What ails China’s healthcare system? Roberta Lipson has a detailed diagnosis

Roberta Lipson is one of the most successful foreign entrepreneurs in China of the last three decades. In 1981, she and Elyse Beth Silverberg co-founded Chindex, which sold American healthcare equipment to Chinese hospitals. In the 1990s, they pivoted the business to healthcare services, launching Beijing Family United Hospital, which has become the biggest foreign investor and operator of private hospitals in China.

Roberta was listed as one of Beijing’s 20 most interesting people by the Beijinger in 2013, and she says she is a Beijinger at heart, having lived in the city longer than any other place in her life.

For The China Project, Carlisle Micallef recently sat down with Roberta to discuss her remarkable experience in China as a pioneer of China’s modern healthcare transformation. She talks about details of government policy, the difficulties of running a private healthcare company in China, and the complex issues of rural and urban healthcare supply and pricing.

Carlisle: What was your experience when you first established operations in China?

Roberta: The company started out importing not only medical equipment but all kinds of products that China was in desperate need of after having been closed to the outside world for 10 years during the Cultural Revolution. I got here in the late 1970s and was welcomed with open arms, like “What can you bring us from America that we need?” We started out really working in a bunch of different industries, including construction, mining, food processing equipment, and medical equipment.

My real interest was medical equipment, so within a few years, we started focusing on just bringing medical equipment to Chinese public hospitals. It was an amazing thing to be able to bring tools that were so desperately lacking and needed by doctors.

One of my favorite, watershed things that happened during my career was the first time we brought real-time ultrasounds to show to Chinese doctors, who were like, “Oh, my God, with this little box, we can, without any radiation, see what’s going on inside of someone’s body.” That was amazing. It was also affordable.

We spent the first 10 years helping Chinese hospitals get the technology that they needed by building a distribution company for medical equipment. Then, in the early 1990s, we decided that we really wanted to transition into healthcare services because we saw that another huge gap wasn’t only the hardware , but also the whole process of delivering healthcare, which we thought we could bring new ideas to and we thought there was a market and demand for. We started talking to Chinese regulators about it and they thought it was a crazy idea. They couldn’t imagine why anyone would want to do for-profit healthcare in China. It’s not so much that we wanted to do for-profit healthcare. We wanted to do healthcare and the only way to raise the capital necessary to do it was through a for-profit platform. So it took us quite a few years — three or four years — until we started to find people in the government who would take us seriously and allow us to do it.

Carlisle: How did you go through the process of changing their mindset in terms of a more standardized healthcare industry?

Roberta: The thing I think that got people to stop and listen and consider the possibilities was when we said that there was a growing international community in Beijing and Shanghai and other big cities in China. Many multinational companies were hesitant in China based on the fact that there was no healthcare that they could be comfortable with available for their talent. When we stated it in terms of improving the investment environment in Beijing, that’s when we started to be taken seriously.

It was hard for the officials to make the jump from healthcare being an entitlement that was the obligation of the government to supply to becoming an investment area. So the way we struck on this approach was to think about it from their perspective — what from their perspective would be the benefit to allow us to do this. At the time, in the ’90s, one of the main missions of the government was to increase foreign investment and import technology and innovation. They wanted to make sure the environment was friendly to those who could bring those things.

Carlisle: The healthcare industry has changed so much since you first arrived. In the bubbles of Shanghai and Beijing, people have more access than people in the countryside, who are still struggling to receive care.

Roberta: Access in the city is also a struggle. People who have money and really good private insurance have access to United Family Hospitals. For those who haven’t chosen to pay for private care or don’t have good commercial insurance and are still using the public system — which is the vast majority of people — to get access to the sought-after 3A public hospitals takes amazing perseverance, getting up at five in the morning, standing in line, then not necessarily getting to see the clinician whom you were hoping to see. So access in the city is still very difficult and access in the countryside is even more difficult.

People in the countryside who have the wherewithal to make it to the big cities do so, and are also in line there at five in the morning. So everybody is crowding to the big cities to the 3A hospitals. The government is quite aware of that problem.

So part of the healthcare reform initiative that is really being focused on is this concept of tiered medical service provision. There are the community clinics, and there are the first-tier hospitals, second-tier hospitals, and third-tier hospitals. The government’s objective — and it’s a good goal to have — is to get people to go to clinics for their preventative care and basic care. So if it’s not treating a complex disease or set of symptoms, people should take care of it at their community health clinic. Then they can be referred to the 3A hospital if they need it.

