By Jeffrey Towson
Professor of Investment at Peking University Guanghua, Author & Keynote Speaker
Private health insurance is arguably both the biggest and the most vexing opportunity in China today. The need is clear. Increasingly wealthy Chinese consumers are growing increasingly frustrated with the public healthcare system. And still nascent private hospitals are struggling to find larger and more stable revenue flows.
But while local and foreign insurers are lined up to fill this growing supply-demand gap, the insurance opportunity remains tantalizingly out of reach. Most efforts in private health insurance have, thus far, been stymied by regulatory constraints; by too few private secondary care hospitals; by poor consumer awareness of health insurance; and by inaccessible, limited and non-standardized medical data for underwriting and pricing.
China’s growing healthcare supply-demand gap
Chinese consumers are becoming both wealthier and more sophisticated in their expectations for healthcare. A survey last year by consultancy McKinsey & Co. of some 10,000 Chinese consumers found an increasing focus on eating healthier and safer food, practicing preventive medicine and playing sports. There is an overall increasing focus on healthy living, which is great for healthcare and hospitals (although kind of bad for KFC).
Healthcare demand is also increasing as the population ages. And as China develops and urbanizes, chronic diseases common to developed countries, such as diabetes and obesity, are also becoming more common. Overall, the demand for healthcare keeps growing.
There is a “significant increase in the awareness and demand for private medical treatments in China,” said Neil Raymond, CEO of Pacific Prime, an insurance advisory company based in Hong Kong. “This means if you have the money, and more and more people do, then you will pay to go to good private facilities.”
However, the supply remains largely stagnant. Chinese public hospitals remain overcrowded, with questionable financial incentives and with frequently criticized poor service. While public insurance does extend to 95% of the population, this coverage is actually very patchwork. Users are frequently required to pay 10%-35% of the cost of inpatient care. Coverage is limited with most private facilities and many treatments and medicines, especially for cancer excluded. So despite “universal” social insurance, Chinese consumers still pay over 50% out of pocket for their care.
This growing gap between healthcare supply and demand can be seen in the long lines outside of top Chinese hospitals virtually every day. It can be seen in the number of people traveling to Hong Kong, Singapore and California for care. It can be seen in families’ continued hoarding of cash for medical emergencies. And it can be seen in the record number of attacks on hospital workers every year in China.
The need to move beyond add-on insurance products
Private insurance is the natural solution to this gap – and is the next step for the Chinese healthcare system. And in 2015, private insurers took in around $36 billion in premiums in China, according to Boston Consulting Group. This figure has been growing at about 36% a year since 2010.
However, while that sounds impressive, most health insurance products sold in China today are actually critical illness riders attached to life insurance policies. These products pay out a lump sum based on a diagnosis, such as cancer, and are not really health insurance. Plus many (most?) are unprofitable, and they do not open the door for negotiating discounts from healthcare providers.
Real healthcare reimbursement insurance policies that pay out for care over longer terms are rare in China and mostly limited to group accounts for larger companies. These products are also notoriously difficult to price and underwrite, given the lack of medical information coming from hospitals and other providers. Claims can also be high, unpredictable and prone to fraud.
Medical information isn’t just scarce In China. It’s also not standardized, with varying systems for coding diagnoses and treatment. Additionally, there is little medical insurance expertise in China. Overall, underwriting and pricing comprehensive health insurance to cover true secondary care is still a long way off. And companies and individuals also lack tax incentives to buy health insurance right now.
Nonetheless, many insurance companies are now seeking licenses to sell health insurance in China. Some, such as Ping An Insurance Group, have a clear (and compelling) strategy — offering limited health insurance add-ons, creating apps for appointment scheduling and claims processing, and trying to position themselves as the front and back offices of the future healthcare system. Its Ping An Good Doctor mobile application offers medical and pricing information, doctor scheduling, payments and non-prescription e-commerce. Some insurance companies (and mobile app companies) are even opening clinics and moving into laboratory services as a way to control more aspects of care.
How to fill the increasing supply-demand gap
In Part 2, I lay out three models for launching real private health insurance in China. These models have all worked in other locations and would require only minimal regulatory changes to proceed.