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The Community Health Service Center Opportunity For Investors In China's Health Care Space

Both Phase I and Phase II of the Chinese health reforms have stressed the development of China's Community Health Service Centers, 社区卫生服务中心, (CHSCs). It is tempting to see the American Community Health Center (NYSE:CHC) model as the closest analog to the CHSC, but I believe that the better comparison can be found in the model of certain American outpatient centers that function as components of larger care organizations.

In contrast to American community health centers, which are part of the safety net system that caters to the uninsured and the underserved and function primarily as non-governmental organizations, CHSC's are, in theory, (1) the primary and preventive care pillars of China's regionalized healthcare system and (2) are increasingly recognized by various provinces as a niche in the health care system that could greatly benefit from fully realized privatization incentives.

The reason I qualify the first of the above two statements with "in theory" is that China's greatest reform issue continues to be its inability to shift the primary patient access point from the largest urban hospitals to lower-level access points like CHSCs. The reason I qualify the second statement with "increasingly" and "fully realized" is that the push to privatization is not the same in all areas and, more importantly, the way that CHSC privatization is being encouraged is not the same everywhere.

I want to talk about the second of these qualification, because the first of the two problems has been extensively covered elsewhere by us and many others.

On this second point I want to use a 2009 paper by Yan Wang of the Shandong Provincial Health Department and Karen Eggleston of the Asia Health Policy Program at Stanford. The paper, "Contracting with providers for primary care services: evidence from urban China," is a case study of how contracting with private providers for urban primary and preventive health services in Shandong Province, China, is affected by different bundles of government incentives. Two concurrent pilot program in the city of Weifang and in "City Y" where privately-held CCHCs were allowed to contract with the government for a certain package of incentives provided the authors (and one would assume, pilot architects as well) with a natural experiment to measure the outcomes of incentive bundles in two different cities.

What the study found is that one year after the privately-held CHSCs entered into contracts with the two governments, in Weifang city there was no great difference between the performance of privately-held CHSCs and government-run CHSCs along certain performance dimensions after size and other characteristics were controlled for. Meanwhile, in City Y, privately-run CHSCs performed much worse than government-run CHSCs. The question the authors sought to answer is, What does this tell us?

While the authors were careful to not jump to any firm conclusions, they still draw a lot of insights from the outcome of the natural experiment.


As mentioned, the most glaring difference between Weifang and City Y is the bundle of benefits given to private CHSCs. In Weifang 33 private CHSCs entered into a contract with the government that stipulated the providers would receive the benefits of,

  1. payment for public funds for designated services (up to 10 RMB per patient),
  2. inclusion in the expanded social insurance coverage system,
  3. the ability to receive professional training from the larger hospitals in the area, and
  4. financial assistance for investment in infrastructure.

In return the private providers had to agree to two terms:

  1. all buildings and medical equipment purchased would resort to the government at the end of the Contract period, or sooner if the CCHC pulled out of the program, and
  2. they must adhere to the policies governing service provision, quality of care and regulatory oversight.

In City Y, privately held CHSCs participating in the program (there were around the same number of participants as in Weifang), had to adhere to all of the same conditions as the providers in Weifang, but in return the contract stipulated that the only benefit City Y would provide would be the public fund reimbursement of 10 RMB per person.

In both cases, at the end of the program, the per resident expenditure was still much higher in government run CHSCs than in the privately-run CHSCs, a disparity best explained by the difference in the mix of services available in government-run centers, which in turn impacts the number of referrals that government-run centers can make to hospitals.


The differences in the two programs (Weifang and City Y) can partly be explained by Weifang's greater ability to reform the problems that characterize the engagement (or lack thereof) between the private sector and the government. By providing training, the opportunity to participate in the social insurance system, and financial assistance in addition to per-resident payment, the Weifang City government went a long way towards addressing the opportunity cost of foregone curative care that CHSCs face when agreeing to greater government oversight. This not only brought up the level care of privately-held CHSCs, there is some evidence that it also helped recuperate the image of privately-held CHSCs in the eyes of the patient public.

Indeed, the benefits to private players were substantial (huge! even, if I am allowed to step out of my policy-language bubble). The private players were allowed to participate in the social insurance system, a heretofore limiting step to the expansion of private care in China. Moreover, they were given access to the best government health care workers. If you're a private investor of health care entrepreneur looking for an entry point, just these two facts alone should make the CHSC an opportunity worth pursuing.

The other really enticing aspect of CHSCs is that they are not only a rural phenomenon, in fact they are a central component of the urban health care system. Therefore, CHSCs are not just a door into the Chinese health care system generally, they are a potential entry way into the urban health care market.

At Rubicon Strategy Group we now look at the CHSC opportunity whenever we work with clients.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.