On July 17, 2018, the National Health Commission, in conjunction with the National Administration of Traditional Chinese Medicine, formulated the “Measures on the Management of Internet Diagnosis and Treatment (Trial)”, “Measures on the Management of Internet Hospitals (Trial)” (“Internet Hospital Measures”), and “Regulations on the Management of Remote Medical Services (Trial)“, which opened the prelude to the compliance of “Internet + Healthcare”. Under the framework of the aforementioned regulations, “Internet + Healthcare” is regulated in three aspects: internet diagnosis and treatment, internet hospitals, and remote medical services.
This article will focus on the compliance requirements for foreign investors to invest and operate internet hospitals in China.
2. Establishment and Personnel of Internet Hospitals
According to the Internet Hospital Measure, there are two ways to establish an internet hospital in China: (i) as a second name of a physical medical institution, and (ii) as an independent internet hospital established based on a physical medical institution.
It is worth noting that in the case of the second mode, i.e., the “independent internet hospital established based on a physical medical institution” mode, there are theoretically two hospitals that have obtained the “Medical Institution Practice License”: one is the traditional physical medical institution that has the qualification to support it, and the other is the newly established internet hospital. This also leads to the legal consequence that in the first mode, the physical medical institution is the legal entity that takes legal responsibilities, while in the second mode, the internet hospital that has obtained the “Medical Institution Practice License” is the independent legal entity that takes legal responsibilities.
Corresponding to the two modes of establishment, there are also two types of applicants for internet hospitals: in the first mode, the applicant is a physical medical institution that has already obtained the “Medical Institution Practice License”; in the second mode, the applicant can be the internet hospital operator, not necessarily be a medical institution.
3. Regulatory Requirements for Licenses Involved in Foreign Investment and Operation of Internet Hospitals
As mentioned earlier, there are two ways to establish an internet hospital: (i) as a second name of a physical medical institution, and (ii) as an independent internet hospital established based on a physical medical institution. Regardless of the mode used to establish it, a physical medical institution must be set up first.
At the same time, the operation of an internet hospital requires the establishment of an internet information platform. Such internet information platform will be the basis for the Internet hospital, and should be connected to the Internet Medical Service Supervision Platform established by the Health Commission at provincial level for real-time monitoring and supervision.
As a result, there are three types of licenses required for an Internet hospital, respectively for the establishment of physical medical institutions, internet hospitals, and internet information platforms.
a. Licenses for the Establishment of Physical Medical Institutions
For foreign investors, when investing in and operating physical medical institutions, they will inevitably encounter the restrictions on foreign investment proportion. The relevant legal basis and restrictions are outlined below:
Currently, there are quite a few foreign-owned medical institutions operating well in China, and regulatory authorities generally allow the establishment of such institutions as long as they meet the above proportion requirements.
b. Licenses for the Establishment of Internet Hospitals
Compared with the establishment of physical medical institutions, the regulatory authorities currently seem to hold a relatively conservative attitude towards the establishment of foreign-invested internet hospitals based on physical medical institutions.
(1) The regulatory authorities in Yinchuan once stated that the establishment of Sino-foreign joint venture internet hospitals is a prohibited investment project, and there has been no precedent for Sino-foreign joint venture internet hospitals in the past.
(2) The Qingdao Municipal Health Commission has also stated that it will not accept or approve any applications from foreign-invested enterprises to establish internet hospitals within its jurisdiction.
(3) At the same time, although many Hong Kong Stock Exchange-listed companies with VIE structures have successfully established internet hospitals, the key is that the founding teams are all Chinese citizens rather than foreign citizens/entities.
c. Licenses for the Internet Information Platform
Regardless of how an internet hospital is established, if it involves foreign investment during the construction of the internet (hospital) information platform, it will likely encounter telecom-related regulatory restrictions on foreign investment.
Internet hospital services fall into the category of value-added telecom services, which use public network infrastructure to provide medical information services to society. According to the “Telecom Business Classification Catalog,” value-added telecom services can be divided into several subcategories, each of which requires the corresponding license. The key types of licenses that may be involved in internet hospital services are listed as follows:
Internet information services:
the value-added telecommunications license for Internet information services is commonly referred to as the Internet Content Provider License (“ICP License”). Internet information services is a very broad category that covers various online services such as instant messaging, information publishing platform services, information search queries, online communities, and online antivirus services, etc. Those who provide internet information services need to obtain an ICP license.
Online data and transaction processing business:
Online data and transaction processing business includes transaction processing, electronic data exchange, and network/electronic equipment data processing.
Domestic multi-party communication service:
Domestic multi-party communication service refers to real-time interactive or on-demand voice and image communication services between two or more points within China using a multi-party communication platform and public communication networks or the internet.
The internet (hospital) information platform may involve one or more types of value-added telecom service licenses mentioned above.
Except for a very few value-added telecom services that have been fully open to foreign investment, in most cases, the proportion of equity held by foreign investors in operating value-added telecom services cannot exceed 50%. In practice, even if the proportion of foreign shareholding is below 50%, it is still difficult for foreign investors to obtain relevant value-added telecom licenses.
d. Potential Options for Foreign Investors
There are several options for foreign investors to establish internet hospitals, each with its own advantages and disadvantages:
Generally, WFOEs cannot obtain most of the necessary licenses and permits, so they are not a feasible option for foreign investment in operating internet hospitals in China.
Sino-foreign joint venture:
In theory, it is feasible to establish a joint venture with a Chinese partner to invest in and operate internet hospitals, especially when the joint venture is established under the “Closer Economic Partnership Arrangement” between mainland of China and Hong Kong or Macao. However, in practice, it is still very difficult to obtain the necessary internet hospital licenses and related value-added telecom licenses under this model.
