Portfolio: Eight Roads and China's DeltaHealth

Located in the quiet, middle-class district of Qingpu, not far from Shanghai Hongqiao Airport and a one-hour drive from downtown Puxi, Shanghai DeltaHealth Hospital is intended to be a pioneering example of a foreign-owned general hospital in China. The facility is spick and span, having only been open six months, but it represents 10-year effort for Eight Roads Asia, formerly Fidelity Growth Partners Asia.

The 50,000-square-meter hospital, which currently holds 202 beds, is spread over three floors, each one characterized by contemporary design and modern lighting and furniture. The first floor is home to outpatient services and general practices functions such as pediatrics, gynecology and dental services. An emergency room will open next month. Cardiovascular treatment – the hospital’s area of specialization – occupies the upper two floors: diagnostic laboratories, cardiac care units, operating rooms and inpatient wards that offer a one-stop service for heart disease.

Over the past 24 weeks, doctors have performed 60 complex heart surgeries, with six to eight procedures taking place each week. This compares to 30-100 times per year at class-three public hospitals, the highest standard in China.

“Our desire is to capitalize on the co-existence of China’s reforms and the development of a private healthcare system in such a way that we all increase the standard. That was our vision 10 years ago, and it’s still the vision today. Nothing has changed in that regard,” says Daniel Auerbach, senior managing partner at Eight Roads, and chairman of DeltaHealth, the healthcare services group of which the hospital is part. “Previously we were very much focused on building something of the highest quality and with the highest standards. Today we’re squarely in the clinical delivery and operational mode.” 

Incremental change

Moves to liberalize China’s healthcare services industry were announced in late 2013. The following year the government further opened up the space by allowing 100% foreign ownership of private hospitals in seven cities and provinces. Prior to that, an overseas investor had to pair up with a local partner and could own no more than 70% of the resultant joint venture.

Eight Roads started lobbying for reform in Shanghai 10 years ago, arguing that it was essential if the government wanted to attract the talent, adopt the advanced foreign technologies and implement the best practices required to improve the healthcare system. The firm suggested that four top US academic medical institutions, including Columbia University, open a hospital in the city dedicated to cardiology. 

“What might be unique about us is that we look way ahead. There was a bet that the healthcare system in China was going to experience a stress test. To us it was very obvious – the government couldn’t deliver public healthcare services to the entire population with an infrastructure that was not yet modernized and scattered throughout the country,” says Auerbach.

Public hospitals – which in 2013 accounted for about 60% of all hospitals nationwide – are grouped into three classes, based on capability and responsibility levels. Each class is then subdivided into three further levels, A, B and C. A system exists to channel the sickest patients to hospitals best equipped to treat them, but it doesn’t work in practice. While a class-one hospital can treat a flu case, most patients go to higher-ranked hospitals because they believe the service will be better, which means class-three facilities are a bottleneck.

In the face of these challenges, the government decided to allow first private investors and then foreign investors to enter the sector. By 2015, of the 27,587 hospitals in China, approximately 50% were privately run. However, the public sector still accounts for the bulk of revenue, generating RMB2.09 trillion in 2015 to the private sector’s RMB203.6 billion.

“DeltaHealth is taking patients who want a different type care – and can afford to pay for it – and that releases some pressure from the public system,” says Jarlon Tsang, managing partner at Eight Roads. “As the middle class grows in China, as in many countries, patients start demanding better healthcare. Right now a lot of people leave China for treatment in Hong Kong, Singapore, and even the US. But China has some of the best doctors in the world – the volume of surgeries they have performed in their careers is far greater than for US doctors.”

Between 2011 and 2015, total healthcare expenditure, which includes government investment and individual spending, increased from RMB2.43 trillion to RMB4.1 trillion, according to Frost & Sullivan. It is expected to reach RMB6.28 trillion in 2020.

Despite this growth, there remains a mismatch between demand and supply, with cardiology a standout example. About 20 million people are admitted to hospital in China each year suffering from cardiac diseases, but only 600,000 percutaneous coronary interventions (PCIs) – a common non-surgical procedure used to treat narrowing arteries – are performed.

“The first wave of private healthcare services focused on outpatients, with many operators building small clinics that were easy to scale in a short time frame. When you look at the second wave of healthcare services companies – some of which have now been listed – they were larger hospitals specializing in maternity care, eye care, dental care, and health check-ups. None of these specialties relate to life-threatening issues involving in complicated procedures,” Tsang says.

Building up

Eight Roads, recognizing the gap between those who suffer from heart disease and those who receive treatment for it, identified cardiovascular care as the main focus for its hospital. The firm established DeltaHealth and started construction on the Shanghai facility four years ago.

It has so far invested $200 million in the hospital, including a $100 million loan from China Merchants Bank in 2013. For most well-equipped hospitals, equipment accounts for 25-30% of total expenditure. DeltaHealth has bought a CT scanner, an MRI machine and an X-ray machine, as well as several ultrasound machines for heart check-ups. For heavy equipment, such as X-ray machines, which generate a lot of radiation, designs must be customized to the space in order to prevent leakage. 

