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Regulation on medical service in KoreaLawyer Talks: Korean Health Care Laws ④
  • By Kim Sun-Wook and Kim Young-jun
  • Published 2017.04.04 11:45
  • Updated 2017.08.30 09:21
  • comments 0

a. Regulation by the Korean Government

Profit-making activities by means of medical practices are called as “medical service.” Predominant countries in the world maintain a certain degree of statutory intervention against engagement in the medical service pursuant to relevant laws unlike any general business involving in freely transacting ordinary goods and services. Nevertheless, Korea has been taking her firm stance to rigorously regulate the medical service unprecedented in the world.

b. Prohibition from practicing medical service by an unlicensed person other than a medical person, a nonprofit organization or the Korean government

Kim Sun-Wook, esq. and Kim Young-Jun, esq.

In Korea, an individual in a capacity of a medical doctor, a dentist and/or an oriental medical doctor is only granted to practice medical service. In order to engage in medical service in Korea, an entity other than a Korean administrative agency must be incorporated and registered as a non-profit organization such as an incorporated association or an incorporated foundation duly recognized under the Korean Civil Code or a medical corporation granted a license to practice under the Korean Medical Service Act.

A stock company duly recognized under the Korean Commercial Code is permitted to have an internal medical organization for the purpose of treatment of its executives and employees and their families only; therefore, a stock company duly recognized under the Korean Commercial Code is prohibited from providing medical service to the general public. The regulation related to granting a license to engage in medical service in Korea is substantially different from those in China, Japan and most European countries. Moreover, such Korean regulation may be comparable to the U.S. counterpart by which any profit-making American entity has been granted to practice medical service to date by virtue of the U.S. court judgment from a lawsuit between the American Medical Association (AMA) and the U.S. Federal Trade Commission (FTC) ultimately leading to a removal of the AMA’s indirect restraint having been imposed upon any individual or business entity banning them from practicing medical service.

c. History related to restriction on medical service in Korea

The Korean modern medical system was implemented based on the heavy influence by the Japanese relevant laws at the time of the Japanese colonization over Korea. As a consequence, any business entity recognized under the then effective Commercial Code in Korea administered by the Japanese colonization was able to engage in medical service in Korea just like Japan. Even after liberation from the Japanese colonization, Korea took her position to preserve such medical system. In 1950, Korea enacted the Korean Medical Service Act, which introduced the first ever statutory measure related to the medical system, nevertheless incorporating the same medical system to the previous one implemented prior to this act in order to maintain the continuity and consistency.

However, the National Assembly proceeded to revise the Korean Medical Service Act in its entirety in 1974 causing a significant change in the medical system existed prior to such revision under which only a medical person or a non-profit organization would be granted a license to practice medical service while any person or entity unlicensed to practice would be prohibited from engaging in medical service. Any corporate run hospital existed prior to the entire revision of the Korean Medical Service Act in 1974 was required to shut down, if this hospital would not transform its status to a medical corporation whose status was newly introduced under the wholly revised Korean Medical Service Act.

In addition to the revision of the Korean Medical Service Act, Korea also adopted a new measure to have mandatorily applied the National Health Insurance System to all her citizens starting from 1974. As we have already briefly mentioned, this National Health Insurance System undoubtedly invited the medical doctors’ vigorous objections. In order to ease such objections from medical doctors, the Korean Government had no alternative but to come up with an administrative policy completely banning any hospitals ran by either any unlicensed individual or any business entity recognized under the Korean Commercial Code from practicing medical service other than those operated by a licensed medical doctor(s) or a non-profit organization(s) including a university(s).

Thanks to this policy, Korea was able to timely launch the National Health Insurance System for the benefit of her citizens although such policy also inevitably created the medical doctors’ monopoly over the Korean medical service market. Such monopolistic market structure has been maintained to date.

Under the circumstances, the Korean government as well as the general public explicitly showed their respective concerns against a company called Lotte’s recent attempt to participate in the Korean court-driven rehabilitation procedure for a financially troubled hospital in an effort to its acquisition of a medical corporation on a ground of the Lotte’s probable violation of the well settled principle of banning a profit seeking hospital. Such concerns clearly showed the public sentiment surrounding medical service in Korea.

On the other hand, a great number of doctors and hospitals have been or are exerting their efforts to entering into the international medical service market utilizing a stock company duly recognized under a jurisdiction to which they desire to enter. As a matter of fact, the National Assembly, the legislative branch in Korea, enacted the “Act on Support for Overseas Expansion of Healthcare System and Attraction of International Patient” around December 2016 as a part of the pivotal measure aiming to help the Korean hospitals enter into the international medical service market to generate profits. This enactment may have demonstrated two polarizing and contradicting positions in Korea associated with the way that medical service ought to be provided; i.e., i) medical service must be provided by a non-profit organization in Korea in any event while ii) it is acceptable that medical service can be provided even by a profit making company elsewhere in the globe.

d. An issue related to a foreigner’s engagement in medical service in Korea

A foreigner or foreign entity may have two legally permissible routes for the purpose of engagement in medicals service in Korea.

