The Final Chapter of Huarun Medical's "Seven-Year Separation" from Yanhua Hospital: Why Did the IOT Model Fail?
Hello everyone, I'm your financial journalist. Today, we're going to discuss a story that may seem dull on the surface but actually has a significant impact on the entire healthcare industry: the seven-year legal battle between Huarun Medical and Beijing Yanhua Hospital has finally come to an end.
The court ruled to terminate their IOT (Invest-Operate-Transfer) agreement. This is not just a dispute between a state-owned enterprise and a hospital; it marks the official demise of an operational model that was once popular nationwide and viewed by many investors as a gold mine for profits.
To make it easier for you to understand, I'll break down the details without using legal jargon and analyze the logic behind this "century-long separation" from five different perspectives.
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1. What is the IOT Model?
Simply put, the IOT model is similar to being a "sub-landlord" in a lease agreement.
- The landlord (the hospital): Owns the property (the hospital), but it may be outdated in terms of facilities and inefficient in management.
- The sub-landlord (social capital, such as Huarun Medical): Pays to renovate the hospital and improve its facilities, then signs a long-term contract (for example, 47 years, from 2008 to 2055).
- How do they make money? The sub-landlord doesn't own the hospital, but they have control over its management. They earn money in two ways:
1. By charging management fees: A percentage of the hospital's profits.
2. By controlling the supply chain (a major source of profit): The hospital must purchase medicines and supplies through the sub-landlord's designated channels. The sub-landlord buys from manufacturers at lower prices and sells them to the hospital at higher prices, making a profit on the difference.
In 2017, Yanhua Hospital contributed 256 million yuan in revenue from medicines and supplies to Huarun Medical, while the management fees amounted to only 36.32 million yuan. As you can see, the profit from selling medicines accounted for more than seven times the amount of management fees. This is the crux of the IOT model: it doesn't rely on providing medical services to generate income but on monopolizing the hospital's purchasing power for medicines and supplies.
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2. Why Did the Dispute Arise?
The dispute stemmed from the substantial profit margins, which the hospital found unfair.
In January 2019, Yanhua Hospital unilaterally terminated the agreement, citing straightforward reasons:
- Opaque prices: The hospital discovered that Huarun Medical was not buying medicines and supplies at fair and reasonable prices.
- Kickback practices: Media reports in 2015 exposed how Phoenix Medical (Huarun's predecessor) required suppliers to pay up to 30% in kickbacks. Many small suppliers, unable to afford these fees, were removed from the hospital's supply list.
- The hospital's realization: The hospital realized that Huarun's primary goal was to encourage them to buy more medicines, thereby increasing its profit margin. This money should have gone towards improving medical facilities, but it was being taken by the operator instead.
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3. Seven Years of Litigation: Huarun Medical Seeking 550 Million Yuan
After Yanhua Hospital terminated the agreement, Huarun Medical filed a lawsuit, claiming compensation for the transfer of management rights, unpaid loans, lost management fees, and other damages, totaling 348 million yuan.
- Final outcome: In February 2025, Yanhua Hospital paid 209.5 million yuan in management fees and supply chain costs. In September 2025, the court ruled to terminate the agreement and confirmed the remaining compensation. If all claims are fulfilled, Huarun Medical could recover over 550 million yuan in total.
Sounds like a big win for Huarun Medical? Not necessarily. The 550 million yuan is just compensation for past losses. More importantly, the ruling confirms the termination of the IOT agreement, meaning Huarun Medical no longer has control over Yanhua Hospital's management and supply chain.
For Huarun Medical, recovering the money is a form of loss mitigation, but they have also lost a profitable project that once generated substantial profits. This ruling serves as a warning to other investors: this path is no longer viable.
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4. Why Did the IOT Model Fail?
There are three main reasons for the IOT model's decline:
① National centralized procurement: Eliminating profit margins
The biggest source of profit for the IOT model was the difference in the prices of medicines and supplies.
- In the past: Prices were opaque, allowing operators to control purchases and earn high profits.
- Now: The government has implemented centralized procurement, negotiating prices directly with manufacturers, resulting in lower prices.
- Impact: With transparent prices, the profit margin has been significantly reduced. When Yanhua Hospital refused to cooperate in 2019, it coincided with the start of the national procurement program, and Huarun Medical decided to end the agreement, as the profit margin had almost disappeared.
② Legal restrictions: Non-profit hospitals cannot distribute profits
The 2020 Basic Medical and Health Promotion Law prohibits non-profit institutions from distributing profits to investors.
- The issue with IOT: Management fees are essentially a form of profit distribution by the operator from the hospital's profits.
- Legal risk: For a state-owned enterprise like Huarun Medical, violating this law could lead to the termination of the project and potential penalties, so they had to withdraw to avoid legal risks.
③ Declining profits: Running hospitals is becoming less profitable
In addition to centralized procurement and legal restrictions, there are practical challenges:
- Rising costs: Labor and operating expenses are increasing.
- Limited income: Profits from medicines and supplies have decreased, and hospital revenues are stagnating.
- Financial evidence: Huarun Medical's financial reports show a sharp decline in revenue from IOT-related activities, from 37.43 million yuan at the end of 2023 to 6.745 million yuan by the end of 2025, indicating a significant reduction in business volume.
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5. Far-reaching Consequences: The End of the "Golden Age" for Social Capital in Healthcare
Huarun Medical's exit from the IOT model is not an isolated incident; it's a sign of broader changes in the industry:
- The end of the IOT model: None of Huarun Medical's hospitals are using this model anymore, and other investors using similar approaches are facing similar challenges.
- Dilemmas for social capital in healthcare: Non-profit hospitals cannot distribute profits, and for for-profit hospitals, there are pressures from healthcare insurance and price controls. The ability to make profits through controlling the supply chain has been eliminated.
- Future directions: If social capital wants to continue in healthcare, they must focus on providing high-quality services, specialized treatments, and health management, rather than relying on profit margins from medicine sales. This requires higher expertise, stronger brand influence, and a longer return period.
In summary, the separation of Huarun Medical and Yanhua Hospital reflects the changing landscape of the healthcare industry:
- For Huarun Medical: They have recovered some losses but lost a profitable source of income and need to find new ways to generate profits.
- For Yanhua Hospital: They have gained control over their supply chain but lost a strong partner.
- For the industry as a whole: The IOT model is dead. Social capital in healthcare is moving from a model based on profit margins to one that emphasizes quality services and expertise.
In conclusion: The era of making money by selling medicines is over. In the future, only those who provide truly high-quality medical services will be able to thrive.