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The Entrepreneurial Journey of China’s First Private Mental Health Hospital


23 May 2023Cold Call Podcast



THE ENTREPRENEURIAL JOURNEY OF CHINA’S FIRST PRIVATE MENTAL HEALTH HOSPITAL



The city of Wenzhou in southeastern China is home to the country’s largest
privately owned mental health hospital group, the Wenzhou Kangning Hospital Co,
Ltd. It’s an example of the extraordinary entrepreneurship happening in China’s
healthcare space. But after its successful initial public offering (IPO), how
will the hospital grow in the future? Harvard Professor of China Studies William
C. Kirby highlights the challenges of China’s mental health sector and the means
company founder Guan Weili employed to address them in his case, Wenzhou
Kangning Hospital: Changing Mental Healthcare in China.



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Brian Kenny:

May is Mental Health Awareness Month in the United States, a designation
established in 1949 to increase the awareness of the importance of mental health
and celebrate treatment and recovery. And yet, 70 years later, mental health
continues to be a crisis of epic proportions around the world. There are lots of
reasons for this, not the least of which is that despite all the evidence, many
governments refuse to acknowledge or address the problem. The World Health
Organization notes that governments spend on average 0.5 percent of their
overall healthcare budget on mental health, a minuscule amount given that nearly
one billion people around the world report having mental health disorders each
year.

But as with many other vexing societal challenges, we know that relying on
government to solve the problem isn't sufficient. Business can and should play
an important role, and today's case offers an example of an entrepreneur in
China who is doing just that. Today on Cold Call, we welcome Professor William
Kirby to discuss the case Wenzhou Kangning Hospital, Changing Mental Healthcare
in China. I'm your host Brian Kenny, and you're listening to Cold Call on the
HBR podcast network.

Professor Bill Kirby examines contemporary China business, economic, and
political developments in an international context. His most recent book is
Empires of Ideas: Creating the Modern University from Germany to America to
China. Bill, welcome.

Bill Kirby:

Thank you very much, Brian. Great to be here.

Brian Kenny:

We've had you here a couple of times before. We haven't talked about that book,
so maybe we should have you back again.

Bill Kirby:

Absolutely.

Brian Kenny:

And do a case about that book.

Bill Kirby:

With pleasure.

Brian Kenny:

But today's is about quite a different topic, and I actually, I thought it was a
pretty optimistic case, given the intro that I just read, because this problem
continues to be so prevalent everywhere in the world. It's something that we
haven't been able to get our arms around in the United States or many other
places, and here's somebody who's really having an impact in a part of the
world. I was surprised, I guess.

Bill Kirby:

Yeah, it's having an impact and obviously not at a mass scale, but as a very
interesting example of what can happen with imagination and investment.

Brian Kenny:

And even in a country like China, where we know it can be difficult to get some
of these entrepreneurial things off the ground. So I think our listeners will
really enjoy hearing you talk about it. So thanks for being here. Thanks for
writing the case. Let me ask you to start by telling us what the central issue
is in the case and what your cold call is to start the discussion in class.

Bill Kirby:

Yeah. The central issue is about the transformation of healthcare, and
particularly mental healthcare in China, with the example of this Wenzhou
Kangning Hospital, which is a remarkable and innovative approach to mental
healthcare. And my cold call to the students would be to ask, what experiences
have they had, if they have been in China, with a hospital in China? What was
that like? Because I've had several myself, which served to me as a personal
wake-up call of some of the challenges of healthcare systems in China.

Brian Kenny:

Yeah. You spent many, many years in China. You've written a lot of cases about
China. How did you hear about this one in particular, and why was it important
for you to write a case about this entrepreneur?

Bill Kirby:

Actually, it came through by reading about it, and I had a research associate at
that point, Yuanzhuo Wang, an incredibly bright young gentleman originally from
China, who had a strong interest and wanted to go into healthcare systems for
his career after his time here at Harvard Business School. And we looked
together for what would be the best case that we could find in an otherwise
pretty difficult landscape of healthcare in China. And we came across this one
in Wenzhou.

Wenzhou, for your listeners, is on the southeastern coast of China, historically
in Zhejiang province, one of the most entrepreneurial provinces historically in
China and still today. And Wenzhou is known for its entrepreneurs. It's known
for its underground banking. It's also known for its gangsters, but in this case
it became known also for the kind of mixture of both entrepreneurialism and care
for seriously ill people.

Brian Kenny:

You've talked already a couple of times about the challenges of healthcare in
China. How has mental healthcare in particular evolved over time?

Bill Kirby:

Well, in China, like everywhere else, mental healthcare has been historically
stigmatized and underfunded. Prior to the 1980s, people with mental illnesses
were often sent simply to rural areas or isolated on the outskirts of society or
on the outskirts of family. To the degree that there were mental health
hospitals, which is a very recent development in the 20th century, actually the
first one was in 1898, these institutions were one in which people were sent to
and largely simply locked up and forgotten. Wealthier families could afford to
do more in this regard, traditionally using traditional Chinese medicine in the
privacy of their own homes, if they had large enough compounds and extra staff
to want to take care of individuals.

Brian Kenny:

The case mentions the mental health law of 2013. What was the intent of that
law?

