VZCZCXRO1544
RR RUEHGH RUEHVC
DE RUEHCN #0231/01 2890644
ZNR UUUUU ZZH
R 160644Z OCT 09
FM AMCONSUL CHENGDU
TO RUEHC/SECSTATE WASHDC 3464
INFO RUEAUSA/DEPT OF HHS WASHINGTON DC
RUEHCN/AMCONSUL CHENGDU 4158
RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 03 CHENGDU 000231 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EINV PGOV SOCI CH
SUBJECT: U.S. VENTURE SEEKS FOR-PROFIT RURAL HEALTH CLINIC NETWORK IN 
SW CHINA 
 
REF: A) CHENGDU 155, B) CHENGDU 229 
 
CHENGDU 00000231  001.2 OF 003 
 
 
¶1. (U) This cable contains business confidential information, 
not for distribution on the Internet. 
 
¶2. (SBU) Summary: To address the lack of adequate rural 
healthcare in SW China, a U.S. firm seeks to establish a 
for-profit network of clinics using a telemedicine and "barefoot 
doctor" model borrowed from Alaska.  While publically financed 
in Alaska, the model could be profitable in China due to the 
enormous rural population and few business competitors, the 
firm's executives believe.  Major challenges include: a lack of 
doctors willing to staff such clinics, PRC capitalization 
regulations for joint ventures that favor large hospital 
enterprises over small clinics, and rules against franchising. 
Consul General offered to seek high-level provincial 
appointments on their behalf in Chengdu and Chongqing to seek 
regulatory exemptions for the firm in the context of an 
urban-rural integration pilot program.  End Summary. 
 
¶3. (U) Bart Daniel, Chief Executive Officer and CFO of Eastern 
Spring Healthcare Services, Inc., and Dr. Jonathan Osborne, 
Chairman, briefed Consul General, Senior Commercial Officer, and 
PolEconOff October 14 on their young company's plan to develop a 
for-profit network of rural healthcare clinics in Sichuan 
Province.  Daniel spent 25 years working in hospital 
administration, including work as an administrator for the 
Alaska Area Native Health Care Service, before coming to China 
in 2003 as Chief Financial Officer for United Family Hospitals 
(UFH). 
 
Daniel: China Not Yet Ready for a Charity Model 
--------------------------------------------- -- 
 
¶4. (U) Eastern Spring's current venture owes much to Daniel's 
failed first venture to establish a charity hospital, he said. 
Daniel and his wife, president of UFH's foundation, helped to 
establish China's first charity children's hospital in Zhengzhou 
in 2007.  The couple did not foresee the immense capital costs 
required, however, and had to use virtually all of their savings 
before securing support from corporate social responsibility 
projects (CSR) and individual donors back home.  The project 
ultimately had to close down, he said, as the Chinese government 
asked multinational companies to redirect their CSR work to 
areas affected by the Sichuan earthquake just as the private 
donor base in the United States was drying up due to the global 
financial crisis. 
 
¶5. (U) In Daniel's view, China is not yet ready for a charity 
model for non-profit organizations.  China's richest citizens 
are too close to coming out of abject poverty, he argued, "it's 
too soon."  The Sichuan earthquake may have been a watershed 
event, as it was the first time China saw philanthropic activity 
by its citizens on a large scale.  Yan Cheung, founder and 
chairwoman of top Chinese waste-paper recycler Nine Dragons 
Paper and the richest woman in China at roughly USD 5 billion, 
told Daniel she wanted to be the next Bill Gates, but was "not 
rich enough yet" to donate more to his charity hospital. 
 
To Address Rural Health, Must Reach the Village Level 
--------------------------------------------- -------- 
 
¶6. (SBU) Daniel's new venture, Eastern Spring, seeks to address 
the lack of decent healthcare in rural areas of China, but the 
absence of a charity model means a different financing mechanism 
is necessary.  To address rural health, you have to reach the 
village level, he said.  Eastern Spring's goal is to establish a 
for-profit network of rural healthcare clinics in southwest 
China, with a possible initial public offering (IPO) down the 
road to attract additional investment.  The system they envisage 
would rely on telemedicine to connect rural clinics to urban 
hospitals, such as the well respected Huaxi Hospital in Chengdu. 
 (In addition, Eastern Spring hopes to open a healthcare 
consulting service and a Basic Life Support training center for 
local first responders, multinational corporations, schools, and 
extreme sports organizations.) 
 
Using Alaska's Model: Telemedicine and Barefoot Doctors 
--------------------------------------------- ---------- 
 
¶7. (U) The real problem Eastern Spring faces in China, he 
continued, is how to capture consistency and quality in its 
business model.  A significant barrier to establishing a 
telemedicine network is the current lack of practitioners in 
rural areas who could staff these clinics.  Doctors are 
unwilling to move to rural areas of China because there is a 
dearth of decent schools for their children to attend.  The 
plan, therefore, would require extensive training, Daniel 
conceded. 
 
