OREANDA-NEWS. The removal of administrative approval for Chinese medical institutions' applications for basic medical social insurance (BMSI) should favour private-hospital development by raising the number of outpatients, says Fitch Ratings. Most private hospitals are not currently covered by China's BMSI scheme, thereby limiting their affordability for outpatients. All public hospitals, by contrast, are covered by the scheme, and outpatients pay only a small portion with cash for prescription drugs.

China's State Council issued a statement in mid-October 2015 to remove the administrative examination and approval for medical institutions' qualification for the designated BMSI. Government has been signaling a positive attitude towards developing private hospitals for some time. In June, the State Council issued a series of measures to accelerate development. These included exemption from business tax (income tax exemption for non-profit private hospitals in particular), promotion of free flow of human talent among different medical agencies, and encouragement of diversified funding sources.

The supportive policies set no deadline for implementation, although Fitch views this as a good start in enhancing private-hospital competitiveness. According to the National Health and Family Planning Commission (NHFPC), the number of private hospitals doubled to 12,546 in the five years to 2014, while that of public hospitals dropped to 13,314 from 14,051.

Drug-makers are the main force in private-hospital investment, with economic incentives to underpin the downstream market by centralising and optimising the medicine supply chain, instead of expanding the hospital market by compromising with high kickbacks to the latter amidst fierce drug market competition. On the other hand, as China undergoes changing dynamics at a slower economy growth, some industry capital has quit the previous high-yield sectors such as real estate and mining and crowded instead into the medical service industry.

China's medical services industry is characterised by high investment, low returns and a long cycle. Risks involved in private-hospital development include various obstacles at the administration level, only a faint profitability visibility, and low social recognition (and hence only a limited number of outpatients). Data from NHFPC shows that the number of outpatient visit to private hospitals accounted for only 11% of total visits in 2014 (8% in 2009).