It seems more feasible for foreign investors to license their technology and trademarks to Chinese partners, as the Chinese partners, as domestic companies, will be more likely to obtain the necessary licenses and permits. However, under this model, foreign companies can only exert limited control over the operations of their Chinese partners.
In a typical VIE structure, an offshore holding company establishes a WFOE in China to control and obtain the financial benefits of a domestic company that holds licenses and assets that foreign entities are not legally permitted to own. This structure is widely used by Chinese companies listed or planning to list on foreign stock exchanges.
The VIE structure allows investors to control the daily operations of the services provided in China. However, it should be noted that in a typical VIE structure, foreign investors are mostly financial investors who do not participate in the daily operations of the company. The founders (usually Chinese citizens) control the daily management. Therefore, if the foreign investors themselves are foreign hospitals or online service providers, and the VIE structure is not established for the purpose of foreign IPOs, regulatory authorities may have reservations about it, and there may be great uncertainty about whether this type of VIE structure is allowed.
4. Compliance Requirements for Operating Internet Hospitals
Internet hospitals are essentially medical institutions, and as organizations that relate to public health, every aspect of their operation, from the diagnosis and treatment behavior, to the writing of medical records, prescription and medication management, advertising, medical data security, innovative payment, and more, are subject to strict regulatory supervision.
a. Diagnosis and Treatment Activity Management
Internet diagnosis and treatment are not allowed for initial consultations. Jiao Yahui, deputy director of the Medical Administration Bureau of the National Health Commission, said in a press conference on September 14, 2018 that：
“When conducting online follow-up visits and prescribing medications, physicians must have access to the corresponding medical records of patients, and it must be clear that the patient has already received a clear diagnosis of a certain disease or several diseases in a physical medical institution, so that follow-up services can be provided for the diseases that have been clearly diagnosed. If no medical records of the patient can be found, it can only be suggested that the patient seek medical treatment at a physical medical institution. After establishing electronic medical records, if it is a follow-up for a diagnosed disease, doctors can provide corresponding online services.”
The “Shanghai Internet Hospital Management Measures” further stipulate that internet hospitals should not only prohibit “initial consultations”, but also prohibit the provision of diagnosis and treatment services for (i) Class A infectious diseases as identified by laws and regulations, (ii) critically-illed patients, and (iii) patients who require physical examination or medical equipment-assisted diagnosis at physical medical institutions.
b. Medical Records, Prescription, and Drug Management
Regarding the requirements for writing medical records in the process of carrying out internet diagnosis and treatment activities, the regulations emphasize the consistency between online and offline medical records, and require hospitals to follow “Regulations on the Management of Medical Records in Medical Institutions (2013 Edition)”, “Management Specification for Electronic Medical Records (Trial)” and “Basic Specification for Medical Record Writing“.
Compliance risks relating to internet hospitals’ commercial bribery and ethical conduct are quite similar to those of traditional physical hospitals. Therefore, the same compliance requirements also apply. For example, doctors cannot be required to undertake sales tasks for drugs, nor can their salary be linked to drug sales. In addition, it should be noted that internet hospitals are not allowed to prescribe anesthetic drugs, psychotropic drugs, and other high-risk drugs with special management regulations on the internet. When prescribing children’s medication online for children under 6 years old, it should be ensured that the child has a guardian and a relevant professional physician be present.
c. Compliance Management of Internet Medical Advertisements
In recent years, illegal advertising in the medical field, especially in the consumer medical sector (such as medical beauty and physical examinations), has been a key issue of concern in law enforcement, with internet medical advertising being particularly prominent. Therefore, compliance management of medical advertising in the operation of internet hospitals is particularly important.
For example, when hospitals conduct online live streaming activities to sell medical services, they may invite doctors to explain diagnosis and treatment methods, and engage KOLs and “Recommendation Officials” to share their “personal experience”, aiming at promoting the medical services. This is a seemingly common marketing tactic in the ordinary consumer goods industry. However, once it is applied to the medical industry, the medical institutions may cross multiple regulatory red lines, leading to administrative penalties.
d. Protection of Health and Medical Data
Most of the health and medical data is sensitive personal information. Regulations have repeatedly emphasized the importance of the protection of health and medical data and impose heavy penalty liabilities. Hence, it is critical to ensure the compliance of the collection and processing of health and medical data, particularly if the data will be transferred out of China. For detailed information, please refer to our previous articles: A Brief Analysis of Network Security Issues in the Medical Field/医疗领域网络安全相关问题简析and China’s Regulation on Outbound Data Transfer/中国数据出境合规监管.
e. Innovative Payment for Internet + Healthcare Projects
With the development of “Internet + Healthcare”, innovative payment projects are emerging quickly. Previously, a batch of “specific drug group medical insurance” projects had appeared on the market. In such projects, insurance companies bear the cost of late-stage drug treatment for patients with diagnosed diseases and cooperate with internet hospitals for the settlement of medical expenses payment. However, since the insurance products underlying these innovative payment projects failed to meet the regulatory requirements, they were called off by the China Banking and Insurance Regulatory Commission in 2022.
Therefore, when business partners are engaged for innovative payment projects, their compliance with applicable laws should also be ensured.
The internet hospital sector in China is in a stage of vigorous development. Against the backdrop of the COVID-19 pandemic, “Internet + Healthcare” services have been promoted and applied to solve problems such as difficult access to medical care, difficult medical treatment, and uneven distribution of medical resources, etc. At the same time, the regulatory environment in China is constantly changing. Therefore, to ensure successful investment and compliance, foreign investors may want to consult professionals and make detailed plans before entering into the Chinese market.