 
CHENGDU 00000231  002.2 OF 003 
 
 
¶8. (U) Drawing from his own experience, Daniel offered the 
example of Alaska for how such rural healthcare challenges could 
be met.  Alaska probably has the premiere rural healthcare 
system in the United States, he said, providing services to 
350-400,000 people thanks in large part to former Senator Ted 
Stevens' ability to secure Federal funds for financing the 
system.  Alaska faced the same issue of lack of schools in rural 
areas deterring doctors, so they moved to a telemedicine model 
that now includes tele-radiology, e-prescriptions, and 
electronic medical records. 
 
¶9. (U) Even earlier, Alaska started developing its own "barefoot 
doctor" program in the 1950s, called the Community Health Aide 
(CHA) Program, officially recognized and federally funded in 
1968 and currently certified by Medicare and other major 
certifiers.  According to Daniel, high school graduates are put 
through a three-month intensive training followed by two years 
of ongoing on-the-job training.  The practitioners, called 
Community Health Aide/Practitioners (CHA/Ps), are taught how to 
take a good medical history and then use the 2000-page 
standardized, algorithm-based Alaska Community Health 
Aide/Practitioner Manual to work through to a diagnosis and 
treatment under the constant supervision of a licensed doctor at 
the other end of a telemedicine system. 
 
Alaska + China = Profitability, Maybe 
------------------------------------- 
 
¶10. (SBU) What makes this publically-financed system work as the 
basis of a profitable plan for China is that rural villages in 
China have 40-50,000 people instead of just 200, Daniel said, 
providing for economies of scale.  Eastern Spring's model 
requires a village with a minimum population of 40,000 and a 
minimum per capita GDP of RMB 10,000 (USD 1464) in order to be 
profitable.  With an investment of USD 75,000 per clinic Eastern 
Spring can be operational, and after three years can net USD 
25,000 per clinic.  "In China, you can make your money back in 
two-and-a-half years if you're doing it right," he added. 
 
Current Regulations Mean No Clinics Yet 
--------------------------------------- 
 
¶11. (U) The biggest legal impediments, Daniel said, are 
joint-venture regulations for medical institutions that were 
designed with UFH and other large hospitals in mind, and which: 
 
-- require a 70-30 foreign/Chinese split and RMB 20 million (USD 
3 million) registered investment per facility; and, 
 
-- prohibit franchising (Supplementary Provisions to the Interim 
Measures for the Administration of Chinese-foreign Equity Joint 
and Cooperative Joint Medical Institutions, adopted by the 
Ministries of Health and Commerce). 
 
¶12. (SBU) One option would be to use what Daniel termed a 
"captive domestic ownership" model, in which the venture has a 
domestic Chinese owner and everything is completely mortgaged. 
Though it is a "proven model" used by UFH, he continued, venture 
capitalists find it too risky.  Eastern Spring hopes instead to 
find relief under the National Development and Reform 
Commission's new strategic initiatives for healthcare, which 
included an announcement in April 2009 allowing for "pilot 
programs," he said.  Eastern Spring plans to request an 
exemption to the current regulations, arguing they could bring 
in USD 3 million over three years and develop clinics 
accordingly.  At this stage, Eastern Spring has achieved 
Wholly-Owned Foreign Enterprise (WOFE) status and is doing some 
consulting in Chengdu, but is primarily engaged in raising funds 
(through friends, family, and angel investors) while taking time 
to build relationships with key officials. 
 
Eastern Spring See No Chinese Competition 
----------------------------------------- 
 
¶13. (SBU) Asked by CG what interest the central or local 
government would have in making special provisions for the 
venture versus protecting local competition, Daniel said PRC 
officials believe Eastern Spring will see limited profits and 
that there is no competition.  (Note: Ref A discussed Cisco 
Systems' CSR-funded rural telemedicine project in quake-affected 
areas.  End Note.)  China's only interest is in hospitals, not 
actual functioning clinics, Osborne argued, as the PRC system 
lacks preventative care.  "China is great at hardware," he 
added, opining that recent upgrades to 29,000 clinics across 
China improved facilities without improving care. 
 
¶14. (SBU) Consul General suggested Eastern Spring explore 
finding room to maneuver within the Chongqing and Chengdu 
urban-rural reform pilot programs (ref B), as the venture's 
 
CHENGDU 00000231  003.2 OF 003 
 
 
proposal seems consistent with the thrust of the pilots.  Daniel 
accepted CG's offer to seek appointments on their behalf with 
the Chongqing and Chengdu governments to advocate for market 
access. 
BROWN