Introduction

Since the initiation of the first healthcare reforms in the late 1990s, China has pioneered public health and universal insurance reforms that are unprecedented in scope and scale. The results of these campaigns to drive improvements, in combination with higher living standards and a reduction in poverty, are a significant decline in mortality rates and an increase in life expectancy. Children born in China today can expect to live more than 30 years longer than their forebears half a century ago, which is half the time that it took certain other developed countries to achieve the same gains.(1)

Development of Chinese health insurance

Because of these efforts, China has achieved the commendable goal of extending a system of universal medical insurance coverage to approximately 97% of Chinese residents, up from approximately 30% in 2003. It has done so largely through its insurance schemes for employed urban, unemployed urban and rural residents.(2) Healthcare expenditure as a percentage of total fiscal expenditure increased from approximately 4.2% in 2002 to 6.8% in 2015,(3) with the number of private hospitals more than doubling over six years to 16,900 in 2017.(4) This has been accompanied by a decline in aggregate out-of-pocket expenditure from approximately 60% in 2001 to 32% in 2014.(5) Although this increased expenditure is in part attributable to China's strong economic growth and expanding social insurance programmes, it continues to outstrip gross domestic product growth, which, together with other factors, has raised concerns for future affordability. Although comparatively lower than equivalent levels of expenditure in certain mature economies, this increased expenditure has raised concerns over future sustainability, for which reform, and the further development and uptake of private health insurance and medical facilities, is viewed as a desirable antidote. That said, for as long as residents' income levels continue to rise and mortality and fertility rates continue to fall, the corresponding demand for the use of higher-level facilities, more modern and expensive items, longer stays and the treatment of chronic ailments will likely offset attempts to cut healthcare expenditure.

In conjunction with the expansion of coverage, there has also been a gradual deepening of benefits. Service capacity and use of health services have risen, while aggregate out-of-pocket spending (as borne by patients) as a share of total health expenditures has fallen.(6) This has led to more equitable access to care and greater affordability overall. The 2009 healthcare reform built on the implementation of public insurance schemes by providing free coverage for 12 categories of basic public services, including:

  • care for several chronic conditions;
  • an essential drug programme; and
  • subsequent regulations to encourage greater private sector participation and financing for the construction of primary care facilities.(7)

Healthcare reforms under the 13th Five-Year Development Plan for 2016-2020(8) also had "population health improvement" as its main goal. The so-called 'Healthy China' strategy aimed to "deepen the reform of the medical and health systems, promote the interaction of medical services, health insurance and pharmaceutical supply, implement the tiered delivery system and establish primary care and modern health care systems that cover both urban and rural areas".(9)

Broader coverage, but shortfalls in cost protection

Despite China's successful expansion of its universal healthcare programme and various reforms, concerns remain over the quality and affordability of the coverage on offer. With the increasing burden of non-communicable diseases that are not easily treated – such as diabetes, cancer and Alzheimer's – and an increasingly elderly population, pressure continues to mount. An examination of the drug exclusions and co-pay requirements of various related policies reveal a shortfall in adequate protection. Relatively low reimbursement caps and co-payment requirements of 10% to 20% (up to 25% to 30% in some cases) can impose a high burden. To this extent, private citizens still feel the need to allocate money to cover health-related contingencies, even before accounting for those that may not take up medical services due to a lack of adequate coverage.

Private healthcare reforms

The complicity of factors fuelling the funding deficit – together with the general perception among the increasingly affluent middle class that their needs are not being wholly met by existing public health insurance coverage – has seen the government take policy-driven measures to stimulate the development and uptake of private health services and insurance. The advent of newer disruptive models for delivering health and insurance services online in recent years, coupled with an increasing demand for convenience and quality in general, has provided further incentive in this regard.

On the back of these policy, regulatory and taxation-driven measures, the private insurance market is projected to generate revenues of over Rmb1.1 trillion by 2020.(10) This has been reflected in notable increases in private healthcare penetration rates. Reforms have also included several key supportive policies to streamline approval procedures for:

  • establishing private hospitals;
  • expanding the state medical insurance scheme to qualified private hospitals;
  • supporting doctors from public hospitals to practise in private ones; and
  • allowing private hospitals to set prices for medical services.(11)

Even public hospitals have noticed the relative ease of providing better care to those with private medical insurance, and employers are recognising the benefits of offering a comprehensive package of private group medical insurance as a modern means of attracting employees.

Challenges and opportunities for private insurers

Despite a range of stakeholders having vested interests in developing the private health insurance market, it has remained underdeveloped and is generally considered by Chinese insurers to be unprofitable compared with life insurance lines. Insurers have also found it hard to stimulate uptake by a consumer base that is relatively unfamiliar with the added value of such products and have largely relied on selling them in the form of add-ons or riders to existing life and accident insurance products. There are a number of structural and societal factors behind this.

One such factor is that the existence of capped payments for a defined group of diseases and a prevalence of critical illness coverage providing a one-off payment on diagnosis of specific illnesses, among other things, fail to provide potential customers with the peace of mind that they should make such an investment. That said, a general perception that health needs are as important as financial ones holds promise that there is a sizable opportunity for insurers that can overcome these hurdles and market their products effectively.

Another factor is that some of the more comprehensive health insurance products traditionally require a sales team and brokerage network to explain and sell them. Brokers have the knowledge to:

  • better match products with customers;
  • explain such products' terms, conditions and terminology; and
  • provide a second point of recourse should there be a legal dispute.

