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    Why China’s Largest Hospitals Are No Longer Immune to Change

    As private investment floods into the health care sector, general hospitals will have to rethink their role.

    The Chinese government today is strongly encouraging private investment in the medical sector. As dean of a public hospital, I believe that this will spell the end of China’s tertiary hospitals in their current form. These institutions deliver general and comprehensive care at the municipal, provincial, or national level.

    For hospitals of this size, gone are the days of large-scale expansion of facilities, mass recruitment of staff, and substantial growth of services. Going toe-to-toe to compete for patients with primary or secondary hospitals — which deliver care at the community or district level — would be a self-defeating strategy, and there are three reasons for this.

    First, the Chinese government supports the development of private medical institutions. Statistics show that 2,115 new private medical institutions were established between July 2015 and July 2016. Plans for a further 1,000 or so medium- to large-scale institutions are currently pending approval.

    Compared with the great number of hospitals run by a small group of businesspeople in the city of Putian, in eastern Fujian province, these new hospitals are financed by professional investors and large-scale companies both domestic and international. Their operations are more wide-ranging, have more abundant financial resources, and possess stronger management capacities. For tertiary public hospitals, they are strong competitors.

    Second, the government strongly backs the development of community medical centers. Among many health care reform measures, the Communist Party has placed particular emphasis on the classification of different types of treatment. The idea is that common diseases should be diagnosed and treated at the community level, thereby providing an alternative to people who might otherwise flood large tertiary hospitals with relatively minor ailments.

    This structure has played a major role in the ongoing reform of health care in Shanghai, where residents can choose family doctors depending on where they live. They can also select one secondary and one tertiary hospital anywhere in the city, depending on their medical needs.

    More and more residents are opting for treatment at the local level and signing contracts with doctors at their community medical centers, a sign that this policy has proven successful. The next phase would be to decrease the number of patients receiving treatment at tertiary hospitals for common diseases.

    Third, people in China pay medical fees according to the individual services rendered to the patient. In effect, this model places the onus of responsibility on hospitals to generate their own profits. There is a strong financial incentive for hospitals to bring in more patients, because more clinic appointments mean more prescriptions, examinations, hospitalizations, surgeries, and other services. The more the hospital does for the patient, the more money it makes.

    However, the pay-per-service model makes it difficult for the government to control health care expenditure. Most tertiary hospitals have been actively encouraged to expand, but in the past few decades, the rate at which they have grown has spiraled out of control. Many such hospitals now have thousands of beds, and their profits can amount to billions of yuan. As costs rise, it is inevitable that some of them get passed on to the patient.

    But there are ways to keep medical bills from skyrocketing. Two techniques for tackling this problem are treatment packages and the introduction of American-style health insurance.

    Treatment packages set a fixed price for an entire course of treatment for one disease or surgery. No matter how much medicine is prescribed or how many examinations take place, the patient pays the same amount. The rationale is straightforward: If a hospital spends less per patient, it makes more money; if it spends more, it makes less money. The hospital’s role thus revolves around reducing costs. If the institution intends to expand, it is better for it to write fewer prescriptions, perform fewer checkups, and cut down on non-essential operations.

    Treatment packages are like going to a restaurant and paying for a set menu that includes an appetizer, a main course, and a dessert. Instead of being charged for each individual ingredient, one price gets you everything from the seasoning in your soup to the gas used to heat it.

    In theory, health insurance should guarantee me treatment for any disease I catch. It is in the interest of insurance companies to keep patients safe from major health problems, as these tend to result in the largest payouts. By encouraging applicants to undergo regular physical checkups and receive early treatment where necessary, customers are less likely to get sick, go to clinics, get prescriptions, or be hospitalized for surgeries.

    The American health care system has been implementing treatment packages and health insurance policies for many years. That’s why there are so few large-scale hospitals in the U.S. compared to China: You don’t need that many beds if patients are simply paying out of pocket, and extended stays just cost the hospital more money anyway. In America, people’s basic medical needs can be met at the community level, so they only go to hospitals for emergencies, or if surgery is required.

    Of course, the U.S. model has several shortcomings, which are the subject of much debate in China. For example, medical bills are high in America, where even those with insurance are frequently priced out of medical care. Yet since a lot of the technical and managerial aspects of Chinese hospitals are modeled after America, I would predict treatment packages and health insurance to soon become the norm.

    Overall, then, for Grade A tertiary hospitals — those that provide the very highest level of service — the future probably looks like this: Patients with common diseases will be diverted to primary and secondary institutions, while most operations will be completed in “daytime surgical centers” affiliated with but separate from the institutions patients would go to for minor surgical needs. Aside from more specialized operations, surgeries will not be performed at the tertiary level.

    Such a future does not require a large number of hospital beds, or a colossal outpatient building, or an army of medical staff. Doctors at tertiary hospitals will be able to spend more time mentoring trainees at lower-level institutions, treating emergency cases and serious conditions, and researching cures for rare and debilitating diseases.

    (Header image: Three doctors walk through a hospital in Shanghai, April 16, 2013. VCG)