The problem, both for rural residents and the community clinics, is that there’s not a meaningful number of well-trained family medicine physicians or general practice physicians to staff those places. So often what happens — hopefully, this is changing — is a patient may say that they have a community health station and according to policy and convenience they should go there because all they have is a cold or small skin infection. They’ll go and not get the proper treatment, or the medication that they need won’t be available there. So they give up on it. Next time, they will go straight to the 3A hospital. So that comes back down to one of the big problems being training of family medicine and other primary care physicians.

Carlisle: Aside from the talent gap, do you think that there are any other challenges that the government faces in trying to modernize the country’s healthcare?

Roberta: The talent gap is a really big one. And one of the things that keeps it from being resolved is that the official salaries of doctors are very low. And because of the perverse incentives implicit in the payment system and the way that the payments are made, doctors often will want to find ways to supplement their own salaries. Also, the hospitals — because of the fixed price structure imposed by the government — need to find ways to have higher revenues so they can meet their payroll and maybe pay their doctors bonuses. Famously, the public hospitals use drug sales to make up for their revenue gap.

So the result of that is that too many people get prescribed too many drugs, including antibiotics, which is a problem not only for the individual — if you take drugs you don’t need, it’s not good for your body, but if you take antibiotics that you don’t need, you contribute to the global resistance of antibiotics. The antibiotics that everyone needs become useless and then the industry needs to invest more into developing the next level of antibiotics. So the government has been working really hard to resolve that problem. They hope to not allow hospitals to add any margin to their drug sales so that this supplemental income stream becomes less meaningful to them. But there is also a problem with certain pharmaceutical distributors and pharmaceutical companies using their margin to supplement the hospital or doctors’ incomes directly. So that’s a tough problem to resolve.

They have also reduced the price of lab tests and imaging tests because that is another way that hospitals were making money, which leads to over-testing. They would order a lot of tests, needed or sometimes not, to supplement revenues. So what I hear is that they’ve greatly reduced the government-mandated price of CAT scans, for example. So the hospitals find another strategy. There’s a saying in Chinese, 上面有政策下面有对策 (shàngmiàn yǒu zhèngcè xiàmiàn yǒu duìcè), that means, “Whatever policy the government sets, we will find a way to deal with it.”

As a result, the doctors in public hospitals are now ordering CAT scans, for example, one organ at a time. In the case of pharmaceuticals, they are still allowed to charge a limited markup from the prescribing fee. In the past, someone with a chronic disease might go to the public hospital and get a month’s worth of medication or maybe even for a longer period of time. But now because doctors’ consultation fees have been increased and they are no longer allowed to earn money on the medication, they might give you enough medication for a week. Then you have to come back again, pay another consultation fee, and then get another week’s worth of medication. So the hospitals need to find ways to make up for this. This is a very sticky and complex set of problems.

I truly believe the only way to resolve it, no matter whether in the public system or private system, is to get away from fee-for-service medicine. So fee-for-service medicine means that you come to the hospital, you get a set of services, and you pay one by one for those services. That encourages hospitals to give you more services whether you need them or not. Even if they have control over how they are allowed to charge for each service item, they find ways to put those services together in such a way that they are able to maximize their revenue. I believe that this creates perverse incentives for hospitals — public and private — that need to have revenue to survive or to pay their doctors.

There are other possible approaches to charging. One example is a diagnosis-related group (DRG). The government is experimenting with this. A DRG means that if you have one specific diagnosis that is encountered by the hospital, the hospital will have one price for all related services so the patient doesn’t have to worry line by line if they are being charged for too much or too little testing or treatment related to that diagnosis. Theoretically, the hospital should do what is necessary to treat that particular disease and be reimbursed as a package. Better yet is the per capita model, where a hospital will get a certain amount of money for a certain population. If that hospital is really smart, it will figure out how to keep that population healthy, in the most efficient way, which is the win-win-win approach.

For example, Kaiser Permanente uses that approach and I think it delivers very high quality healthcare. We are now experimenting with that approach and partnering with insurance companies so at the end of the day, if we are able to keep the insured person healthy, there is more profit for everyone. And the patient is super happy, too, because they’ve stayed healthy. If they get sick, you need to look at the proper and efficient way to cure that illness in a way that is still good for them.

