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Cablegate: U.S. Venture Seeks for-Profit Rural Health Clinic Network In

DE RUEHCN #0231/01 2890644
R 160644Z OCT 09



E.O. 12958: N/A


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.

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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

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

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

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