It is also less likely that an independent broker would mis-sell a product.(12) Therefore, private health insurance policies may not offer the same scope to benefit from China's digital marketing channels as simpler insurance products, relying instead on more traditional sale methods.

Further, a lack of transparent, digital and integrated medical data makes it more challenging for insurers to underwrite and manage risks profitably and handle the claims process knowledgeably. The lack of a standardised and comprehensive data environment is an ongoing challenge that the government and insurers are set on addressing. Further collaborations between insurers and hospital providers – coupled with a larger body of digital data garnered from health-related claims, reimbursements and hospital records – has the scope to provide a more granular, population-wide view of risks and morbidity, from which better underwriting and product coverage may be derived. This lack of data has given rise to a lack of product diversification centred on protection from certain critical diseases, hospitalisation pay-outs, accident insurance and preferential treatment in hospitals. This relative lack of differentiation has meant that competition based on price and commission has affected the sector's overall profitability.

In addition, public hospitals have not been properly incentivised to collaborate with insurers until recently. The agenda of insurers is to optimise patient turnover, with:

  • a balanced mix of cases;
  • an emphasis on improving population health outcomes; and
  • treatment at the general practitioner level.

However, this does not sit comfortably with the remuneration model for China's treatment-focused, hospital-centric public health services, which are based on:

  • fees for services;
  • margins generated for prescribing drugs and procedures; and
  • admitting patients to hospitals for longer stays.(13)

As a result, the average length of a hospital stay, a key driver of higher costs, is greater in China than Organisation for Economic Cooperation and Development countries and public expenditure on hospitals is less equitable to poorer people who are more likely to access primary levels of care.(14) To address this imbalance, continuing government reforms are expected to provide a starting point for a more collaborative model with insurers. The Chinese social insurance services may achieve this by incentivising health service providers to deliver more cost-efficient services that more closely align with patient outcomes (eg, by incentivising day care and day surgeries, high-priority outcomes connected with vaccination coverage and effective diabetes and high blood pressure case management). Strategic utilisation of social insurance funds over the simple balancing of revenues with claims may lead to more efficient outcomes.(15)

The overall effect is that the Chinese health insurance market, despite having made tremendous progress over the past few decades, is not as mature, innovative or profitable as it could be. This has been exemplified by mature foreign undertakings with sophisticated health insurance operations in other countries choosing to focus on narrower, more profitable niche areas catering to expats and the delivery of high-end services or overseas treatment.

However, things are changing with the further implementation of preferential tax policies and simplified claim settlements in accordance with the State Council's policy goals. Hospital reform measures for more efficient operation and management of medical expenses may also encourage hospitals to join the provider networks of private insurers, via both foreign joint ventures and domestic outfits. Insurers that exercise the skills and relationships required to enrol hospitals and establish the relevant systems and processes may thereafter be rewarded with a competitive advantage in the market. Significantly, the lifting of government restrictions on insurers investing in the Chinese healthcare sector(16) has also opened opportunities to get involved by other means, such as:

  • investing directly in healthcare providers;
  • partnering in data and claims management; and
  • developing, piloting and managing digital medical records.

Taikang Life is one insurer that is now investing billions to build a network of hospitals, elder-care communities and specialty facilities. Further, Sunshine Insurance was one of the first insurers to build a 2,000-bed hospital, which opened for business in May 2016.(17) However, for the sale of longer-term reimbursement health insurance products in what is a rapidly growing and potentially lucrative market, success will likely hinge on:

  • granulating data;
  • segmenting customers according to their specific needs; and
  • gearing marketing efforts appropriately.

Having the right strategy, knowledge, data, administrative systems and processes, provider connections, economic clout and entrepreneurial vision to roll out the right products at the right time in the next few years should be key in separating the winners from the losers.

For further information on this topic please contact Hao Zhan, Yu Dan, Zhang Xianzhong or Sharif Hendry at AnJie Law Firm by telephone (+86 10 8567 5988) or email (zhanhao@anjielaw.com, yudan@anjielaw.com, zhangxianzhong@anjielaw.com or sharifhendry@anjielaw.com). The AnJie Law Firm website can be accessed at www.anjielaw.com.?

Endnotes

(1) Deaton 2013; "Deepening Health Reform In China: Building High-Quality And Value-Based Service Delivery"; Policy Summary; China Joint Study Partnership; World Bank Group, World Health Organisation, Ministry of Finance, National Health and Family Planning Commission (NHFPC), Ministry of Human Resources and Social Security 2016, available here.

(2) Further details are available here.

(3) Further details are available here.

(4) According to the NHFPC. Further details are available here.

(5) Deaton.

(6) For example, by 2014 the reimbursement rates for inpatient services under the three main social insurance schemes (ie, Urban Employee Basic Medical Insurance, Urban Resident Basic Medical Insurance and New Cooperative Medical Scheme) had been raised, significantly reducing the differences (ie, they had reached 80% 70% and 75%, respectively). Deaton.

(7) Deaton.

(8) According to the Central Committee at the 18th Session of the Fifth Plenary Session of the Communist Party of China on 29 October 2015.

(9) Ibid.

(10) Boston Consulting Group and Munich Re, "Opportunities Open Up in Chinese Private Health Insurance", available here.

(11) Further information is available here.

(12) For example, where a customer may attend a private hospital only to find that:

  • there is a substantial co-pay requirement on the policy;
  • pre-existing conditions are not covered for high-value surgeries, or
  • there is no direct billing between the insurer and that particular hospital network.

(13) Further details are available here.

(14) Further details are available here.

(15) Deaton.

(16) Ibid.

(17) Further details are available here.

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