The first one is opening a hospital in a free trade zone or Jeju Special Self-Governing Province in Korea exclusively designated for treatment of foreign nationals. Since this hospital is only for foreign nationals, such hospital is not permitted to provide medical service to any Korean citizen. An entity to operate this hospital exclusively for treatment of foreign nationals can be established in a form of a profit making company recognized under the Korean Commercial Code while it needs to contribute a minimum capital in the amount of 5billion Korean Won (i.e. approximately $5 million) to adequately operate the hospital. Even satisfaction of the required capital threshold of 5 billion won ($4.4 million) more, the Ministry of Health and Welfare may take its consideration various factors prior to granting a license to practice medical service to a foreign entity.

For instance, although a commercial enterprise from China attempted to incorporate a profit making entity in Jeju Special Self-Governing Province a few year ago as a part of its ambitious business plan to have its own a hospital for foreign nationals mostly Chinese, the Ministry of Health and Welfare made its determination not to grant a license to this Chinese company citing that executives of this Chinese company had committed number of violations of Chinese laws. On the other hand, the Greenland Group, one of gigantic real estate developers in China, was able to successfully obtain a preliminary approval from the Ministry of Health and Welfare and is about to operate its own hospital exclusively for foreigners mostly Chinese in Jeju Special Self-Governing Province.

The other route opens to a foreigner or a foreign entity to run its own hospital in Korea is his/her or its incorporation of either a medical corporation pursuant to the Korean Medical Service Act or a non-profit organization recognized under the Korean Civil Code. Korea has no discriminatory policy or regulation related to the nationality of directors constituting of the board of such non-profit organization. Even if a hospital is established and operated in either form of a non-profit organization or a medical corporation, either form is nevertheless deemed a non-profit entity from legal perspective and thus is not able to pay or likewise repatriate any dividends earned from the hospital operation to its home country because a non-profit entity is literally not permitted to issue shares.

e. An issue related to hospital operation by management service organization (MSO)

In the past, a dispute occurred between a Korean medical doctor and an American medical device manufacturing company specializing in blood dialysis with respect to the joint operation of a partnership hospital in Jeju Special Self-Governing Province. This hospital was opened in the name of the Korean doctor while the shareholdings of the hospital were contractually split, on 80 percent and 20 percentbasis, between the American company and the Korean doctor respectively. The branch office in Korea of the American company commenced a legal proceeding before the Korean court seeking damages against the Korean doctor on the alleged ground of the Korean doctor’s breach of his contractual obligations under the Joint Venture Agreement. The Korean court, however, found the Joint Venture Agreement invalid and thus unenforceable holding that such joint operation of the partnership hospital alone between the Korean doctor and the American company, which was unlicensed to practice in Korea, was a violation of the Korean Medical Service Act. In the end, the Korean court ruled that the American company would not be legally permitted to claim damages merely relying on the contractual breach of the Joint Venture Agreement by the Korean medical doctor.

It has become evident that some Chinese companies have entered or are entering into lease agreements with Korean medical doctors, under which those Chinese companies leased parts of their buildings or facilities to Korean medical doctors in a form of MSO in exchange for the Korean medical doctors’ payment of promised profits earned from their hospitals to those Chinese companies in accordance with the respective lease agreements. This sort of a profit sharing arrangement based on the above lease agreement is likely held invalid and unenforceable in light of the above Korean court’s judgment. Of course, it is legally valid to lease a building to a Korean medical doctor in exchange for the Korean doctor’s payment of a rent to the owner of the building. If the owner of a building has entered into a joint venture agreement with a Korean medical doctor thereby contracting to claim a certain percentage ownership in the hospital operated by the Korean medical doctor exceeding the fair market value of the rent or has caused the Korean medical doctor to be hired by the building owner in realistic sense by the owner’s payment of a certain monthly wage to the Korean medical doctor, however, such arrangement is deemed a violation of the Korean Medical Service Act and thus held invalid.

Any foreign entity arranged such invalid joint venture agreement with a Korean medical doctor may subject to a criminal sanction under the Korean Medical Service Act and at the same time, such hospital operated by a Korean medical doctor may also subject to an administrative sanction ordering a compulsory redemption of all medical bills submitted by the hospital to the National Health Insurance Service. The Korean court ruled in a recent case, for instance, that upon finding a fraud arising from unjustified medical bills submitted by a hospital to the National Health Insurance Service, such hospital would subject to an aggravated punishment than a lesser penalty, which would have been otherwise imposed under the Korean Medical Service Act.


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Kim Sun-wook, esq.(Korean bar) is a managing partner of KIM & HYUN law firm (SeSeung LLC). He acts as an advisory lawyer for various hospitals in Korea.
Kim Young-jun, esq.(Washington State Bar) is a U.S. attorney for KIM & HYUN law firm.

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