Bill Kirby:

So the mental health law of 2013 was for the first time intended to protect the
rights of patients with mental illnesses and to provide national guidelines for
diagnosis, treatment, and management of mental health illnesses in China. And it
stipulated something brand new. And this is something that had happened
elsewhere in the world, that inpatient enrollment now had to be voluntary,
unless the person demonstrated risk of self harm or injury to others. And so it
raised the profile for the first time of mental healthcare as part of the
overall healthcare system in China.

Brian Kenny:

So that's a big step forward.

Bill Kirby:

It's a huge step forward.

Brian Kenny:

And probably helpful to our protagonist in this case, who I'm going probably
butcher the name. You can correct me. Guan Weili?

Bill Kirby:

Yeah, you got it, Guan Weili.

Brian Kenny:

Tell us a little bit about Guan Wei Li and his background.

Bill Kirby:

Well, he's from this highly entrepreneurial place of Wenzhou in southern
Zhejiang province, born at the height of the cultural revolution. And he came of
age during the period of opening up in reform in which Wenzhou was one of the
most rapidly developing centers of commerce in China, both domestically and
internationally. And when he was 15, he enrolled in Wenzhou Health School to
earn a specialized high school degree in medical assistance. So he had an
interest in healthcare from his teenage years on, and he served as an assistant
for a surgeon in a large hospital. All the larger hospitals are public
hospitals, state run hospitals, not private hospitals in China.

Brian Kenny:

Yeah. What drew him to mental health?

Bill Kirby:

What drew him to mental health initially was simply working in general
healthcare in a large comprehensive hospital in Wenzhou, where the service for
patients was horrific and individuals with mental healthcare were not treated
separately or differently from others. And what drove him to this was he wanted
to be transferred out of that hospital to the Wenzhou, again publicly run,
mental health hospital, known as the Wenzhou Number Seven Hospital, and began to
work there in 1988. Because he met his future wife there, and he courted her.
She had started working in that hospital a year before he did. And so once he
was drawn into it, he decided to stay.

Brian Kenny:

But this was not ... So I found it interesting that in addition to this, he's
got a side gig going here where he's building lighters.

Bill Kirby:

Well, he's got many side gigs. When he started as a doctor's assistant in
Wenzhou in the late 1980s, he was paid about $12 a month, US dollars. So he did
a taxi gig. He drove a taxi every night for three to four hours, but still had
very little income. When he and his wife decided to marry, they could not marry
yet because in those days the government decreed not only how many children
married couples could have, but when people could get married, in order to
restrict population growth. And this, to supplement the income, they decided to
get into industry. Many booming light industries in Wenzhou. It's not a heavy
industrial town, but a consumer facing town. And if you remember, I think one of
our earlier conversations, maybe when we talked about Duke University and the
ability of the British American Tobacco Company under the Duke family and others
to addict Chinese to nicotine. So 70 percent of the men in China smoked at that
point in time, in the 1980s and 1990s. And what do you need to help them?
Cigarette lighters. And he started with some small lighter parts, a group of 10
workers, and they built a cigarette lighter factory of more than 200 workers,
and he and his wife in their spare time manage this factory.

Brian Kenny:

Difficult to imagine, and a big enterprise. And I know at some point they have
to make a choice about whether or not to hold onto that. We'll come back to
that. But like any good entrepreneur, he sees opportunity. And so he's got the
observations that he's had from being in this mental health hospital with his
soon-to-be wife. What's the opportunity that he sees there?

Bill Kirby:

Well, at some point I think they do well enough financially, first of all, in
order to have significant savings. They decide that at the end of the day,
anybody could run a cigarette lighter factory. I'm not sure that's true. I'm not
sure I could do it. I'm not sure you could do it. But that's what they believed.
But very few people could run a mental health hospital. And so he resigned from
the Wenzhou Number Seven Hospital in 1993 and kept his side gig on the side and
explored ways to build his own hospital with the revenues that he could gain
eventually from the sale of the cigarette lighter business.

Brian Kenny:

That sounds like a huge undertaking, just building a hospital. How are hospitals
classified in China?

Bill Kirby:

Well, they're classified with a very simple classification, three, two, and one.
Three are the best. Two, not so good. And one very, very rudimentary. The class
three hospitals are the larger public hospitals, and public hospitals in China,
when we think of the difference between public and private hospitals in China,
we will often assume, it's perfectly reasonable to assume that a private
hospital is for profit and a public hospital is not. But many public hospitals
are run like for-profit enterprises. They often attract because they can afford
to give higher salaries, the very best doctors, and they are run as businesses
as well as public facilities. So if you're ill, Brian, and you go to a doctor
and the doctor determines that you need to have an operation of one kind or
another, before you go under for that operation, you will want to give that
doctor, particularly in a public hospital, a red envelope to remind him, full of
money, to remind him how much you value his services, and you better get the
amount right.

Brian Kenny:

Sounds like there's a lot at stake there.

Bill Kirby:

There's a lot at stake there. And a number of hospitals, they even sell the red
envelopes in the gift shops.

Brian Kenny:

No kidding. Oh my gosh, that's amazing. So Guan sets out to build a hospital.
How does one even begin doing that in China?

Bill Kirby:

Not easy. So as listeners may know, the government owns all the land in China,
and it's not the national government, it's the local government. You have to get
government position, you have to get the land from the government, you have to
get a permit from the local health bureau. And he had already had, because of
his longstanding work in healthcare in Wenzhou, an excellent relationship with
the health bureau, and he convinced its leaders that he and his wife, both of
them being mental health professionals, could help the bureau and the city run a
mental health hospital that they could be proud of, that could be, even though
privately funded, a class three hospital. And this is something that the city
did not have in its plans and didn't believe that it had the funds to afford on
its own.

