A Novel Therapy for China: HMOs

In a five-star hotel here, Zhou Jianxiong rises from his seat to toast his new comrades from Southern California.

He alludes to Xiangtan as the birthplace of Mao Tse-tung, who sowed the seeds of communism in the Middle Kingdom. “From this place, China’s modern revolution spread all over the country,” Zhou says, raising his glass of Great Wall red wine. “We also will influence the whole country, like a single spark igniting a prairie fire.”

Zhou is not talking armed struggle but starting a healthcare revolution of sorts.

Mao’s revolution envisioned free, commune-based clinics -- and so-called barefoot doctors -- for the Chinese. This new experiment will be modeled after California’s oft-maligned managed-care system and will rely on hefty membership fees.

China’s economy is booming, but its healthcare system is sick. That’s because Beijing has broken the “iron rice bowl,” the system in which factories and collective farms provided for workers’ health, housing and pensions.

Tens of millions of workers have been dismissed recently as officials shut down or sold state-owned enterprises to investors. Seven out of 10 Chinese have no medical insurance. That’s about 900 million people. Stories abound of families forced to stop treatment for seniors and dying children because they were bankrupted by healthcare costs.

The collapse of socialized medicine has left masses of people helpless in the face of soaring health costs and presents a threat to Communist Party leaders, who fear social instability.

But is managed care the answer?

In the United States, the health system aimed at controlling costs flourished in the early 1990s as employers pressed for less expensive healthcare and health maintenance organizations, or HMOs.

But soon a backlash ensued. Patients protested denial of care and lack of physician choice. States such as California formed agencies to address widespread consumer complaints. For the last five years, HMO enrollment in California and many other states has been falling.

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Zhou and his partners at Sunnylife Global Inc., a small West Covina health company, believe that HMOs can save China’s hospitals. Zhou is chairman of Xiangtan Electric Manufacturing Group, a 70-year-old state-owned enterprise that makes motors, rail vehicles and dump trucks.

The factory was once run by the Nationalist Party and its leader, Chiang Kai-shek, who battled Mao and the Communists for control of China. During the last decade, the plant has shed about half of its 20,000-member workforce.

The day after last month’s hotel banquet, Zhou turned over 70% ownership of the factory’s 320-bed hospital, Xiangtan Liyuan, to Sunnylife. The U.S. company has already given $2 million to the hospital and pledged to invest an additional $10 million by September to renovate the facility and run it like a members-only hospital, akin to California’s Kaiser Permanente.

Sunnylife has similar deals with 10 other hospitals in China and plans to take control of them over the next three years. Until now, its main business has been selling herbal supplements to China. It sold nearly $1.8 million worth last year, reaping a profit of $673,000, according to the company.

Sunnylife says it has raised money from investors in the United States and Taiwan for the Xiangtan hospital project, and its executives are working to secure additional financing. The company’s stock is traded over the counter and has a market value of about $63 million. Many of its 1,000 shareholders are well-to-do Chinese Americans.

The biggest shareholder is Bridget Cheng, 40, a doctor of Chinese medicine who co-founded Sunnylife four years ago. She comes from an affluent family in Harbin, in China’s industrial northeast, where she learned about HMOs and Kaiser Permanente.

After moving to Southern California in 1996 to get married, Cheng started four medical clinics, hiring away doctors from Kaiser Permanente and exploring ways to combine Eastern medicine with Western healthcare.

Now, she talks unabashedly about wanting to win a Nobel Prize for overhauling China’s healthcare system.

“Basically, they don’t have a system,” Cheng said through an interpreter. Last month, Cheng and 20 others representing Sunnylife, including former California state Sen. Richard Polanco, traveled to China.

Polanco, a paid advisor to Sunnylife since November, sat on stage with high-level Chinese government officials in a balloon-festooned ballroom in Changsha, the capital of Hunan province.

Introduced as a political leader in America’s largest state, the onetime head of the powerful Latino caucus rose up and extolled the new partnership. Communist Party officials handed hospital ownership certificates to Sunnylife executives, who presented a giant mock check for $12 million to their new partners.

At a hotel dinner with Zhou, Polanco feasted on iced lobster and papaya pudding. Afterward, he dashed out with others in his group for a traditional Chinese foot massage.

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Sunnylife wants to sign up 50,000 people for the joint venture, newly named Xiangtan World Friendship Hospital. Each enrollee would pay an annual fee of $375 -- almost a third of most people’s after-tax earnings in Xiangtan, a city of about 3 million.

Members would receive basic medical services for $5 to $10, but their co-payment for complex procedures could be as much as 50% of the costs.

Sunnylife hopes to make money by managing costs and selling its herbal supplements. But signing up 50,000 members could be a long, long march.

