Interview – CEO Chindex

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Background:
With over 26 years experience in China and more than 1,000 employees, Chindex is the leading American healthcare company providing healthcare services and medical capital equipment, instrumentation and products to the Chinese marketplace, including Hong Kong.  Chindex provides healthcare services through the operations of its United Family Hospitals and Clinics, a network of private primary care hospitals and affiliated ambulatory clinics in China. The Company’s hospital network currently operates in the Beijing and Shanghai metropolitan areas.

Interview with Ms. Roberta Lipson
CEO of Chindex
(NASDAQ: CHDX)
May 31, 2007
Beijing, China. Via teleconfernce.

 

Hank Kearney – HK: Good morning Ms. Lipson.  Thank you for taking the time to talk with me and the PHM Emerging Markets Healthcare Monitor.  If okay with you I’d like to have a conversation on the China healthcare market in general and then switch to Chindex’s activities and future opportunities.

To begin, I want to be sure we use the various brands correctly.  Can you tell me how Chindex is positioning the brands?

 

Roberta Lipson – RL: Chindex is the parent company and has a very strong brand identity in China in the medical products and technology field of more than 26 years.  Our United Family Hospitals brand is also highly regarded by the expat community and China’s elite for nearly 10 years.  This is the brand that defines modern healthcare in Beijing and Shanghai.

So, Chindex is the parent company with United Family Hospitals falling within Chindex, but also standing alone in China.

 

HK: For our readers I’d like to touch briefly on background information in China.  For instance, we see total healthcare spend as percentage of GDP at 5.6%, which, while not great, is a common level in emerging markets.  However, we see the Chinese government’s portion is less than 1%, which is much less than half what even the poorest countries of Eastern Europe spend.  How does this impact Chindex?

 

RL:  On our healthcare services side, the hospital and clinic division, we’ve put a lot of emphasis on targeting the employer sponsored market. That is, we see significant growth in supplemental benefits offered by multi-nationals, and eventually state enterprises.  To that end we’re positioning United Family Hospitals as the network of choice for this market.

In fact, back in 1997, when we started the healthcare services division, it was as a small experiment, targeting the ex-patriot community, and was primarily employer driven.  Now, nine years later we have a growing Chinese national patient census.

 

HK: On the medical device side, it’s certainly a fragmented market with 14,000 competitors.  Chindex is the leading American distributor, but how does it rank among the 14,000?  Also, as a key Siemens’ distributor in China, how have Siemens’ internal challenges impacted Chindex sales?

 

RL: I would say there is probably not another private company of our size and reach in China in the distribution of medical devices.

In regards to Siemens and their internal reviews and audits: This has not impacted Chindex at all, we’re a publicly traded company and fully engaged in transparency.  Sales of medical devices and equipment overall has slowed a bit in China though.  This is due to internal country realities and the government’s efforts to crack down on corruption.  While the death penalty for the former head of the State Food and Drug Administration, which was announced yesterday is an extreme example, the crack down on corruption has resulted in a longer sales cycle.

 

HK: Earlier this year, the Minister of Health, Gao Qiang, expressed his support for private investment in healthcare.  Do you see this including private DELIVERY and what is the potential?

 

RL: Obviously the demand is huge.

 

HK: Unlimited?

 

RL: Yes that’s a fair way to describe healthcare potential in China.  The enormous growth in societal and individual wealth, along with corresponding increase in expectations is the main driver.  In addition, as competition for workers increases we’re seeing a steady growth in employee benefits, which of course means greater expectations for healthcare services.

 

HK: Since 1994 the government has approved approximately 100 foreign invested private hospitals, but only 40 are currently operating in China.  Can you explain some of the reasons why less than 50% of approved foreign invested private hospitals are currently operating?

 

RL: Oh, to begin, it is very difficult to develop a hospital in China.  Though the Minister’s statement of support for private investment in healthcare is important, the reality is sobering.  Private investment in healthcare needs a Chinese partner, of at least 30% ownership.

Any joint venture is hard to manage, but here we have cultural and business norms that are unique and few companies are experienced enough to bring development to fruition.  And the bureaucracy can be daunting.  For instance, the process to open a hospital takes upwards of 180 separate government approvals, from construction to your first patient.  We see many instances where a hospital building has broken ground only to stop and sit uncompleted.  There are 14 government bodies that regulate healthcare in China. 

 

HK: How has Chindex managed to bring their projects to operation in this environment?

 

RL: At the time we started with our first hospital we had 15+ years experience in China.  Our people were accustomed to working through the cultural and bureaucratic challenges as we were fully engaged in managing clinical operations, procurement, human resources, etc.

 

HK: But I see Chindex’s executive team is all Western, if not all American.  How does this impact Chindex’s ability to work in the cultural realities of China?

 

RL:  We have a growing team of local managers who have been with Chindex from the start.  Of course, at the beginning we needed to bring in outside expertise simply because it didn’t exist in China at the time.  From the start we invested heavily in training and education of our China staff, and today we have Chinese nationals with MHAs or Masters in Hospital Administration.

To that end, at the hospital system managerial and director level Chinese nationals comprise about 50% of our staff.  At the facility level Chinese national participation is even higher.

 

HK: How has the government viewed Chindex’s western executive leadership?

 

RL: From the start our development strategies included the need to grow local talent.  We’re preparing a significant growth phase and we need local talent, which we’ve been training.  Also, with our long history in China we’ve never broken the government’s trust in Chindex.  And that has been very important to us.  We’ve invested heavily in clinical seminars, we’ve recently been accredited by the Joint Commission International and we’re committed to the Chinese society and local communities.