Brian Kenny:

Okay. Okay, so there's a potential win-win situation there, as the local
leadership sees it. What were some of the design considerations? He had been in
other mental health hospitals. He knew he wanted to do things differently. What
were some of the things that he wanted to do to differentiate this hospital?

Bill Kirby:

Well, before we get to that, let me just say one thing and then I'll answer
that, is something about Guan and his wife that's so remarkable is their
persistence. In order to get the necessary land, so he had the support of the
health bureau, but not of the city planning bureau. And as he told me, "I showed
up early in the morning almost every day for a year at the planning bureau's
office with a letter of support from the health bureau to try to obtain the
land. I was there so much, people thought I actually worked there." And
eventually he received four acres allocation of land for which he then had to
purchase the usage rights. It was about half of what he asked for, but it was
enough to start this hospital. And when he built it, when he built this
hospital, he decided to design it in a totally different way than other mental
health facilities in which people had been locked up away from the outdoors,
away from light, and so on. I visited it as we were researching this case. It's
a remarkably open, clean, and friendly facility, no elements of the prison-like
atmosphere of traditional mental health hospitals in China and indeed in many
parts of the world. So they turned the best rooms in the hospital, south facing
rooms with more sun exposure, for patient rooms. The offices, which otherwise
would've had the best views and so on, were kept downstairs in less happy
circumstances. Every patient room had access to 24-hour hot water supply, very
unusual in China at that time, appliances such as refrigerators, microwaves,
hair dryers, to make people's lives more convenient, to treat them like real
people, in other words. These were hardly ever found in any hospital in China at
this time. And wealthier patients could pay for better quality rooms, but the
poorer patients would not find worse quality than what I have just described.
And the wards are open, and only several of them would be closed, depending on
the severity of the illness of the patients there. So when I walked through,
there was a wide open space. There were people also working collectively on
projects, on puzzles, on art and other things. It was really far different than
what I had expected before I went.

Brian Kenny:

And certainly counter to what we typically imagine when we think about a mental
healthcare facility. Even in the United States, I think that sounds pretty
remarkable. How do patients actually pay for services? You mentioned that some
are wealthier than others. I know China has a rising middle class, but is there
a healthcare system that provides for this or?

Bill Kirby:

There is some health insurance and now it is better than it was then. China has
extended as of 2013, a form of universal healthcare, but it's very, very
rudimentary. And so in this case, you have families who will pay for this. You
have individuals, but also the government would pay for some portion of the
patients who otherwise did not have the means to be there. But this is a moment
also of very considerable wealth creation. And in time, during the time,
particularly in the 20 teens as this hospital was developing, not only do
families get wealthier in Wenzhou, but also the city gets wealthier indeed. And
it has more revenues on which to expend for things such as healthcare.

Brian Kenny:

Does it launch as a class three hospital? I mean, who makes that designation and
how does it evolve over time?

Bill Kirby:

The designation is made by the government, and in this case by the local
government. And it gradually makes its way up the, as it were, ranking table,
until by 2013 it's a class three, grade A hospital.

Brian Kenny:

Who's their competition as they're coming up? Are there other mental health
hospitals that are coming online that they're trying to compete against?

Bill Kirby:

Well, this is a time in which there is a great number of hospitals that are
coming online in China, and mostly public. The healthcare system is expanding
dramatically in the urban areas such as Wenzhou, much less dramatically in rural
areas. But they establish partnerships with mental health programs and other
ones that have emerged as well, Wenzhou Medical University, as well, and its
hospital. And Kangning would eventually become the mental health teaching
hospital for Wenzhou Medical University, giving it a very, very reliable
pipeline for the best young talent graduating from that. So how do you get the
best candidates, again, by paying more, but also by offering competitive
compensation with social benefits equal to those public hospital employees. And
even though in this case those are subsidized by the state and the public
hospital, these not, and the very highest level of talent would receive
compensation that was five times that of their peers in Wenzhou and twice that
of their peers in Shanghai, where the cost of giving wow is much higher. And in
2014, they implemented an employee stock incentive program, whereby Guan and
Wang transferred a certain percentage of the company's shares to 112 key
employees, including senior executives, managers, and over 90 doctors and
nurses. So it's a profit sharing operation, as well.

Brian Kenny:

That sounds hugely progressive. Was that unusual in China at that time?

Bill Kirby:

It's extremely unusual, particularly in the healthcare system.

Brian Kenny:

Yeah. And throughout all of this, he's thinking about how he can grow this
enterprise. So there are obviously some big considerations about where to expand
and how to expand. What are some of the things that he's thinking about as he
thinks about growing the operation?

Bill Kirby:

So as a businessman, he's thinking about how to, I don't think they ever use the
word franchise, but how to expand the footprint, how to make a bigger impact,
and of course as a businessman, a greater profit. And so after they exceeded
their own initial design capacity of a thousand beds, they turned to the
surrounding areas of Wenzhou, which are of course, like every Chinese city,
growing very dramatically in the first two decades of the 21st century, and
using their existing patient base and the local reputation and the local
resources, talent that they could draw on. And they expanded to a nearby
hospital. But then they opened between 2011 and 2013, they opened four wholly
owned hospitals in counties further out around Wenzhou, and between 2011 and
2015, then to nine different locations altogether outside of Wenzhou. And their
strategy was to set a strong foundation in Zhejiang, their home province, but to
plan for a national reach.