Since the time that we started United Family, we’ve been honored that the government has been very interested in what we are doing. We’ve done a lot of various kinds of innovations and the government has taken a great interest. When we began talking about United Family in the ’90s, we got a poor reception from the government, but now we are warmly welcomed by the government because they look at some of the innovations that we’ve made and see them as interesting, useful, and good for the system as a whole. So we are hoping that this new approach — the shared-risk model — where we share the responsibility of the patient’s good health with the insurance company, the patient, and ourselves as this kind of three-way partnership — we hope they will look at that and say, “Wow! This is the system we should be using.”

Carlisle: So you’d say there’s a lot of openness to innovation on the government’s side?

Roberta: More and more. Look, healthcare is really complex. In the United States, we haven’t figured it out, and it’s also super emotional. Should this be a public good, can you charge for it, how do you charge for it, what level of healthcare provision should be a public good or could be a public good? Where does the financing come from? Those become really emotional issues.

But I have to say, to the credit of this Chinese administration, they’ve really looked at things in a very thorough and open way. If you read the latest five-year plan (in Chinese) or the Healthy China 2030 document, it changes the game a little bit. It asks for individuals to take responsibility for their own healthcare. It includes things like encouraging fitness and public health initiatives such as smoking cessation and emphasizing healthy foods. These are really great things. But as long as the payment system in the public system doesn’t change, and if there’s not a massive initiative to train family doctors and family practitioners really well, a lot of the problems will be hard to solve.

Carlisle: Another issue that has been emphasized in the media is Chinese people’s changing lifestyles and the growing elderly population. Do you think that the government or the hospitals themselves have been trying to angle their practices to meet these new needs?

Roberta: Yes. Obviously, the government is very aware of the aging population. I’m not sure if the focus on gerontology has caught up. I think there is lots of focus on chronic diseases that go along with that. The government has talked a lot about encouraging investment in eldercare. It has lots of incentives for companies that invest in eldercare. That is not gerontology, though. That is old-age homes. There has been quite a bit of investment in old-age homes, but I think the economic model has not been very clear.

People who are ready for old-age homes probably haven’t benefited that much from the economic miracle of the last 20 years. But the next generation has. So from the private perspective, some companies that have begun selling annuities with future access to eldercare facilities are doing well. Whereas the ones that are trying to fill eldercare facilities today are facing some challenges. I like that the government is trying to establish community health clinics that include home health and nursing visits. I think that is something very good for this generation of older people. So there are some initiatives going in that direction. United Family also has a home health service that benefits people who are homebound.

Things like hospice care are very undeveloped in China because of insufficient awareness and policy limitations.

Carlisle: We originally met at the Wharton event, where we talked a lot about investment and market access. It’s very difficult for foreign companies to penetrate the Chinese healthcare industry. Why do you think the government has been hesitant to liberalize the industry and investment?

Roberta: It’s a really good question. I think that there are probably several schools of thought within the government. From the time we started talking in the ’90s, I mentioned that it was very difficult to even get a hearing. But ironically at the time, there was a rule allowing for foreign investment in healthcare services and there was no top limit of what the foreign investor could own. There was only a requirement that there be a local partner. So it could be a local partner with 10 percent ownership or even less. So our first joint venture was a 90-10 joint venture.

After we opened, a new rule came out limiting the top holding of the foreign investor to 70 percent. A couple of years ago, another new regulation came out, allowing for 100 percent foreign ownership if the ownership came from qualified investors from Hong Kong or Taiwan, or if the investment went into one of the free trade zones. Only a few months after that, a new investment catalog came out that specified top foreign investment to be 70 percent, including in the free trade zones. So they took back that 100 percent opportunity.

I think it shows very clearly that there is probably a tension within the government about foreign participation. Why? I’m not sure. It is hard for me to say. I think it is a matter of keeping control and thinking that a foreign participant might not be as easy to control. It might also be partially that tension of whether or not private healthcare is good at all. On the other hand, the government has repeatedly since 2006 said there’s an important role for private healthcare, as the government just doesn’t have the wherewithal to be everything to all people and fill the needs of everybody.

