China Launches Pilot Programme to Further Open Up Its Healthcare Industry

Yiqiang Li, Partner and Sally Qin, Associate, Faegre Baker Daniels LLP

For a long period of time, China did not allow foreign investors to form wholly foreign-owned subsidiaries in China to operate medical institutions. This has now changed. On 25 July 2014, the National Health and Family Planning Commission (“NHFPC”) and the Ministry of Commerce (“MOFCOM”) jointly promulgated a Notice on Launching Pilot Programmes of Establishment of Wholly-Foreign Owned Hospitals (Ref. Guo Wei Yi Han (2014) No. 244) (the “2014 Notice”), which permits wholly foreign-owned medical institutions to be set up in seven provinces and provincial-level cities and municipalities in the eastern part of China — Beijing, Shanghai, Tianjing, Jiangsu, Fujian, Guangdong and Hainan — on a pilot basis according to implementing rules to be adopted by each of these provinces and municipalities.

Prior to the 2014 Notice, foreign investors who desired to set up and operate a hospital or clinic in China were, with limited exceptions, still required to use an equity joint venture (“EJV”) or cooperative joint venture (“CJV”) for this purpose, with a foreign ownership of no more than 70 percent. The current rules for setting up such EJV or CJV medical institutions are laid out in the Interim Measures on the Administration of Sino-Foreign Equity and Cooperative Joint Venture Medical Institutions jointly promulgated by the predecessors of NHFPC and MOFCOM dated 15 May 2000 (the “2000 Measures”). In the limited exceptions, investors from Taiwan, Hong Kong and Macau were permitted to establish wholly foreign-owned medical institutions starting from December 2010, and foreign investors generally were permitted to establish them in the China (Shanghai) Pilot Free Trade Zone (“Shanghai FTZ”) starting from November 2013.

Besides the lifting of the cap on foreign ownership, another major development in the 2014 Notice is the delegation of approval authority for the establishment and on-going supervision of a wholly foreign-owned medical institution from the state-level NHFPC to its provincial branch. As is the case with the establishment of EJV or CJV medical institutions, a foreign investor needs to apply with the provincial-level branch of the NHFPC for approval and then proceed with the provincial-level branch of MOFCOM for establishment formalities.

The qualification requirements applicable to foreign investors as delineated in the 2014 Notice are basically the same as those set out in the 2000 Measures for foreign investments in EJV or CJV medical institutions. However, unlike the 2000 Measures, the 2014 Notice does not require a minimum registered capital or total investment for a wholly foreign-owned medical institution. We suspect this might relate to the abolishment of the minimum capitalisation requirement under the newly amended Company Law promulgated on 28 December 2013.

The 2014 Notice contains only broad-stroke rules for the approval of establishment and on-going supervision of wholly foreign-owned medical institutions. As is stated in the notice, the provincial-level branches of NHFPC and MOFCOM are expected to promulgate implementing rules. However, as of the date of this writing, none of the pilot provinces or municipalities has issued such rules. The local authorities in these provinces and municipalities will likely need to consult with NHFPC to coordinate their approach and deal with potential conflicts between the 2014 Notice and the 2000 Measures, which remain in effect. In the absence of such rules, it is likely that local authorities will be reluctant to accept any applications for the establishment of wholly foreign-owned medical institutions, so industry practitioners may need to wait for this regulatory development to be borne out in practice. It is also possible that the rules may set out additional requirements for establishing a medical institution, which do not appear in the 2014 Notice, or that they may not be issued until NHFPC amends the 2000 Measures.

Despite such challenges, we expect that, more foreign investors will be prompted by the issuance of the 2014 Notice to explore the opportunity of setting up wholly foreign-owned hospitals in one or more of the pilot provinces and municipalities, especially those targeting entering into the high-end healthcare market sector by servicing the rapidly growing group of wealthy Chinese who rely less on Chinese mandatory insurance programmes.