Brian Kenny:

So this requires, again, a lot of people to scale operations like that. Are they
buying enterprises that are already staffed or are they adding? Probably both,
right?

Bill Kirby:

Both.

Brian Kenny:

They're both probably adding-

Bill Kirby:

Both, but even as far away as Shenzhen. So Shenzhen, the extraordinary new, we
think of it as new, but basically 1990s, 2000s city, now this extraordinary
place just north of Hong Kong,

Brian Kenny:

It takes money to expand. They need investors. Is this considered a good
investment if you're in China? How are they making this an attractive
investment?

Bill Kirby:

It is considered a good investment because it remains remarkably profitable, and
it's attractive to funders because of the potential of China's very large
underserved mental healthcare market. They gained a reputation that was national
in scope, even as they remained regional largely in their footprint, both in
mental health and in the growing business of private healthcare, generally
speaking. It had a good track record and it knew how to get over the locally
high barriers to establish private health hospitals, having been successful
first in Wenzhou.

Brian Kenny:

Yeah. So this leads them, like most good cases, we've got a decision point
coming up here and the decision point is IPO. So what are some of the things
that he's got to think about? There's some trade-offs, as there is with any IPO,
but he's got some trade-offs to consider here.

Bill Kirby:

Well, they have investors already, but those investors are naturally looking for
other ways to finance the company and also other ways to benefit from the
success of the company. And they believe that an IPO would be a cost-effective
way for Kangning to get more financing, as it would be for its expansion. But
like everything else that they had done, they were first. They would be the
first privately owned mental health hospital, and now a mental hospital group,
to IPO in China. This would generate a huge amount of publicity for the company.
But of course there are risks in this, as well. They were very successful as
things were. But it shows you a sense of, my guess is that they would never have
IPOed the cigarette lighter.

Brian Kenny:

Right. Tough to differentiate that. I mean, fire is fire, so.

Bill Kirby:

So they IPOed eventually in 2015 on the Hong Kong Stock Exchange for about $88
million.

Brian Kenny:

Is there a concern when you IPO that now you've got to do things at scale,
you've got to meet quarterly targets. Is there a trade-off there in terms of the
kind of service and care you can give in a hospital setting?

Bill Kirby:

There may well come that time. So far, not yet in this case. And it has allowed
them to continue to expand and to continue to prosper. And they are happily in
an industry which enjoys extraordinary public and political support: healthcare.
It was at the heart of the agenda of the former President Hu Jintao, and has
been under President Xi Jinping also one of the central national priorities, to
improve healthcare across the country as part of what President Xi calls common
prosperity.

Brian Kenny:

So it sounds like China is taking it seriously and they're no longer
stigmatizing it in the way that may have happened in the past.

Bill Kirby:

But we cannot overestimate the fact that this is a glittering and extraordinary
example, one example, there are now many others, but one example, but in a
landscape in which if you live in rural China or if you live outside, even in
the suburbs of the larger cities, by and large your healthcare options are
severely, severely limited. So there's one district in Shanghai, that we had at
our Harvard Center of Shanghai, a Center that our School set up in 2010, and
addressed by the mayor of one of the larger districts in the main Hung district
in Shanghai, where they had built over the previous 10 years, 87 new hospitals.

Brian Kenny:

Wow.

Bill Kirby:

And yet, if you were to go a hundred miles away, you would find healthcare
systems that are much closer to what they were a century ago than to what they
are today. And people in urban areas, such as Wenzhou, will likely have more
capacity and more resources to pay for good care, whether it's for mental health
or for others. Whereas you still have in rural China three to 400 million people
who are too poor to consume and who actually save enormously from a very limited
income for the catastrophic health event that will someday befall them.

Brian Kenny:

Not unlike in the United States and some other parts of the world, too, though.
It feels like there's some similarities there.

Bill Kirby:

The inequality of healthcare, education and so on, this is something we sadly
share with China.

Brian Kenny:

Yeah, Bill, it's a fabulous case. I've really enjoyed the conversation. Let me
just ask you one final question, which is if there's one thing you want people
to remember about the case, what would it be?

Bill Kirby:

I would urge people to remember that things can change in one of the most
difficult areas of healthcare, and in one of the least well served parts of the
world in mental healthcare. Kangning Hospital represented a new approach to
mental healthcare in China, emphasizing patient-centered care and a wide range
of therapy options. Its success demonstrated really the potential of private
healthcare facilities to play a significant role in improving healthcare for the
most, still today, the most populous country in the world. And the other thing
to remember is that Wenzhou is a place where entrepreneurs grow, and have grown
for centuries. Imagine an entrepreneur transitioning from cigarette lighters to
mental healthcare, a man with a mission, but also with an extraordinary business
sense, who has made a difference in the world.

Brian Kenny:

Yeah, I guess we can all be glad that he made the change when he did.

Bill Kirby:

Absolutely. I mean, it is a remarkable facility to visit.

Brian Kenny:

Bill Kirby, thanks so much for joining me.

Bill Kirby:

Thank you, Brian.

