Growing Orthopedic Hospitals in China

When a Texas-sized idea runs headlong into a China-sized opportunity, watch out! In the middle of March Mike Franz, former CEO of the Texas Back Institute (TBI), flew off on his 54th or 55th trip to China (he has lost count of the number) to celebrate the opening of a prototype that, very probably, will profoundly change how orthopedics is practiced in that country.

As part of a group that took some Chinese companies public between 2003 and 2005, Franz “got to know the landscape in China.” He realized that China’s population of 1.35 billion people was rapidly aging, that they held western medicine in extremely high regard, and that the affiliations that orthopedic practices had worked out with hospitals in the United States might also work in China. It was, he said, “like a light bulb going off.”

Franz’s big idea was to establish a network of free standing private orthopedic surgery hospitals in China that specialized in spine, sports medicine and total joints. The patients would be solicited from three groups: wealthy Chinese who would pay a premium to be treated by western surgeons, expatriates, and patrons of medical tourism. The premise undergirding the project was that wealthy patients would pay a premium to be treated in China by western doctors following a western protocol.

Though Franz has a reputation for moving fast to implement his business projects, he knew that, to develop his big idea, he had to slow himself down.

For this venture, ” he said, “we had to be very deliberate in the beginning to put a foundation, a solid footing in place that was firm.

He spent a year and a half in China just developing relationships at the senior orthopedic level with people working in spine, joints, and in orthopedics in general. He wanted to understand the landscape relative to the hospital situation in China and who the players were. He needed to know who was in control in China. At that time foreigners could own up to 70% of private hospitals so Franz knew that he was going in the direction that the government was going to approve. “There was a light breeze at our back, ” he explained, relative to the government of China’s support.

Front Door of the First Affiliated Hospital of Soochow University, Suzhou, China

Franz quickly learned that in China, unlike the United States, people select the hospitals where they want their surgery performed. They do not select the doctors. (The exceptions are the few elite surgeons to whom people will travel to patronize.) Therefore the reputation of the hospital is all important.

The hospital is the key, ” he noted. He also learned that the public hospitals are the dominant institutions and that private hospitals are “just starting to roll out.

By 2009 Franz had developed close relationships in China, felt that he had a good understanding of what was happening in the country and had developed a model that he believed made sense. It was time to proceed with Phase 1 of the execution strategy, what he called the “proof of concept” stage, which was to put his orthopedic model in an existing Chinese hospital. He partnered with a public hospital, the Affiliated Hospital of Suzhou University, located about an hour and 20 minute drive from Shanghai that had the required volume, patient flow, reputation and history. There he built a VIP orthopedics ward and clinic where western surgeons could come every six weeks to do spinal surgery. Franz said they focused first on spinal surgery because they wanted to perfect their model in spine. It was also probably significant that the chief of orthopedics in the Suzhou University Hospital was a spine surgeon.

The facility opened in March 2011 and has been a big success. Surgeons from the United States came to Suzhou for a two-week period of work. During the first two and a half days they met patients in the clinics. The remainder of their time was spent doing surgeries.

With the proof of concept demonstrated to be successful in a Chinese public hospital, Franz moved to test it in a private hospital in what he calls Phase 2. “We instituted a joint venture with a Chinese hospital group called Tongren and did a deal with the Tongren Hospital in Kunming which is a 500 bed, full-service private hospital, ” he said. “We did that deal in December 2011, had a test run with one of the Texas Back surgeons there in the beginning of March 2012 and had the grand opening on March 21.” This hospital will specialize in sports medicine and Franz flew off to China for the opening.

Still to come is Phase 3 for which Franz is now in the process of lining up both strategic and hospital partners to build his first free-standing orthopedic surgery center. He expects to have it up and running by the middle of 2013.

The political climate in China is, if anything, accelerating Franz’s plans. While he sensed a breeze at his back in 2009, he said that breeze has turned into a powerful wind. “The government has come out with its five-year plan and in the health care reform area they have strongly stated that they encourage foreigners to invest in private hospitals in China. That is a very strong wind that is blowing and we are going in the same direction that the Chinese government wants.”

The initial phase of Franz’s China project, organized as The International Spine and Orthopedic Institute (ISIO), was funded by individuals. Approximately 65 U.S. orthopedic surgeons are investors as are the two institutions, Texas Back Institute for spine and Kerlan Jobe, of California, for sports medicine and total joints.

The individual investors, besides putting in their money, must agree to participate—play their professional roles, from doing surgery in China to managing the training of Chinese physicians in China or in the U.S. Texas Back Institute and Kerlan Jobe serve as training hubs for doctors from China.

Franz is now in conversations with institutional investors and strategic partners, principally in China, for the financing of Phase 3. “We have had extensive discussions and multiple conversations with firms and we are lining up the capitol funding. The feedback we are getting is that we are coming in at the right time with a model that people really like, ” he said. Within the next six months Franz expects to have secured a relationship with a strategic partner “with the resources and desire to scale this across China in a fairly rapid manner.” Franz plans to perfect his model in the first stand-alone surgery center. “We will do that in conjunction with the strategic investment partner—one who is already in the health care field and wants to be in the service end of it.”

So how does it work? As Franz explains, “One very important aspect that we are promoting to the market place is that we have a unique combination of western surgeons and Chinese surgeon partners. The patients understand that when they see a western doctor there is a Chinese partner next to him. When the western doc goes back to the U.S. the Chinese doctor is there and is part of a two-man team. Patients will meet their western and Chinese surgeons at the same time. As the volume grows the Chinese surgeon partners will be doing a lot of the surgery as well. We are deploying a tele-medicine capability that will keep the western surgeon involved in what we call a case-director strategy.”

“This is not about taking western practices and forcing them on Chinese patients, ” Franz insists. “It is about finding the optimum mix or blend of the Chinese culture and how they do things and western practices. We are very sensitive to that. The formula for failure would be to take a model from the outside and force it on China.”

Franz is aware that, as time goes on, Chinese surgeons will get better and better. “Our game plan is to recognize the present window of opportunity, ” he said, “and establish what we need to within that window.”

Franz says that he is sensitive to the fact that China is a tremendous market place—that it is a different culture from the U.S. and that people think differently. He says that he “does not go to bed at night worrying. We have been very methodical in putting the foundation in place. The pieces are there. The task now is one of putting them together and executing the strategy that has been laid out.”