafting their own implementation plan of the pilot scheme in each pilot region and will be in charge of the approval and daily supervision on wholly foreign-owned hospitals.  Thus, it is expected that more detailed and localized policies will be issued later, after considering the specific situations of each region.

Conclusion

The issuance of the Notice aims to further open up the domestic health care market to foreign investments, and to steadily bring in advanced medical technologies and experiences to modernise the Chinese medical service market as a whole.  The government may further expand the pilot regions based on the implementation of the Notice.  However, how the Notice will be implemented in practice remains to be seen, as detailed supporting regulations or rules about the pilot scheme have yet to be released by the local provincial administrative authorities in the pilot regions.