Brian Kenny:

If you enjoy Cold Call, you might like our other podcasts, After Hours, Climate
Rising, Deep Purpose, Idea Cast, Managing the Future of Work, Skydeck, and Women
at Work. Find them on Apple, Spotify, or wherever you listen. And if you could
take a minute to rate and review us, we'd be grateful. If you have any
suggestions or just want to say hello, we want to hear from you. Email us at
coldcall@hbs.edu. Thanks again for joining us. I'm your host, Brian Kenny, and
you've been listening to Cold Call, an official podcast of Harvard Business
School and part of the HBR podcast network.





 Read more

Brian Kenny:

May is Mental Health Awareness Month in the United States, a designation
established in 1949 to increase the awareness of the importance of mental health
and celebrate treatment and recovery. And yet, 70 years later, mental health
continues to be a crisis of epic proportions around the world. There are lots of
reasons for this, not the least of which is that despite all the evidence, many
governments refuse to acknowledge or address the problem. The World Health
Organization notes that governments spend on average 0.5 percent of their
overall healthcare budget on mental health, a minuscule amount given that nearly
one billion people around the world report having mental health disorders each
year.

But as with many other vexing societal challenges, we know that relying on
government to solve the problem isn't sufficient. Business can and should play
an important role, and today's case offers an example of an entrepreneur in
China who is doing just that. Today on Cold Call, we welcome Professor William
Kirby to discuss the case Wenzhou Kangning Hospital, Changing Mental Healthcare
in China. I'm your host Brian Kenny, and you're listening to Cold Call on the
HBR podcast network.

Professor Bill Kirby examines contemporary China business, economic, and
political developments in an international context. His most recent book is
Empires of Ideas: Creating the Modern University from Germany to America to
China. Bill, welcome.

Bill Kirby:

Thank you very much, Brian. Great to be here.

Brian Kenny:

We've had you here a couple of times before. We haven't talked about that book,
so maybe we should have you back again.

Bill Kirby:

Absolutely.

Brian Kenny:

And do a case about that book.

Bill Kirby:

With pleasure.

Brian Kenny:

But today's is about quite a different topic, and I actually, I thought it was a
pretty optimistic case, given the intro that I just read, because this problem
continues to be so prevalent everywhere in the world. It's something that we
haven't been able to get our arms around in the United States or many other
places, and here's somebody who's really having an impact in a part of the
world. I was surprised, I guess.

Bill Kirby:

Yeah, it's having an impact and obviously not at a mass scale, but as a very
interesting example of what can happen with imagination and investment.

Brian Kenny:

And even in a country like China, where we know it can be difficult to get some
of these entrepreneurial things off the ground. So I think our listeners will
really enjoy hearing you talk about it. So thanks for being here. Thanks for
writing the case. Let me ask you to start by telling us what the central issue
is in the case and what your cold call is to start the discussion in class.

Bill Kirby:

Yeah. The central issue is about the transformation of healthcare, and
particularly mental healthcare in China, with the example of this Wenzhou
Kangning Hospital, which is a remarkable and innovative approach to mental
healthcare. And my cold call to the students would be to ask, what experiences
have they had, if they have been in China, with a hospital in China? What was
that like? Because I've had several myself, which served to me as a personal
wake-up call of some of the challenges of healthcare systems in China.

Brian Kenny:

Yeah. You spent many, many years in China. You've written a lot of cases about
China. How did you hear about this one in particular, and why was it important
for you to write a case about this entrepreneur?

Bill Kirby:

Actually, it came through by reading about it, and I had a research associate at
that point, Yuanzhuo Wang, an incredibly bright young gentleman originally from
China, who had a strong interest and wanted to go into healthcare systems for
his career after his time here at Harvard Business School. And we looked
together for what would be the best case that we could find in an otherwise
pretty difficult landscape of healthcare in China. And we came across this one
in Wenzhou.

Wenzhou, for your listeners, is on the southeastern coast of China, historically
in Zhejiang province, one of the most entrepreneurial provinces historically in
China and still today. And Wenzhou is known for its entrepreneurs. It's known
for its underground banking. It's also known for its gangsters, but in this case
it became known also for the kind of mixture of both entrepreneurialism and care
for seriously ill people.

Brian Kenny:

You've talked already a couple of times about the challenges of healthcare in
China. How has mental healthcare in particular evolved over time?

Bill Kirby:

Well, in China, like everywhere else, mental healthcare has been historically
stigmatized and underfunded. Prior to the 1980s, people with mental illnesses
were often sent simply to rural areas or isolated on the outskirts of society or
on the outskirts of family. To the degree that there were mental health
hospitals, which is a very recent development in the 20th century, actually the
first one was in 1898, these institutions were one in which people were sent to
and largely simply locked up and forgotten. Wealthier families could afford to
do more in this regard, traditionally using traditional Chinese medicine in the
privacy of their own homes, if they had large enough compounds and extra staff
to want to take care of individuals.

Brian Kenny:

The case mentions the mental health law of 2013. What was the intent of that
law?

Bill Kirby:

So the mental health law of 2013 was for the first time intended to protect the
rights of patients with mental illnesses and to provide national guidelines for
diagnosis, treatment, and management of mental health illnesses in China. And it
stipulated something brand new. And this is something that had happened
elsewhere in the world, that inpatient enrollment now had to be voluntary,
unless the person demonstrated risk of self harm or injury to others. And so it
raised the profile for the first time of mental healthcare as part of the
overall healthcare system in China.

Brian Kenny:

So that's a big step forward.

Bill Kirby:

It's a huge step forward.

Brian Kenny:

And probably helpful to our protagonist in this case, who I'm going probably
butcher the name. You can correct me. Guan Weili?

