Financial Management of Healthcare Facilities in China

Financial management is an area that is frequently overlooked by new operators when they open a hospital or clinic in China.  It is not a terribly glamorous or exciting aspect of healthcare management in any case and is often overshadowed by the more pressing issues of medical staff recruitment and marketing strategies, yet experienced administrators know and understand how critical good financial management is to the success of a project.

But why is this an issue in China?  How difficult can it be?  You hire an experienced financial manager and some accountants, set up your general ledger, develop your procedures and you’re on your way to good financial management of your facility.  Well, not so fast.  Let’s consider some of the difficulties that you will encounter:

The first difficulty is the same problem you encountered recruiting physicians, nurses, technicians and other staff; there aren’t skilled people on the market who understand your requirements.  Chinese accounting standards and international standards are VERY different.  Finding employees who understand these differences and appreciate your requirements will be difficult particularly when you consider that this is healthcare we’re talking about.  Financial management of healthcare facilities in China is extremely rudimentary and backward; even more so than the general business environment, so recruiting someone with experience in Chinese healthcare facilities is not terribly meaningful or helpful.  Another key point in recruitment is not to make the mistake of assuming that job titles have the same meaning in China as they do internationally.  It’s not uncommon to see resumes citing chief financial officer experience in healthcare environments.   But before you write that offer letter, look closely at their actual duties.  The CFO title is casually used when the real role of the individual is generally something very different from the role you probably associate with that title.  Generally, the most senior financial executive in a Chinese healthcare facility, regardless of what title they tout on their resume, is equivalent to a senior accountant or less and has very little status in the organization and almost no role in decision-making.  So accept that recruiting a senior level financial executive is going to be one of your most difficult recruitments.

At this point you may be thinking ‘what is all this talk about being rudimentary?   accounting is accounting,’ how rudimentary can it be?  Well, very rudimentary.  As an example, a typical international hospital or clinic will have dozens, often as many as a hundred or more, cost centers.  Each cost center will have its own budget, capture and manage costs and have a cost center manager.  Consider that Chinese hospitals generally have no cost centers or at the most a handful and even these do not discretely capture costs.  A few years ago, I invited Dick Clarke of the Healthcare Financial Management Association to China to give a series of lectures on good practices in healthcare financial management.  Dick and his colleague, Steve Berger, were amazed by the simple practices of even the largest, 1,000-beds or more, hospitals.  While there was great interest in the subject and the lectures were very well attended, there was strong resistance to the whole idea of implementing international practices or delegating financial management authority to cost center managers.  In part this is due to the preoccupation in Chinese healthcare with cash control and cash management.  While I have described financial management practices as ‘rudimentary’ cash handling procedures are very tight with strong controls.  This is reflected in the fact that in many institutions, the most senior financial executive is the chief cashier.  A great deal of emphasis is placed on procedures designed to prevent defalcation.  Unfortunately, these procedures often preclude giving middle managers any sort of spending authority or ability to authorize purchases of any amount, no matter how small.  As a result, even if you had leadership that was interested in implementing cost center management, there aren’t any managers that are trained in this area.  My experience in implementing these changes in Chinese hospitals is that it generally takes three budget cycles to reach the level of financial management that you are seeking.  While all of this sounds very gloomy, this is an area where with strong senior management, effective training and good recruitment practices you can bring about significant change in a relatively short period of time; perhaps two to three years.  I have found that Chinese department heads are eager to learn these ‘new’ techniques and will embrace the delegated authority they are given with great enthusiasm.  Key to the success of implementing these procedures though is the recruitment of a real CFO who is given the authority to design procedures and focus on financial reporting in a meaningful way.

Other examples of major differences in international practices and Chinese financial reporting practices include the fact that Chinese hospitals rarely record depreciation or amortized costs.  This will lead many hospital CEOs to claim that they are ‘profitable’ when in fact what they are saying is that they are cash flow positive.  As I mentioned earlier, Chinese healthcare is a cash-focused environment.  There are also significant reporting issues associated with the issuance of ‘fapiaos’, the official tax receipt in China.  In order to avoid paying income tax, employees are encouraged to submit fapiaos for restaurants, taxis, groceries, etc. and be reimbursed for these expenses from their salary.  This has the effect of reducing salary expense but cluttering your income statement with meaningless expense that masks your real operating activity.

Your interest here is obviously to have effective financial reporting to gauge your progress towards achieving your goals as well as to provide meaningful management tools for your administrative team.  But how do you do that when confronted with a bewildering maze of regulatory reporting demands, fapiao distortions and off-the-books cash payments that almost seem designed to prevent presenting a realistic picture of your operating activity?  The simple solution which is anathema to an internationally-trained financial executive is to maintain two sets of books.  One, the official set that meets all of the government regulatory requirements but is incapable of serving as a management tool, and a second unofficial record of your actual financial activity for management purposes.  It’s twice the work but this is China and you need to be pragmatic in your solutions to this environment.

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