Jeffrey Towson on Advancing Private Health Insurance in China: Opportunities, Challenges, and Strategic Models

It has been argued that private health insurance represents one of the biggest opportunities in China today, yet it is also a highly frustrating one. Jeffrey Towson, Professor of Investment Management at Guanghua School of Management, Peking University, shared his insights on how commercial health insurance will develop in China through an article. VCBeat (WeChat ID: vcbeat) has compiled and summarized his views.

Jeffrey Towson (Image source: jeffreytowson.com)

As Chinese consumers grow wealthier, their healthcare needs are becoming increasingly complex. Last year, McKinsey & Co., a renowned global consulting firm, conducted a survey of 10,000 Chinese respondents and found rising interest in food safety and health, as well as physical exercise, with more people adopting preventive medical measures. One major driver behind this heightened health awareness is population aging; another is the growing burden of “developed-country chronic diseases,” such as diabetes and heart disease, which are increasingly affecting many people as living standards improve. In sum, demand for healthcare in China will continue to rise.

The growing complexity of demand has given rise to another trend: for healthcare consumers with greater financial means, the public healthcare system can no longer meet their higher expectations for medical services, while private hospitals, springing up in large numbers, are seeking larger and more stable revenue streams.

“The demand for treatment at private hospitals among Chinese people is growing,” said Neil Raymond, CEO of Hong Kong-based An Er Bao Insurance Consulting. “If you are wealthy, you may opt for more expensive private hospitals that offer better and more attentive care than public hospitals. And now, there are increasingly more wealthy individuals in China.”

On the other hand, China’s current healthcare landscape reveals numerous challenges: long queues form daily outside major public hospitals; patients continue to travel great distances to seek medical care in Hong Kong, Singapore, and California; many families save money over the long term to prepare for medical emergencies; and incidents of violence against medical personnel frequently make headlines. These phenomena all reflect the gap between the supply and demand of medical services.

Domestic and foreign insurers have lined up in droves to bridge the gap in multi-tiered healthcare demand, yet numerous challenges remain. Regulatory restrictions, low public awareness of health insurance, and the absence of standardized underwriting and pricing criteria are all impeding the progress of private health insurance.

According to a survey by the Boston Consulting Group, private health insurers in China generated $36 billion in premium income in 2015, representing a 36% increase from 2010. Despite these striking figures, the majority of health insurance products currently sold in China are offered as riders, such as critical illness coverage attached to life insurance policies. These products typically provide a one-time lump-sum payment upon diagnosis of a critical illness, with most offering only this single form of full payout and lacking collaborative arrangements with healthcare providers for cost reductions or fee waivers.

There are very few insurance products capable of providing long-term coverage for medical expenses, and most are limited to large corporate groups. Furthermore, due to the scarcity of medical data obtained from hospitals and other providers, underwriting and pricing for specialized commercial medical insurance remain highly challenging. In actual claims settlement, insurers may face lower-than-expected profitability due to excessive reimbursements from basic medical insurance, or encounter insurance fraud, making risk prediction extremely difficult.

The disadvantages of private health insurance can be summarized as follows: First, there is insufficient medical information, and the degree of standardization is low due to the use of different diagnostic coding systems across various healthcare systems. Second, China has a scarcity of health insurance experts, and there is still a long way to go in establishing precise pricing for comprehensive medical insurance products. Third, there is a lack of sufficient tax incentives to encourage companies and individuals to purchase medical insurance voluntarily.

Nevertheless, many domestic companies are still seeking licenses to sell medical insurance. For instance, Ping An Insurance Group has implemented a clear strategy: offering limited medical insurance riders, developing several dedicated mobile apps to facilitate medical appointment scheduling and health insurance claims processing, and positioning itself as a comprehensive service provider within the new healthcare ecosystem. Ping An Insurance is undoubtedly the most agile player in the private health insurance sector, and it has stated that commercial medical insurance will become a key focus area for the company.

There is a highly instructive case for China’s commercial health insurance companies to reference: Oxford Health Plans, which excelled in building its provider network and claims processing system. Oxford Health Plans achieved remarkable success in the 1980s, primarily because itIt has devoted most of its efforts to serving local residents, attracting millions of local members by integrating networks of top-tier local physicians and hospitals., thereby achieving a market share substantial enough to negotiate terms with major medical suppliers.

The case of Oxford Health Plans demonstrates that local health insurers can compete on par with national carriers. To implement this model in a Chinese city, hospitals participating in the medical insurance partnership would need to charge a fixed monthly fee and assume the majority of risks associated with medical care. This approach, vividly termed “capitation,” circumvents extensive insurance claims processes, barriers to data access, and standardization issues.

Another viable approach to expanding private health insurance in China is,Health Insurance Plans Launched by Integrated Hospital Networks Within Their Own Systems. This concept was proposed in 1980 by Stanford economist Alain Enthoven. In this model, hospital networks monitor and coordinate the entire healthcare process, while the finance department handles insurance marketing. This approach effectively avoids the complex contracts and medical reimbursement processes between healthcare providers and insurers.

Today, the renowned Kaiser Permanente in California has already implemented this model, covering health insurance for 10 million members, with 38 medical centers and 16,000 physicians. The appeal of this model to China lies in the fact that insurance is an integral part of healthcare services, enabling medical reimbursements to be processed quickly without cumbersome claims procedures. Moreover, it allows for risk management through control of healthcare supply, providing a solid platform for future organic growth.

Investors in the healthcare sector often face disappointment. While demographics, age structure, technological advancements, disease incidence, and other statistical data may paint a picture of a vast market, policy remains the decisive factor determining the actual size of the healthcare market. Only within this overarching framework can private insurance truly discuss its “potential.”

Over the past 5–10 years, reforms in China’s healthcare sector have been gradual and incremental, yet the resulting improvements have been nothing short of remarkable. Basic medical insurance has steadily achieved universal coverage; although the number of beds in private hospitals remains relatively low, it has nonetheless sparked a wave of investment. Most importantly, Chinese consumers’ demand for high-quality medical services has risen significantly alongside growing wealth. In this context, the entry of private commercial health insurance has emerged as a valuable complementary solution.