Bill Kirby:

Yeah, you got it, Guan Weili.

Brian Kenny:

Tell us a little bit about Guan Wei Li and his background.

Bill Kirby:

Well, he's from this highly entrepreneurial place of Wenzhou in southern
Zhejiang province, born at the height of the cultural revolution. And he came of
age during the period of opening up in reform in which Wenzhou was one of the
most rapidly developing centers of commerce in China, both domestically and
internationally. And when he was 15, he enrolled in Wenzhou Health School to
earn a specialized high school degree in medical assistance. So he had an
interest in healthcare from his teenage years on, and he served as an assistant
for a surgeon in a large hospital. All the larger hospitals are public
hospitals, state run hospitals, not private hospitals in China.

Brian Kenny:

Yeah. What drew him to mental health?

Bill Kirby:

What drew him to mental health initially was simply working in general
healthcare in a large comprehensive hospital in Wenzhou, where the service for
patients was horrific and individuals with mental healthcare were not treated
separately or differently from others. And what drove him to this was he wanted
to be transferred out of that hospital to the Wenzhou, again publicly run,
mental health hospital, known as the Wenzhou Number Seven Hospital, and began to
work there in 1988. Because he met his future wife there, and he courted her.
She had started working in that hospital a year before he did. And so once he
was drawn into it, he decided to stay.

Brian Kenny:

But this was not ... So I found it interesting that in addition to this, he's
got a side gig going here where he's building lighters.

Bill Kirby:

Well, he's got many side gigs. When he started as a doctor's assistant in
Wenzhou in the late 1980s, he was paid about $12 a month, US dollars. So he did
a taxi gig. He drove a taxi every night for three to four hours, but still had
very little income. When he and his wife decided to marry, they could not marry
yet because in those days the government decreed not only how many children
married couples could have, but when people could get married, in order to
restrict population growth. And this, to supplement the income, they decided to
get into industry. Many booming light industries in Wenzhou. It's not a heavy
industrial town, but a consumer facing town. And if you remember, I think one of
our earlier conversations, maybe when we talked about Duke University and the
ability of the British American Tobacco Company under the Duke family and others
to addict Chinese to nicotine. So 70 percent of the men in China smoked at that
point in time, in the 1980s and 1990s. And what do you need to help them?
Cigarette lighters. And he started with some small lighter parts, a group of 10
workers, and they built a cigarette lighter factory of more than 200 workers,
and he and his wife in their spare time manage this factory.

Brian Kenny:

Difficult to imagine, and a big enterprise. And I know at some point they have
to make a choice about whether or not to hold onto that. We'll come back to
that. But like any good entrepreneur, he sees opportunity. And so he's got the
observations that he's had from being in this mental health hospital with his
soon-to-be wife. What's the opportunity that he sees there?

Bill Kirby:

Well, at some point I think they do well enough financially, first of all, in
order to have significant savings. They decide that at the end of the day,
anybody could run a cigarette lighter factory. I'm not sure that's true. I'm not
sure I could do it. I'm not sure you could do it. But that's what they believed.
But very few people could run a mental health hospital. And so he resigned from
the Wenzhou Number Seven Hospital in 1993 and kept his side gig on the side and
explored ways to build his own hospital with the revenues that he could gain
eventually from the sale of the cigarette lighter business.

Brian Kenny:

That sounds like a huge undertaking, just building a hospital. How are hospitals
classified in China?

Bill Kirby:

Well, they're classified with a very simple classification, three, two, and one.
Three are the best. Two, not so good. And one very, very rudimentary. The class
three hospitals are the larger public hospitals, and public hospitals in China,
when we think of the difference between public and private hospitals in China,
we will often assume, it's perfectly reasonable to assume that a private
hospital is for profit and a public hospital is not. But many public hospitals
are run like for-profit enterprises. They often attract because they can afford
to give higher salaries, the very best doctors, and they are run as businesses
as well as public facilities. So if you're ill, Brian, and you go to a doctor
and the doctor determines that you need to have an operation of one kind or
another, before you go under for that operation, you will want to give that
doctor, particularly in a public hospital, a red envelope to remind him, full of
money, to remind him how much you value his services, and you better get the
amount right.

Brian Kenny:

Sounds like there's a lot at stake there.

Bill Kirby:

There's a lot at stake there. And a number of hospitals, they even sell the red
envelopes in the gift shops.

Brian Kenny:

No kidding. Oh my gosh, that's amazing. So Guan sets out to build a hospital.
How does one even begin doing that in China?

Bill Kirby:

Not easy. So as listeners may know, the government owns all the land in China,
and it's not the national government, it's the local government. You have to get
government position, you have to get the land from the government, you have to
get a permit from the local health bureau. And he had already had, because of
his longstanding work in healthcare in Wenzhou, an excellent relationship with
the health bureau, and he convinced its leaders that he and his wife, both of
them being mental health professionals, could help the bureau and the city run a
mental health hospital that they could be proud of, that could be, even though
privately funded, a class three hospital. And this is something that the city
did not have in its plans and didn't believe that it had the funds to afford on
its own.

Brian Kenny:

Okay. Okay, so there's a potential win-win situation there, as the local
leadership sees it. What were some of the design considerations? He had been in
other mental health hospitals. He knew he wanted to do things differently. What
were some of the things that he wanted to do to differentiate this hospital?