“We made a lot of investments not only in equipment but also in the rooms for this equipment to ensure we meet all the requirements,” says Desmond Thio, CEO of DeltaHealth Hospital, who was formerly president of Philips’ Greater China healthcare business. “When building a new hospital you can actually design it the way it has to be for that purpose, making sure all issues including safety issues are properly addressed.”

Once the equipment is in place, a hospital must attract the right doctors to use it – a challenge for any greenfield facility in China. Most highly qualified physicians choose to work at top public hospitals, typically in Beijing, Shanghai, Guangzhou and Chongqing, where the benefits are better and career advancement is clearer. Essentially working as civil servants, they are offered accommodation subsidies and insurance coverage in addition to a stable monthly salary.

However, the bottlenecks in class-three hospitals – and standardized pricing for surgeries in order to reduce state health insurance payouts – mean these doctors are overworked and feel increasingly undercompensated. This has prompted some to cross legal and ethical lines, privately charging families for better treatment, prescribing expensive and unnecessary drugs for the kickbacks offered by drug makers, or taking weekend jobs at other hospitals.

The government has responded by modifying its policies. It started by allowing doctors to practice at cooperative medical institutions with permission from their original organizations, and now physicians in certain pilot areas can apply to work at up to three medical institutions.

Over the past three years, Eight Roads has worked closely with senior doctors in the public sector to hear their views on the evolution of China healthcare reform. It managed to recruit Professor Lizhong Sun of Beijing Anzhen Hospital – a leading cardiovascular specialist who has developed procedures now seen as global standards – as president and chief medical officer at DeltaHealth. Getting others to move from public to private practice has proved difficult.

“If you take a 10-15 year view on innovating and creating new drugs and treatments for the global market, China will succeed extremely well. If you communicate this to physicians who would like to participate in this journey, it works very well. On the other hand, if you say that you will pay them well and ask them to get out from the public system because you don’t respect that system, they will most likely never join you in this journey,” says Auerbach.

Although doctors are allowed to work for multiple institutions, the practicalities are challenging. Public hospitals are reluctant to see top talent – physicians they have nurtured – work elsewhere. There are concerns that it could lead to a wider brain drain at senior level. As a result, Sun started at DeltaHealth on a part-time basis and remains full-time at An Zhen so as to maintain good relations with his former employer. The transition to DeltaHealth will be gradual.

In addition to 27 full-time physicians, DeltaHealth is working on agreements with physician groups, private clinics and private hospitals to provide mutual transfers of doctors and patients. For example, if a partner hospital receives a cardiovascular patient who requires complex treatment, it will refer the patient to DeltaHealth. The doctor-sharing scheme is at an early stage, but it is expanding.

The company has also recruited two seasoned international hospital professionals to oversee patient care. COO David Hoidal has more than 30 years of experience as a hospital operator in the US and the Middle East, while Cecilia Ma, DeltaHealth’s director of nursing, was most recently director of patient care at New York Presbyterian Hospital’s intensive care unit. In addition, staff are kept up to speed through a training partnership with Columbia University, which sees Chinese doctors go to the US and US doctors come to China.

“My opinion is that a lot of public healthcare services providers in China are working in silos,” says Hoidal. “Our focus is very much on patient-centric care and services with a multi-disciplinary array of treatment. That approach requires a lot of training, team-building and education. All of our staff have been through that training. All of them, whatever what their position is, are committed to our patient’s safety and utmost satisfaction.”

Long-term view

Based on Hoidal’s experiences of private hospitals in overseas markets, it takes more than a decade to break even, but he believes DeltaHealth Hospital could become profitable within six years. China’s rapidly changing market dynamics are the reason for this, with Shanghai seen as particularly attractive because of its relatively wealthy population and the greater penetration of third-party insurance. (At present, DeltaHealth only accepts cash payments for treatment or private sector insurance.)

The company has already started building a network of outpatient medical clinics in Shanghai. The first one, DeltaWest Clinic, opened in 2012 and provides primary and specialty care. It serves as a platform to generate patients for the main hospital and also as an outpost for those who require post-treatment rehabilitation services.

Meanwhile, the main hospital is now planning its second phase of construction, which will see the addition of 350 beds. There are no plans to recreate DeltaHealth Hospital in other cities. Eight Roads has little interest following the strategy employed by other PE investors of consolidating assets with a view to a quick public listing. Indeed, Auerbach says that DeltaHealth should not be classified as a traditional PE investment; it is a long-term project that will continue to receive capital as it develops.

“Eight Roads is very different from other investors – they are more visionary,” adds Thio. “The hospital business is a long-term investment, which could generate sustainable returns, help people and contribute to the society. In addition, this hospital is full of creative ideas, new technology, innovative services, and collaborations that are reshaping the healthcare landscape bit by bit. I am proud to be a part to drive these innovations.”

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• Topics
• Greater China
• Healthcare
• Expansion
• Eight Roads
• China