March 28, 2014

Tentative Measures for the Administration of Wholly Foreign-Owned Medical Institutions in the Shanghai Free Trade Zone

When China last updated its Foreign Investment Catalogue in 2011, "medical institutions" were removed from the "restricted" category of foreign investment projects, which effectively meant that they had been put in the default "permitted" category. However, no changes were made to in the legal framework for such foreign investment projects, which had previously been restricted to Sino-foreign joint ventures, until the issuance of the General Plan for China (Shanghai) Pilot Free Trade Zone (General Plan), promulgated by the State Council in September 2013, and the Tentative Measures for the Administration of Wholly Foreign-owned Medical Institutions in the Shanghai Free Trade Zone (Tentative Measures), jointly promulgated by the Shanghai Commission of Health and Family Planning (CHFP), Shanghai Commission of Commerce (COFCOM) and the Shanghai Administration for Industry and Commerce (AIC) on November 13, 2013.

Thresholds for Foreign Investors

The General Plan permits foreign investors to establish for-profit, wholly foreign-owned hospitals in the Shanghai Free Trade Zone (Shanghai FTZ). The Tentative Measures provide that the foreign investors of such hospitals established in the Shanghai FTZ must be foreign medical institutions or companies, enterprises, or other organizations owned by them. Furthermore, the foreign investors must have at least five years' direct experience in medical investment and management, and meet one of the following requirements:

  • Be able to provide internationally advanced managerial experience, management modes and service modes in managing health institutions
  • Be able to provide internationally leading medical technologies and equipment, or
  • Be able to complement or improve the inadequacy of local medical service capacity, medical treatment level, medical technologies, funding insufficiency and medical facilities

Criteria for Wholly Foreign-Owned Hospitals

Article 8 of the Tentative Measures stipulates that for-profit wholly foreign-owned hospitals established in the Shanghai FTZ must satisfy the following criteria:

  • Be an independent legal person (i.e., be responsible for its own profits and losses, with an independent accounting system, and be able to assume liabilities independently)
  • Have a minimal total investment of RMB20 million
  • Have a maximum operational term of 20 years

In addition, such hospitals need to have their own articles of association and a board of directors, and operate as a wholly foreign-owned enterprise, a form of limited liability company.

Simplified Approval Process

At present, applications for the establishment of Sino-foreign joint venture medical institutions which are not in the Shanghai FTZ must be submitted to a provincial-level health authority, COFCOM and AIC separately. Although medical institutions are on the "Negative List (2013 version)" of the Shanghai FTZ, the Tentative Measures provide that the "one-stop" application process for projects not on the Negative List will also apply to the establishment of wholly foreign-owned medical institutions in the Shanghai FTZ. Consequently, foreign investors that meet the requirements described above need only file a single application package to the Shanghai FTZ AIC, which will then forward the relevant documents to the Shanghai FTZ Administrative Commission and the Shanghai CHFP.

The Shanghai CHFP, the Shanghai FTZ Administrative Commission and the Shanghai FTZ AIC together have 40 working days to decide whether to approve the establishment of the wholly foreign-owned medical institution. If the application is approved, these authorities will issue an Approval Certificate on Establishment of Medical Institution, a Certificate of Approval for Foreign-invested Enterprise and a Business License to the applicant, delivered by the Shanghai FTZ AIC in its one-stop process. This 40-day timeframe is much faster than the timeframe outside the Shanghai FTZ, which is usually at least several months long.

After receipt of the Approval Certificate on Establishment of Medical Institution, the for-profit, wholly foreign-owned hospital must also apply for and obtain a Practice Certificate of Medical Institution from Shanghai CHFP during the valid term of the Approval Certificate on Establishment of Medical Institution before it can formally commence its operations. Otherwise, the newly-established hospital project will effectively be cancelled. This again is in line with a registration reform launched in the Shanghai FTZ for business licenses to be issued prior to the issuance of certain operational permits.

The Tentative Measures mark a big step towards the opening-up of a major state-controlled sector.  However, some practical questions remain. For example, it is not yet clear that wholly foreign-owned hospitals in the Shanghai FTZ will be covered by the Chinese medical insurance scheme. It is also not clear whether they will be able to hire qualified Chinese doctors, or whether there will be restrictions relating to the foreign licensed doctors who work in them. Nevertheless, the opening up of this sector demonstrates the eagerness of the Chinese government to include more foreign medical resources in its efforts to reform the healthcare system in China.

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