Investing In China's 'Internet Hospitals'
Covid provoked a surge worldwide in the use of technology to deliver healthcare services and products. In China, the number of 'internet hospitals' – the local label for healthcare services and products provided online – increased to more than 1,600 by the middle of 2021 according to official statistics released by National Health Commission (NHC)[1].
Technology development, market incentives and favorable policies have helped to drive the trend in China. This emerging industry has triggered foreign investors' interest but accessing the market is not always easy, especially considering the strategic importance of the healthcare industry.[2]
Foreign investors have faced resistance from local authorities and internet hospitals may have to comply with restrictions imposed on telecommunications businesses.
In this insight, we explore:
major legal obstacles foreign investors may face in their access to the market, and
potential pathways to overcome these obstacles.
Source: National Health Commission of the PRC
01
What are internet hospitals ?
Internet hospitals have emerged in China as a critical way to deliver healthcare services remotely, ranging from online health consultation and management to online diagnosis and treatment, and health management.
They are set up and operated by governments, hospitals or companies. They can emerge as an online addition to an existing 'physical' on-site hospital or healthcare provider, or as a standalone online service platform (which may connect with existing providers).
In December 2018 there were just over 100 internet hospitals, according to the National Health Commission of the PRC. By June 2021, there were more than 1,600.
The number of people using internet-based health services provided via third-party platforms surged by a multiple of 20 in the two years to 2021. For services provided by NHC-controlled hospitals, the number of users has jumped by a factor of 18 over the same period.
02
Investing in medical institutions: difficulties in practice
The ability of foreign investors to buy into medical institutions like hospitals has experienced twists and turns due to constantly changing laws and policies.
Over the past decade, regulatory settings have shifted from a ban on foreign investments seeking full ownership, to a pilot allowing it in certain cities, followed by a retightening which limited the permitted form to joint ventures and equity shares capped at 70% foreign capital contribution.
Internet hospitals, as one type of medical institution, should in theory follow the same rules. This would mean there is no obstacle under the law for joint venture internet hospitals.
However, the current regulatory attitude appears to indicate otherwise:
We have not seen approved cases of joint venture internet hospitals.
We have received feedback multiple times from several local authorities noting that they are yet to study and clarify whether approval will be granted to joint venture internet hospital as a new form of medical institution.
Yet there is hope. A few governmental officials have indicated authorities may grant approval for future applications.
03
Regulatory settings: a recent timeline
China takes a 'catalogue' approach to foreign investment. Depending on which catalogue an industry, sector or service sits in, investments are either encouraged, restricted or prohibited. Medical institutions have moved between catalogues over time, creating uncertainty.
Full ban
Initially, authorities adopted in principle a full ban on foreign investment in medical institutions in the form of Wholly Foreign-Owned Enterprise (WFOE).
Joint ventures allowed
In 2000, under the Interim Measures for the Administration of Sino-Foreign Equity and Cooperative Joint Venture Medical Institutions (中外合资、合作医疗机构管理暂行办法 in Chinese), the ratio of equity or rights and interests by foreign investors in a medical institution was capped at 70%. This cap remains in effect.
Pilot scheme in seven cities/provinces allows WOFE set-up
In 2014 the restrictive attitude towards WOFE was substantially altered by the Pilot Scheme for the Establishment of Wholly Foreign-Owned Hospitals (关于开展设立外资独资医院试点工作的通知 in Chinese),[3] released by the National Health and Family Planning Commission[4] and Ministry of Commerce. This permitted the set-up of WFOE medical institutions through new establishment or acquisition in seven cities (provinces), including Beijing, Tianjin, Jiangsu and Hainan.
Restricted catalogue limits to equity or cooperative JVs
In 2015 this came to a halt on the release of the Catalogue of Industries for Guiding Foreign Investment (Revision 2015) (外商投资产业指导目录(2015年修订) in Chinese). It shifted medical institutions from the permitted catalogue back to the restricted one,[6] and emphasised that medical institutions can only take the form of equity or cooperative joint venture – expressly excluding the form of WFOE.
Negative lists cement restrictions
The same re-tightened rationale has followed in negative lists as applied on both national and Free Trade Zone levels since.[7]
In principle, foreign investment in medical institutions is still therefore limited to joint ventures, with a cap of 70% foreign capital contribution.