Bill Kirby:

Well, before we get to that, let me just say one thing and then I'll answer
that, is something about Guan and his wife that's so remarkable is their
persistence. In order to get the necessary land, so he had the support of the
health bureau, but not of the city planning bureau. And as he told me, "I showed
up early in the morning almost every day for a year at the planning bureau's
office with a letter of support from the health bureau to try to obtain the
land. I was there so much, people thought I actually worked there." And
eventually he received four acres allocation of land for which he then had to
purchase the usage rights. It was about half of what he asked for, but it was
enough to start this hospital. And when he built it, when he built this
hospital, he decided to design it in a totally different way than other mental
health facilities in which people had been locked up away from the outdoors,
away from light, and so on. I visited it as we were researching this case. It's
a remarkably open, clean, and friendly facility, no elements of the prison-like
atmosphere of traditional mental health hospitals in China and indeed in many
parts of the world. So they turned the best rooms in the hospital, south facing
rooms with more sun exposure, for patient rooms. The offices, which otherwise
would've had the best views and so on, were kept downstairs in less happy
circumstances. Every patient room had access to 24-hour hot water supply, very
unusual in China at that time, appliances such as refrigerators, microwaves,
hair dryers, to make people's lives more convenient, to treat them like real
people, in other words. These were hardly ever found in any hospital in China at
this time. And wealthier patients could pay for better quality rooms, but the
poorer patients would not find worse quality than what I have just described.
And the wards are open, and only several of them would be closed, depending on
the severity of the illness of the patients there. So when I walked through,
there was a wide open space. There were people also working collectively on
projects, on puzzles, on art and other things. It was really far different than
what I had expected before I went.

Brian Kenny:

And certainly counter to what we typically imagine when we think about a mental
healthcare facility. Even in the United States, I think that sounds pretty
remarkable. How do patients actually pay for services? You mentioned that some
are wealthier than others. I know China has a rising middle class, but is there
a healthcare system that provides for this or?

Bill Kirby:

There is some health insurance and now it is better than it was then. China has
extended as of 2013, a form of universal healthcare, but it's very, very
rudimentary. And so in this case, you have families who will pay for this. You
have individuals, but also the government would pay for some portion of the
patients who otherwise did not have the means to be there. But this is a moment
also of very considerable wealth creation. And in time, during the time,
particularly in the 20 teens as this hospital was developing, not only do
families get wealthier in Wenzhou, but also the city gets wealthier indeed. And
it has more revenues on which to expend for things such as healthcare.

Brian Kenny:

Does it launch as a class three hospital? I mean, who makes that designation and
how does it evolve over time?

Bill Kirby:

The designation is made by the government, and in this case by the local
government. And it gradually makes its way up the, as it were, ranking table,
until by 2013 it's a class three, grade A hospital.

Brian Kenny:

Who's their competition as they're coming up? Are there other mental health
hospitals that are coming online that they're trying to compete against?

Bill Kirby:

Well, this is a time in which there is a great number of hospitals that are
coming online in China, and mostly public. The healthcare system is expanding
dramatically in the urban areas such as Wenzhou, much less dramatically in rural
areas. But they establish partnerships with mental health programs and other
ones that have emerged as well, Wenzhou Medical University, as well, and its
hospital. And Kangning would eventually become the mental health teaching
hospital for Wenzhou Medical University, giving it a very, very reliable
pipeline for the best young talent graduating from that. So how do you get the
best candidates, again, by paying more, but also by offering competitive
compensation with social benefits equal to those public hospital employees. And
even though in this case those are subsidized by the state and the public
hospital, these not, and the very highest level of talent would receive
compensation that was five times that of their peers in Wenzhou and twice that
of their peers in Shanghai, where the cost of giving wow is much higher. And in
2014, they implemented an employee stock incentive program, whereby Guan and
Wang transferred a certain percentage of the company's shares to 112 key
employees, including senior executives, managers, and over 90 doctors and
nurses. So it's a profit sharing operation, as well.

Brian Kenny:

That sounds hugely progressive. Was that unusual in China at that time?

Bill Kirby:

It's extremely unusual, particularly in the healthcare system.

Brian Kenny:

Yeah. And throughout all of this, he's thinking about how he can grow this
enterprise. So there are obviously some big considerations about where to expand
and how to expand. What are some of the things that he's thinking about as he
thinks about growing the operation?

Bill Kirby:

So as a businessman, he's thinking about how to, I don't think they ever use the
word franchise, but how to expand the footprint, how to make a bigger impact,
and of course as a businessman, a greater profit. And so after they exceeded
their own initial design capacity of a thousand beds, they turned to the
surrounding areas of Wenzhou, which are of course, like every Chinese city,
growing very dramatically in the first two decades of the 21st century, and
using their existing patient base and the local reputation and the local
resources, talent that they could draw on. And they expanded to a nearby
hospital. But then they opened between 2011 and 2013, they opened four wholly
owned hospitals in counties further out around Wenzhou, and between 2011 and
2015, then to nine different locations altogether outside of Wenzhou. And their
strategy was to set a strong foundation in Zhejiang, their home province, but to
plan for a national reach.

Brian Kenny:

So this requires, again, a lot of people to scale operations like that. Are they
buying enterprises that are already staffed or are they adding? Probably both,
right?

Bill Kirby:

Both.

