Private health insurance is arguably both the biggest and the most vexing opportunity in China today. The need is clear: Wealthy Chinese consumers are growing increasingly frustrated with the public healthcare system, and upstart private hospitals are struggling to find larger and more stable revenue flows.
Local and foreign insurers are lined up to fill this gap but the opportunity remains tantalizingly out of reach. Efforts in private health insurance have been stymied by regulatory constraints; by too few real private secondary care hospitals; by poor consumer awareness of health insurance; and by inaccessible, limited and non-standardized medical data for underwriting and pricing.
Chinese consumers are becoming 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. This growing focus on healthy living is great for healthcare and hospitals even if bad for KFC.
Healthcare demand is also increasing as the population ages. Plus, as China develops, chronic diseases common to developed countries, such as diabetes and obesity, are becoming more common. Overall, the demand for healthcare keeps growing.
Meanwhile, Chinese public hospitals remain overcrowded, have questionable financial incentives and are often criticized for poor service. While public insurance extends 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.
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."
This growing gap between supply and demand can be seen in the long lines outside of top Chinese hospitals virtually every day. It can be seen in the numbers traveling to Hong Kong, Singapore and California for care. It can be seen in families' continued hoarding of cash for medical emergencies. It can also be seen in the record number of attacks on hospital workers every year in China.
Beyond add-on coverage
In 2015, private insurers took in around $36 billion in premiums in China, according to Boston Consulting Group, and the figure has been growing 36% a year since 2010. 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, are mostly unprofitable, and do not open the way for negotiating discounts from healthcare providers.
Real healthcare reimbursement policies that pay out for care over longer terms are still rare in China and mostly limited to group accounts for larger companies. These products remain difficult to price and underwrite, given the lack of medical information coming from hospitals and other providers. Actual claims, meanwhile, can be high, unpredictable and prone to fraud.
Medical information isn't just scarce, it's also not standardized, with varying systems for coding diagnoses and treatment. There is also little medical insurance expertise in China. Underwriting and pricing comprehensive health insurance to cover true secondary care is still a long way off. Companies and individuals also lack tax incentives to buy health insurance.
Nonetheless, many companies are seeking licenses to sell real health insurance in China. Some, such as Ping An Insurance Group, have a clear strategy in place -- 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. Some are even opening clinics and moving into laboratory services.
Ping An is arguably the most aggressive in its movement towards private healthcare insurance, declaring that it will become one of the company's primary areas. Its Ping An Good Doctor mobile application offers medical and pricing information, doctor scheduling, payments and non-prescription e-commerce.
Filling the gap
Another direction Ping An is likely considering is creating a pharmacy benefit management business. PBMs are typically several years ahead of full health reimbursement insurance in terms of data standardization, operations and IT infrastructure. The underwriting, pricing, contracting and processing for pharmaceutical transactions is just much simpler than for a full suite of medical products and services. Approval can be done in real-time during drug dispensing and there is far greater control of claims and utilization management.
The area also promises advantages of scale, as a large PBM can offer customers lower pharmaceutical prices than a smaller PBM. All in all, this is a logical first area for reimbursement insurance to take root in Chinese healthcare. Alibaba Health Information Technology, an affiliate of Alibaba Group Holding, is also likely watching this area, having already introduced a pharmacy app called Alijk.
Another approach for dealing with the challenges of Chinese health insurance -- especially creating a provider network and getting medical data and claims systems in place -- would be to follow the example of Oxford Health Plan. This New York City-based insurer rocketed to success in the mid-1980s by focusing its marketing and services mostly on the city's residents. By offering access to desired local doctors and hospitals, it drew in several million local members, giving it enough market share to negotiate discounts with area providers.
Oxford showed that a local health plan can have all the competitive strengths of a national one, a good approach for transitioning from add-on health insurance products to full reimbursement policies. To make this work in a Chinese city, participating hospitals could be paid a fixed amount per member per month while taking most of the risk for care. This approach, known as "capitation," would avoid confronting most claims processing, data access and standardization problems. It would also position the health plan for a non-capitation product later when the technical architecture and hospitals becomes more developed.
A third possible approach to health insurance in China may be found in the model of an integrated hospital and clinic network with its own insurance plans, as envisaged in the 1980s by Stanford economist Alain Enthoven. In this model, the network oversees and coordinates the full spectrum of care and a financing division provides insurance and marketing. This avoids complicated contracting and claims processing between providers and insurers.
Today, the most famous example of this model is California-based Kaiser Permanente, which covers some 10 million people and has 38 medical centers and 16,000 physicians. This model could appeal for China as it enables full reimbursement insurance immediately because the insurer is part of the delivery of care. There would be no need for public hospital cooperation or data and no need for network management or most claims processing infrastructure. Ultimately, risk is managed through control of medical delivery. The model also provides a good platform for future organic growth.
Healthcare is famous for disappointing investors. Big market opportunities are frequently estimated based on population sizes, aging, technology advancement, disease rates and demographics. However, the actual size of the opportunity and the economics of healthcare are always political. Whether China's healthcare market becomes as large as estimated will depend more on politics than any other factor. Within this question, private insurance could be the lynchpin for the development of the entire sector.
While slow and incremental, there has actually been a remarkable transformation in the Chinese healthcare system over the past 5-1o years. Basic government insurance has been expanded to cover the entire population. Private hospitals and private investment have surged, although private hospital beds actually remain small in number. Doctors and other professionals have been partly freed to work outside the public hospital system. Most importantly, the wealth and expectations of Chinese consumers have increased dramatically with regards to healthcare quality and service. The one critical remaining issue is the introduction of full healthcare insurance reimbursement.
Jeffrey Towson is a professor of investment at Peking University's Guanghua School of Management and co-author of "The One Hour China Book."