Over the last couple of months, the question of what to make of changing policies on the topic of nursing stations and home health care has come up a couple of times with our clients. Michael Qu has written a great summary of the legal challenges (reference his last Legal Alert for a very good summary of the new regulatory options). As Rubicon looks to how regulations in China inform actual commercial opportunities, given what we know about the challenges home healthcare providers in China face, I wanted to add some additional context and thoughts (and, to be frank, some unanswered questions we encourage our clients to think through as they wrestle with their regulatory approach).
Let’s begin with the positive points. First, this new space is presenting itself in Shanghai, and if it proves to work as measured by more clinically competent home healthcare models taking shape in the area, it will likely become a regulatory model across the country. Second, this regulatory space aligns with meaningful advances to reimbursement through the yibao for home healthcare services (Jing Huang at Rubicon has done a significant amount of work last year on the topic of how foreign senior care, home healthcare and post acute providers can access the yibao – reach out if you want to discuss these topics as their is a lot going on in these areas). Access to the yibao is a potentially huge and disruptive step that bodes very well for the home healthcare industry becoming more stable and scalable in China. Third, the nursing station carve out is happening, as Michael points out, at the same time a more blended and holistic model for senior care is emerging in China. This model has a heavy emphasis on community care, and as such, creates a critical access point in markets where independent referral source cultivation remains a critical commercial problem without a simple answer. Fourth, the nursing station opens up what home healthcare providers can and cannot do in the home, which allows the market to push price points higher, use more clinical help (i.e. use actual nurses and not caregivers) to deliver care that is again, more commercially viable.
When thinking about the perceived new regulatory space the Chinese government has carved out for nursing stations and their possible impact to home healthcare providers, it is important to frame what types of business and care models we are talking about. The emphasis of much of our work is on free-standing home healthcare models that do not have any sort of ancillary services, such as a community care or day care center, associated with what they are offering to the market. Most of the foreign home healthcare players in particular who have entered China are not that excited about having to own or operate a physical center of care as part of their model, so while the regulatory space opened up by a nursing station license is interesting, it is not what they are looking for.
However, several of the foreign senior housing operators who have begun to offer home healthcare services do find the nursing station licensing approach interesting, because the nursing station is something might have had to pursue anyway for a facility offering, and if it also creates a regulatory safeguard for them to offer home healthcare services at the same time, then even better. Having said this, without laying everything out in detail that we recommend to our home healthcare clients, we do recommend a model that has more of complimentary physical infrastructure in place, both for regulatory and commercial reasons. To say this differently, our advice to foreign home healthcare companies is to have a hybridized model that allows them to do what they do well (home healthcare) while offering some ancillary services that may either be offered themselves, or through a partnership.
Our second pushback or top-level concern around the space created by the new nursing station regulatory space that makes me less excited about this is that it remains very difficult (Michael puts it as “almost impossible”) for a home healthcare operator to be a WFOE if they intend to have a nursing station license. Overall, this regulatory approach tracks the back and forth point of view on Wholly Foreign Owned Enterprises (WFOEs) for hospitals, and that it takes the restrictions on WFOEs for hospitals and transplants that onto nursing stations. To say this differently, China’s approach to opening and then restricting WFOEs for hospitals is sclerotic and unhelpful. In 2012, when the FDI catalog was revised to allow for WFOEs in hospitals, we all got pretty excited, only to see the initial excitement be tempered when the policies came more into focus and it became clear the actual lane WFOEs hospitals could run in was much narrower than we had hoped. As such, for many foreign companies who want a WFOE, this is a big issue. Even more critically, the “skitzo” approach to WFOEs and medical institutions is a problem, and represents a regulatory unknown that makes many of our clients uncomfortable. While we can see the potential
The third point is around where these nursing stations are allowed to be geographically. This is obviously a case-by-case basis, but for a home healthcare company that wants to be able to objectively evaluate where in a city to put resources, the idea they will have to align this decision with where the government is open to allowing such foreign investment is yet another constraint. Given home healthcare in particular is very sensitive to labor absorption and transit time in order to achieve profit, not having the ability to select where you want to deploy resources is uncomfortable for many new to China.
Our last concern is around the need to have, in some cases, a non-profit status in order to take advantage of the nursing station carve out. This is not ideal and while workarounds exist, this is one more challenge that leaves us a little cold to the view that a nursing station license is the way to go. We do see specific opportunities where the nursing station license is the way for a home healthcare provider to open, but it is critical to balance a pure regulatory analysis with a full strategic and commercial survey of what is and is not working to ensure your regulatory model does not lead you down a road where you cannot monetize your home healthcare business in China at any meaningful scale.