You asked the question why it is so hard for foreigners to penetrate the healthcare industry. Part of it might be the regulatory issues, but part of it also might be that healthcare is really complex. No matter where you are, the regulatory environment is complex. Managing healthcare in a responsible way is really complex. Managing it in an environment that’s new to you is even more difficult. Then the question is, what do foreign companies bring to the table? Are they bringing capital? I’m sure there is a lot of local capital for whatever needs to be done in China. Are they bringing a management model? You can’t just pack a management model in a box and send it off for someone to unpack. The foreign investor must have a very clear management model and actually be here to implement it. Not a lot of foreign healthcare providers have the bandwidth to do that. Are they sending talent or doctors? Maybe or maybe not. It is difficult to find talent that wants to pick up and move to another environment. Are they bringing new medications or therapy approaches? Well, the government has to approve those new therapies in order for them to be implemented.

One of the things about United Family and why we were able to be successful, I think, is because we started small and were able to import enough talent and expertise, we were able to build a system as we went. One that borrowed from Western experience, but because we were in China for a long time already, we were able to then make it locally relevant and grow organically from there. I think it’s really hard for a foreign investor to parachute into China and say, “I’m going to do the healthcare thing.” It’s not just the regulatory environment.

That goes for domestic private investors, too. Local domestic private investors have to have something new and different that their public system doesn’t bring, but at the same time, they have to understand the healthcare environment. So if it’s an investor coming to healthcare from another industry, they have a learning curve to deal with. If it’s an investor coming from the public healthcare system, what are they doing differently from the government systems. It’s a matter of bringing all those things together.

Carlisle: In your own experience, you mentioned you were in one of these interesting partnerships that you mentioned earlier. How has that relationship influenced decision-making processes, development, and such?

Roberta: Every one of our hospitals has a different joint venture partner. We also have some wholly owned facilities that were approved during a window of time when it was possible to be wholly owned. In each case, we are the majority owner and control management. But when we look for a joint venture partner, we hope that it would be someone who brings local knowledge, who can maybe help us with talent pool development, help us with government relations. We hope they have the same values as us, or at least aspire to the same values that we have, such as evidence-based medicine, quality, and safety. So they won’t ask us to go down a trail we wouldn’t want to be on.

Carlisle: How has your hospital and company overcome a lot of the challenges other Chinese healthcare companies face, such as talent or implementing the newest research?

Roberta: Our healthcare providers and doctor distribution reflect the distribution of our patient base. So it is about 70 percent Chinese and 30 percent coming from the West. When we hire, we look to hire people who want to work in an international environment and who are capable of thriving in it. We pay our doctors a fair salary so they don’t need to look for extra income outside of what we pay them. Their take-home net pay is perhaps equivalent to what Chinese doctors would net if they combine their official public salary and whatever kinds of extraneous income they can earn, whether it be through extra fees or pharmaceutical kickbacks.

We tend to attract those people who would prefer to pay their personal income tax and earn money in a legal way, who don’t want to prescribe too much medication and want the opportunity to treat their patients in evidence-based ways. There are lots of people like that. Ours is also not a politically complicated environment to work in and many people like that as well. China is now an attractive place for many people from around the world, including doctors from around the world. They see what we’re doing as an opportunity to show a different model of care in the largest country in the world.

Carlisle: Where do you see the healthcare industry going in the future?

Roberta: Healthcare services are certainly an area of foreign investment. Many Chinese real estate companies, Chinese insurance companies, Chinese funds — everyone wants to invest in healthcare. I think frankly in some ways that investment area might be a bit overheated now because a lot of people are investing with very high expectations for return and a limited talent pool to achieve that kind of return. I have a big fear that private healthcare may end up suffering from people taking shortcuts to profitability. I have a fear that it might reflect badly on the whole private healthcare industry.

The government is aware of this and they are trying to stress oversight and governance over these private investors. I try to warn everyone that this is not a short payback. It is an investment that you have to be ready to wait for your payback over time and it has to be sustainable. I think there will probably be a shakeout. I just hope it doesn’t go so badly wrong that the government starts being skeptical of private investment and that consumers start being skeptical of private healthcare.

From a public healthcare perspective, I really like what’s written in the Healthy China 2030 document, and the government’s broader strategic plan. If that plan can be followed and if even a portion of it can be achieved, I think it will be great.