Oct 2019

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China's commercial health insurance market

Source: Asia Insurance Review | Mar 2019

Milliman’s Rong Yi and Sharon Huang provide high-level background of the health insurance market in China, discussing recent trends and how data and analytic innovations may be leveraged to address some of the challenges and support market growth.
The healthcare ecosystem
With at least 95% of its 1.4bn people covered by basic, government-sponsored health insurance, China ranks only behind the US in total healthcare expenditures. However, China’s annual per capita health expenditure is relatively low at around $425, or just over 5% of GDP - though it has been on the rise over the past decade, in keeping with the country’s rapid economic growth. 
There are three types of publicly-financed basic medical insurance: For the urban employed population, for the urban non-employed population and for rural residents, regardless of employment status. Funding of health coverage comes from the central government, local governments, employers, and the participants, and the level of funding varies by geographic area. On average, out-of-pocket spending accounts for 32% of China’s total health expenditures, and varies greatly by geographic area.
Under pressure
China’s public insurance programmes are facing pressure from all sides of the healthcare ecosystem. Population ageing, urbanisation, environmental issues, increasing disease burden due to chronic conditions and cancers, escalating unit cost in health care, waste, and low-value services are all adding to the growing demand for better and more efficient healthcare. 
At the same time, the growth in social insurance funding, part of which is used to fund basic medical insurance, has slowed due to an aging population. To address some of these challenges, the Chinese government has taken various measures including:
  • Moving away from traditional fee-for-service payment for hospital admissions and implementing diagnostic related groupings (DRGs). DRGs originated in the US and have been widely adopted by countries in other parts of the world. Under a DRG model, the provider is reimbursed a case rate which covers the full scope of a disease-based hospitalisation event. 
  • Launching multiple rounds of price cuts on prescription drugs covered by social medical insurance. 
  • Promoting tiered provider networks so that patients do not overload top tier public hospitals. 
  • Encouraging the development of commercial health insurance, as we will discuss below. In 2016, China started to launch tax-deductible commercial health insurance products. 
Commercial health insurance in China
The role of commercial health insurance in China has changed significantly over the past 15 years and continues to evolve as the Chinese government implements reforms that affect the overall healthcare ecosystem. 
PICC Health, China’s first commercial health insurance company, was established in 2005. At the time, the healthcare industry hailed it as “the (first) spring of commercial health insurance,” expecting tremendous growth in commercial health insurance similar to that of the US. 
However, with the central government’s push for Healthy China 2020 and universal health coverage in the following years, the growth of commercial health insurance stalled. 
Playing a minor role relative to the public programme, commercial health insurance has been offered through supplemental policies purchased to cover deductibles, co-payments, and other cost-sharing, as well as coverage gaps in public programs. As of 2018, commercial health insurance premiums account for 14% of the total insurance premium income in China. 
However, in recent years, commercial health insurance has been growing rapidly, significantly outpacing other types of insurance. From 2014 to 2018, the compound annual growth rate of China’s commercial health insurance was 36%, whereas it was 17% for life insurance, and 11% for P&C insurance.
The insurers
Almost every insurance company in China, regardless of line of business, is allowed to write health insurance. The difference is that property and casualty insurers can only write short-term health insurance policies while life and health insurers can write both long- and short-term policies. Life insurers, domestic life insurers in particular, currently dominate China’s health insurance market by leveraging their large distribution networks. 
The products
There are four main types of products offered by commercial health insurance companies in China: Critical illness, medical reimbursement, disability income, and long-term care insurance. Currently, critical illness products are the most prominent, accounting for 50% of the total commercial health insurance premium, while medical reimbursement insurance products account for about 30%. 
Critical illness products are popular with both the participants and insurers because:
  • Most critical illness products are written by life insurance companies and offer high liability limits, ranging from a few hundred thousand yuan to a few million yuan, with very affordable premiums. Deductibles typically start at CNY10,000, although there are products that offer a much lower – or even no – deductible for certain medical conditions such as malignant cancers. Insurers compete in pricing, coverage amount, and covered medical conditions. Product designs are becoming relatively homogenous. 
  • Critical illness products also pay out lump-sum once the insured is diagnosed with a qualified medical condition under the contract, regardless of the actual medical expenditure incurred. Commercial health insurance in China is still a relatively new business line. 
Challenges, trends and opportunities
To achieve healthy, steady growth in a rapidly evolving regulatory environment and changing economic and demographic landscape, China’s commercial health insurance will need to innovate organically, drawing on lessons learned from other healthcare systems while recognizing China’s unique challenges and opportunities. 
Some trends worth noting:
  • Horizontal integration – Unlike US health insurers, which use provider contracting and different payment mechanisms to influence healthcare service utilisation and unit cost, China’s commercial health insurers do not have the same kind of market power to influence cost and utilization. 
  • Big data - More and more insurers understand the importance of data infrastructure and advanced analytics to help them understand population health risks. 
  • Deeper participation in public programmEs – Insurers are deepening their cooperation with government agencies on social medical insurance by helping with data analysis, waste control, and advice on design of payment reform. Commercial health insurers that are more data- and technology-savvy may be better positioned to serve as TPAs for public programs.
  • InsurTech – Mid-sized and smaller insurers are trying to working with InsurTech companies to develop innovative product designs, pricing, and distribution in order to avoid direct competition with the large domestic players. Technology giants such as Tencent, JD, and Alibaba also joined the crowd in offering commercial health insurance through innovative product designs and distribution channels. 
Constant evolution
Commercial health insurance in China appears to be going through a revitalisation, rapidly evolving in response to the country’s changing socio economics. The increased demand for better and more efficient healthcare presents challenges, but also opportunities for insurers in the region. 
Data and analytics is the foundation for understanding risks and opportunities. Data and analytics can be used to segment participants for tailored product design and marketing, stratify high-risk from low-risk patients for early intervention, improve reinsurance metrics and reserving, identify fraud, waste and abuse in a system, track changes in risks and expenditures over time, and identify care caps and improve outcomes. With the growth of InsurTech and advanced analytics, the most critical factor for success will be a company’s ability to organise data, apply meaningful and accurate analytics, and turn those results into actionable business insights. A 
Ms Rong Yi is principal and healthcare management consultant, based in New York. Ms Sharon Huang is director - China and consulting actuary is based in Beijing. Both work for Milliman. 
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