The lines outside Chinese hospitals are growing. And it is not just the patients.
Investors from private equity firms, real estate groups and pharmaceutical companies are vying for a stake in China's hospital sector.
"The public hospital system is already overloaded. People get into very long queues and pay $3 to see [well-known doctors]. It's a very cheap, quick model, but doctors speak with a patient for only three to five minutes," said Bob Chen, a financial advisory partner at Deloitte China's Life Science and Healthcare practice.
Patients trust tier-three hospitals because they are reputable and have no talent retention problems, said Chen. "Meanwhile, tier-one and tier-two hospitals are spread widely across China, but people don't trust them. That's why the government has been encouraging development of private hospitals," Chen said.
However, there is demand for quality healthcare at a premium.
Given the choice, most patients end up queuing at the top level, tier-three hospitals and some even travel thousands of miles just for a few minutes with a doctor in one of these hospitals.
"People are willing to pay $80 to $100 and talk to the doctor for 30, 40 minutes … they want to be treated like a human being," said Chen.
Beijing has earmarked more than $205 billion in its 2017 budget to expand and improve the healthcare sector, accounting for 7.2% of total government spending, Song Qichao, deputy director of China's ministry of finance's social security department said at a news conference in May.
In the 2017 government work report, Chinese Premier Li Keqiang highlighted the need to improve grassroots healthcare facilities so patients can access quality medical care locally.
And the government has invited the private sector to play a bigger role.
The hospital investment race
A growing number of deals over the past three to four years have involved Chinese hospitals, with all kinds of buyers, said Jane He, a financial researcher at Mergermarket. These include big healthcare conglomerates, such as Sinopharm Group Co. Ltd. and Shanghai Fosun Pharmaceutical (Group) Co. Ltd., smaller domestic pharmaceutical companies and private equity.
"Domestic and global private equity funds such as Hony Capital, CITIC Private Equity Funds Management Co. Ltd., Bain Capital, Temasek Holdings are also important players in buying or investing in hospitals," said He.
The number of mergers and acquisitions in China's healthcare sector almost tripled in 2016 compared to the previous year, with about one-third involving foreign acquisitions, Deloitte's Chen said.
Drug manufacturers are interested in hospitals for strategic reasons.
Pharmaceutical companies such as Fosun are re-examining their drug distribution models, said Chen. "When Fosun acquires these hospitals, they actually bypass tier-one [national-level drug] distributors and focus more on regional distributors."
Drug manufacturers are not the only ones interested in buying hospitals. Hospital management groups and even real estate companies have joined the race as well.
"The market believes the medical service [sector] is consolidating and hospitals are becoming valuable assets," said He.
More than 17 real estate companies have invested in the healthcare sector, including China Vanke Co. Ltd., China Evergrande Group and Guangzhou R&F Properties Co. Ltd.. In April, Dalian Wanda agreed to invest about 70 billion Chinese yuan in a healthcare industry park in Chengdu.
Private hospitals account for half the total number of hospitals in the country but only a small part of the revenue.
Specialty hospitals in particular have become prime targets because they have simpler business models and are easier to integrate into a hospital group.
"Generally, specialty hospitals and oncology-focused hospitals are preferred by investors," said He. It is easier to expand operations to other regions and evolve into a hospital chain if they invest in specialty hospitals, she added.
Private hospitals tend to be more specialized, unlike general hospitals. They are relatively lower risk and easier to operate, Chen said.
For private equity investors, the goal is to invest in hospitals and exit in a few years.
"Some PE-backed companies acquire a series of similar hospitals, consolidate them, and improve their internal controls and operational efficiency. They encapsulate these hospitals into a platform and then in the next three to five years, their final target is to get listed," said Deloitte's Chen.
But hospitals do not come cheap — typically valued between 18x and 30x. "The market is very hot, that's why we see the valuation to be very high," Chen added.
Chen expects this trend to continue.
"For strategic buyers, their enthusiasm in this sector will continue. For financial investors, they will enlarge their deal volumes and value in acquiring hospitals. ... In the meantime, overseas acquisitions will step up like last year. Activities in acquiring overseas hospitals will continue to be very active."
As of June 7, US$1 was equivalent to 6.79 Chinese yuan.