Theoretically, this should cover internet hospitals as a type of medical institution. Although it is not possible to wholly own an internet hospital (in the form of WFOE), investment by way of a joint venture should be feasible.
Yet in practice, as noted above, indications and actions from local authorities suggest this is not the case. Promisingly, a few governmental officials have indicated they may grant approval in the future.
04
Investing in value-added telecommunication businesses
Business operations based on the use of the internet are usually subject to qualifications related to value-added telecommunications, and internet hospitals are no exception. Compared with the medical institution sector, foreign investors have faced more stable restrictions, such as a foreign capital contribution capped at 50% in general.[8]
Depending on the business model of internet hospitals, two specific sub-business services of value-added telecommunication may apply:
B25 - Internet Content Provider, ICP
B21 - Electronic Data Interchange, EDI
Notably, the general 50% foreign capital contribution limitation applies to ICPs, but not to EDIs in the field of e-commerce.[9]
While there is disagreement as to whether ICP/EDI registration is needed for internet hospitals, the prevailing practice is that most internet hospitals will apply for ICP or ICP & EDI (under a domestic entity as mentioned below). Companies with foreign investors may still face practical hurdles in applying for ICP registration.
05
Conclusion: prevailing structures and pioneering market players
Although foreign investors are not forbidden to invest in internet hospitals (the form of joint venture is legally feasible), subtle and dynamic limitations imposed by updating laws and policies in medical institutions and telco businesses are crucially important for investment structures involving foreign capital. More than that, inconsistent local practices of authorities may also impede opportunities.
The prevailing practice so far is that foreign investors will adopt a typical Variable Interest Entity (VIE) structure (common in the TMT sector) to set up internet hospital, that is:
establish and operate the internet hospital under a domestic entity which will have less trouble in applying for a medical institution license and value-added telecommunication license, and
put this domestic entity under contractual control of a foreign invested entity. Certain market players are pioneering their way to directly set up joint venture internet hospitals by lobbying the local authorities. We are following these efforts with interest.
Certain market players are pioneering their way to directly set up joint venture internet hospitals by lobbying the local authorities. We are following these efforts with interest.
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Footnotes：
[1] Xinhua: China's internet health services gathering steam amid COVID-19, August 24, 2021, issued on NHC's official website, see http://en.nhc.gov.cn/2021-08/24/c_85005.htm.
[2] Personal health data generated in the healthcare industry matters when it comes to national security and personal privacy, as evident in China's developing regulatory regimes relating to human genetic resources and personal information protection.
[3] Prior to this, signs of a positive attitude toward foreign investment in medical institutions were indicated by the Notice on Further Encouraging and Guiding Social Capital to Establish Medical Institutions (进一步鼓励和引导社会资本举办医疗机构意见的通知 in Chinese), promulgated by the State Council in 2010, which proposed gradually removing the cap on foreign investment in the medical institutions and permitting the establishment of WFOE medical institutions in pilot projects.
[4] The predecessor of NHC.
[5] It should be noted that medical institutions providing traditional Chinese medicine are excluded
[6] In the Catalogue of Industries for Guiding Foreign Investment (Revision 2011) (外商投资产业指导目录(2011年修订) in Chinese), the medical institution sector is classified in the permitted catalogue.
[7] Up to now, the latest negative lists on the national level (i.e. Special Administrative Measures (Negative List) for Foreign Investment Access (Edition 2021) (外商投资准入特别管理措施(负面清单) (2021年版) in Chinese)) and the Free-Trade-Zone level (Special Administrative Measures (Negative List) for Foreign Investment Access in Pilot Free Trade Zones (Edition 2021) (自由贸易试验区外商投资准入特别管理措施 (负面清单) (2021年版) in Chinese)) both confine the form of medical institutions to joint venture alone.
[8] The Administrative Provisions on Foreign-invested Telecommunications Enterprises (外商投资电信企业管理规定 in Chinese), effective on February 6, 2016, provides that the ratio of foreign capital contribution in an enterprise operating value-added telecommunications businesses shall not exceed 50%. The Special Administrative Measures (Negative List) for Foreign Investment Access (Edition 2021) adopts the same rule.
[9] See the Circular of Lifting Restrictions on the Proportion of Foreign Equity in Online Data Processing and Transaction Processing Business (for-profit E-commerce) by Ministry of Industry and Information Technology (工业和信息化部关于放开在线数据处理与交易处理业务(经营类电子商务)外资股比限制的通告 in Chinese).
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