 

HK: In 2005 private hospitals had 5% of the inpatient market share, or about 1.1 million patients.  What is the size of the hospitals, in terms of bed counts and what are the specialties?

 

RL: Each of our hospitals has 50 beds and extensive outpatient clinics.  Initially when built we did not open all the patient rooms, but rather used them for clinics and other uses.  But today, the bed census is doing very well.  Both hospitals became profitable in their second year of operation.

 

HK: It’s good to see the hospitals are not top heavy on the number of beds.  All too often we see new, private hospitals with large numbers of beds and private rooms, all targeting the expat and elite markets.

 

RL:  Well, our two new hospitals will be larger: one at 150 beds and the other at 125 beds.  But these hospitals will target the local Chinese markets.  Our price points will be considerably lower than our current hospitals.  In addition, we’re working with the government to allow partial state insurance reimbursement for our two new hospitals.

 

HK: Allowing state reimbursement for private healthcare would be a major accomplishment.  In the meantime, can you tell me about the specialties of the current hospitals and clinics?

 

RL: Chindex sees family medicine and general practice as a significant need within the Chinese market at large.  There are only 6,000 family practitioners in all of China and a historically strong emphasis on specialty care.

 

HK: Yes, that’s common in centrally planned healthcare markets. But for Chindex, can you tell me what high value specialties the hospitals provide?

 

RL: We’re very keen on pain management. This developed organically from our OB and child birthing services.  Culturally, pain is stoically suppressed in China.  But we’ve found strong support from the patients for early pain intervention in cancer treatments and palliative care for end of life situations.

We are also strong on building depth in orthopedics and sports medicine.  Both our hospitals have emergency departments open 24/7.

 

HK: Is this required by law and how do you deal with trauma cases?

 

RL: No, the ER is not required by law.  Our strategy is to be a general hospital for our clients.  But there are some specialties where we work with the state hospitals.  The state hospitals are well equipped for open heart, brain surgery, etc.  We have arrangements where we will transport a patient, with our clinical staff, to a state hospital for a procedure, and then transport the patient back to our hospital for care.

 

(Note to readers: watch for private hospitals to collaborate with state hospitals for expensive clinical care.  We see it more and more…e.g. last month’s interview with SwissMed Hospital in Gdansk and the use of state hospitals for cardiology procedures.  Advantages include effective use of existing resources and it promotes a collaborative environment with the government.  More importantly, this lays the ground work for PPPs, or public private partnerships in formal settings. )

 

HK: I’d like to move the conversation to reimbursement issues and where Chindex sees the next few years in regards to the hospital services market.

What is the patient breakout between foreign nationals and Chinese?

 

RL: 65%-68% are foreign patients.  That is, they live here, but have non-Chinese passports.  We do have a growing inflow of patients coming to our hospitals from outside China, in particular from Russia and Mongolia.  These patients are coming to our hospitals specifically for care not available in home countries.

 

HK: Clearly the foreign nationals have a greater use of insurance.  What are the hospital’s reimbursement rates from insurance, self-pay, and bad debt collection?

 

RL: 75% of our foreign patients use third party payors.  Interestingly, now about 20% of our Chinese patients use insurance and it is growing.  Our bad debt is very low.  If a patient doesn’t have insurance we collect payment at the time of care.

 

HK:  You mention 20% of your Chinese patients have insurance and it’s a growing percentage.  I see Chindex has a health insurance programme with FESCO IB, the brokerage arm of FESCO.  Let’s talk about this, as it’s likely to have a significant impact on the hospitals.

With your FESCO IB arrangement, does Chindex or its hospitals take any of the insurance risk?

 

RL: No.

 

HK: The policies appear to be very rich in benefits.  Are these travel policies and why such high reimbursement levels?

 

RL: We, Chindex and the whole China health insurance market, are on a steep learning curve.  We’ve been testing benefits and price points specific to the homegrown China market.  Of course there’s essentially no actuarial data, and little market experience.  We wanted to learn how the market would react.

Initially the products were designed to support healthcare outside China so in effect yes they included travel benefits.  Well, there are plenty of existing products on the market for that benefit and it’s being removed.

We’re also committed to using positive incentives; e.g. wellness in benefit design to keep healthcare costs low.  We know the market will not respond well to high premiums and high co-pays.

 

HK: Earlier you mentioned the efforts to promote to multinational employers your hospitals and clinics as the providers of choice.  Are you interested in providing pre-paid services to employer groups?

 

RL: We do provide employment type services to the large multinationals, but as an HMO, taking on risk? No.

The upshot of our work with FESCO IB and insurance development is that we’re gaining a significant amount of experience and data that will be used in developing relationships with insurance companies.

 

HK: That’s great. We continually tell hospitals they need to better understand the reimbursement or insurance market because right now, many hospitals are at a disadvantage when negotiating with carriers, from lack of knowledge alone.

Let’s talk about the immediate future.  You say you’re preparing to open two new hospitals in the next two to three years and they’ll be fairly large, over 100 beds, targeting the Chinese national patient.  Does Chindex actively blend western and traditional Chinese medicine and does Chindex see any export potential?

 

RL: Yes, we support traditional Chinese medicine and a growing number of patients want this.  We’ve become quite proficient at blending the two styles of medicine, but no, we don’t see exporting this expertise.  We have enough potential right in China and we’ve only just begun to penetrate this huge market.

 

HK:  Thank you Ms. Lipson, it’s been a very interesting conversation.

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