Sunnylife probably will lose many of its original patients from the factory because they had long paid only $50 a year for health insurance, said Qiu Yulin, a health specialist at Renmin University in Beijing. “Now it’s $375.”

Xu Bilan, 28, who runs a small shoe store on a street behind the World Friendship Hospital, laughed when she was told about the $375-a-year health plan. She says she sells about $65 worth of shoes a month, of which $50 goes toward rent.

Xu, who has a 1-year-old daughter, said she went to the Xiangtan hospital a few times when she was pregnant and paid several dollars for a checkup. There was no ultrasound machine in the room so doctors put their ears to her belly to listen.

“The facilities are really awful,” she said.

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A walk through the five-acre, wooded campus of Xiangtan World Friendship Hospital is like taking a trip back in time.

A man pushes a wheelbarrow filled with coal past gray, concrete buildings that are 70 years old. A slogan affixed to one structure exhorts: “Create a baby-loving hospital.”

But the most curious site on campus is the CT scan center, which is on an island in a man-made lake. A pagoda once stood there, but officials demolished it to install a $250,000 Siemens scanning machine, fearing radiation contamination.

Under Communist rule, Mao insisted that the best way to treat barefoot farmers and peasants in the countryside was to send barefoot doctors. Many communicable diseases were eradicated. Infant mortality plummeted. Life expectancy soared from 35 to 65 years.

Chen Gang, a pediatrician who joined Xiangtan Liyuan fresh from Hunan Medical College in 1977, recalled wistfully that the hospital was a magnet for doctors from top universities.

“We were quite a good hospital,” he said, lighting up a cigarette on the second floor of the outpatient clinic, where a collage of Mao’s life greets visitors.

But in the last two decades, hospitals such as Xiangtan Liyuan have suffered from a lack of funds from state-owned factories. The situation was worse in rural China, with the disappearance of rural collectives and barefoot doctors.

The central government has launched efforts to reestablish rural medical cooperatives and recently strengthened limits on hospital drug charges. Beijing also has pledged to boost spending on public health -- China has been one of the worst among large economies in that regard -- but some local districts are banking on deals like those with Sunnylife to revive hospitals.

For now, patients at the World Friendship Hospital are housed in a shabby, 37-year-old facility, where each room is shared by three or four patients. The rooms have bare walls, a ceiling fan and metal bed frames with 1-inch-thick mattresses.

Chen and other hospital managers lamented that the hospital’s run-down condition and low pay had driven many talented doctors away. The average annual pay of the hospital’s 200 nurses and doctors is about $2,500, less than what some taxi drivers in the city earn.

“The best graduates come here, and after a year or two they’re gone,” said Gu Jianlian, the hospital’s president.

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Doctors and nurses say they know little about Sunnylife and how the managed-care plan would work. Even as the medical staff braced for possible layoffs, they said they were hopeful their new American partners would modernize the hospital.

Sunnylife executives declined to say what changes they would make.

Bruce Barren, chairman of Sunnylife’s executive committee, argues that managed care has a better chance of succeeding in China than in the United States, where he said the system is beset with costly litigation, fraud and contract disputes among insurers, doctors and hospitals.

“We won’t be squeezing providers for more money because we own the hospitals,” he said.

Many Chinese harbor deep suspicions about the health system. In China, insurers generally pay out a few thousand dollars at most. Hospitals have dispensed dangerous fake drugs, overcharging has become prevalent and doctors are widely believed to push patients to take or do more than what’s needed because their bonuses are based on how much revenue they generate.

Health analysts in China say that Sunnylife appears to be the first HMO in the nation and that no regulation or guidelines for it exist.

“Certainly the international [experience] demonstrated opportunities for misuse and abuse of the HMO model,” said David Wood, a healthcare consultant and president of a children’s hospital in Beijing.

Wood estimates that 200 hospitals in China now operate as foreign joint ventures. Most are having a tough time because they charge too much and compete against large public hospitals. In Xiangtan, more than 10 hospitals -- only three with more than 300 beds -- serve the city’s core population of 400,000.

Wood doesn’t think an HMO model is feasible in China. A primary idea behind managed care is that patients first see doctors who direct their care and send them to specialists if necessary. But the Chinese medical system is geared around specialists, he said, and people in China routinely seek out their own.

“There’s no way to control utilization,” said Wood, who heads Beijing-based Chinacare Group and was once assistant director at the UC hospital in San Diego.

Besides, he said, Chinese consumers are notoriously hard-nosed, which could challenge the HMO model. “If consumers buy a policy that allows them 50 visits, they want all 50 of them.”

Lee reported from Xiangtan and Yi from Los Angeles.