Brian Kenny:

They're both probably adding-

Bill Kirby:

Both, but even as far away as Shenzhen. So Shenzhen, the extraordinary new, we
think of it as new, but basically 1990s, 2000s city, now this extraordinary
place just north of Hong Kong,

Brian Kenny:

It takes money to expand. They need investors. Is this considered a good
investment if you're in China? How are they making this an attractive
investment?

Bill Kirby:

It is considered a good investment because it remains remarkably profitable, and
it's attractive to funders because of the potential of China's very large
underserved mental healthcare market. They gained a reputation that was national
in scope, even as they remained regional largely in their footprint, both in
mental health and in the growing business of private healthcare, generally
speaking. It had a good track record and it knew how to get over the locally
high barriers to establish private health hospitals, having been successful
first in Wenzhou.

Brian Kenny:

Yeah. So this leads them, like most good cases, we've got a decision point
coming up here and the decision point is IPO. So what are some of the things
that he's got to think about? There's some trade-offs, as there is with any IPO,
but he's got some trade-offs to consider here.

Bill Kirby:

Well, they have investors already, but those investors are naturally looking for
other ways to finance the company and also other ways to benefit from the
success of the company. And they believe that an IPO would be a cost-effective
way for Kangning to get more financing, as it would be for its expansion. But
like everything else that they had done, they were first. They would be the
first privately owned mental health hospital, and now a mental hospital group,
to IPO in China. This would generate a huge amount of publicity for the company.
But of course there are risks in this, as well. They were very successful as
things were. But it shows you a sense of, my guess is that they would never have
IPOed the cigarette lighter.

Brian Kenny:

Right. Tough to differentiate that. I mean, fire is fire, so.

Bill Kirby:

So they IPOed eventually in 2015 on the Hong Kong Stock Exchange for about $88
million.

Brian Kenny:

Is there a concern when you IPO that now you've got to do things at scale,
you've got to meet quarterly targets. Is there a trade-off there in terms of the
kind of service and care you can give in a hospital setting?

Bill Kirby:

There may well come that time. So far, not yet in this case. And it has allowed
them to continue to expand and to continue to prosper. And they are happily in
an industry which enjoys extraordinary public and political support: healthcare.
It was at the heart of the agenda of the former President Hu Jintao, and has
been under President Xi Jinping also one of the central national priorities, to
improve healthcare across the country as part of what President Xi calls common
prosperity.

Brian Kenny:

So it sounds like China is taking it seriously and they're no longer
stigmatizing it in the way that may have happened in the past.

Bill Kirby:

But we cannot overestimate the fact that this is a glittering and extraordinary
example, one example, there are now many others, but one example, but in a
landscape in which if you live in rural China or if you live outside, even in
the suburbs of the larger cities, by and large your healthcare options are
severely, severely limited. So there's one district in Shanghai, that we had at
our Harvard Center of Shanghai, a Center that our School set up in 2010, and
addressed by the mayor of one of the larger districts in the main Hung district
in Shanghai, where they had built over the previous 10 years, 87 new hospitals.

Brian Kenny:

Wow.

Bill Kirby:

And yet, if you were to go a hundred miles away, you would find healthcare
systems that are much closer to what they were a century ago than to what they
are today. And people in urban areas, such as Wenzhou, will likely have more
capacity and more resources to pay for good care, whether it's for mental health
or for others. Whereas you still have in rural China three to 400 million people
who are too poor to consume and who actually save enormously from a very limited
income for the catastrophic health event that will someday befall them.

Brian Kenny:

Not unlike in the United States and some other parts of the world, too, though.
It feels like there's some similarities there.

Bill Kirby:

The inequality of healthcare, education and so on, this is something we sadly
share with China.

Brian Kenny:

Yeah, Bill, it's a fabulous case. I've really enjoyed the conversation. Let me
just ask you one final question, which is if there's one thing you want people
to remember about the case, what would it be?

Bill Kirby:

I would urge people to remember that things can change in one of the most
difficult areas of healthcare, and in one of the least well served parts of the
world in mental healthcare. Kangning Hospital represented a new approach to
mental healthcare in China, emphasizing patient-centered care and a wide range
of therapy options. Its success demonstrated really the potential of private
healthcare facilities to play a significant role in improving healthcare for the
most, still today, the most populous country in the world. And the other thing
to remember is that Wenzhou is a place where entrepreneurs grow, and have grown
for centuries. Imagine an entrepreneur transitioning from cigarette lighters to
mental healthcare, a man with a mission, but also with an extraordinary business
sense, who has made a difference in the world.

Brian Kenny:

Yeah, I guess we can all be glad that he made the change when he did.

Bill Kirby:

Absolutely. I mean, it is a remarkable facility to visit.

Brian Kenny:

Bill Kirby, thanks so much for joining me.

Bill Kirby:

Thank you, Brian.

Brian Kenny:

If you enjoy Cold Call, you might like our other podcasts, After Hours, Climate
Rising, Deep Purpose, Idea Cast, Managing the Future of Work, Skydeck, and Women
at Work. Find them on Apple, Spotify, or wherever you listen. And if you could
take a minute to rate and review us, we'd be grateful. If you have any
suggestions or just want to say hello, we want to hear from you. Email us at
coldcall@hbs.edu. Thanks again for joining us. I'm your host, Brian Kenny, and
you've been listening to Cold Call, an official podcast of Harvard Business
School and part of the HBR podcast network.





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William C. Kirby

T. M. Chang Professor of China Studies
Spangler Family Professor of Business Administration

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