Is the Golden Era of Commercial Health Insurance Here? Tax-Free Deduction up to RMB 2,400 Nationwide
On December 11, the Ministry of Finance, the State Administration of Taxation, and the China Insurance Regulatory Commission issued the “Notice on Implementing Pilot Programs for Individual Income Tax Policies Related to Commercial Health Insurance,” launching pilot programs in 31 cities starting January 1, 2016, to offer individual income tax incentives for commercial health insurance. Premiums paid for designated health insurance products are exempt from individual income tax, with an annual tax-exemption cap of RMB 2,400.
This marks the third time this year that national-level policies on tax-preferred health insurance have been issued.
On May 28, 2015, the Ministry of Finance, the State Administration of Taxation, and the China Insurance Regulatory Commission (CIRC) jointly issued the Notice on Launching Pilot Programs for Individual Income Tax Policies Related to Commercial Health Insurance. On August 20, the CIRC promulgated the Interim Measures for the Administration of Individual Tax-Advantaged Health Insurance Business, deciding to establish individual tax-advantaged health insurance and specifying the permissible forms of such policies.
This time, the pilot scope of tax-preferential health insurance has been expanded from the four municipalities of Beijing, Shanghai, Tianjin, and Chongqing to 31 cities, with the pilot cities further clarified. Furthermore, this notice outlines the guideline framework for individual tax-preferential health insurance products, as well as three sets of model clauses: Type A, Type B, and Type C individual tax-preferential health insurance.
In summary, there are five key points regarding individual tax-advantaged health insurance:
Positioning:Medical Insurance (health insurance is divided into four major categories: critical illness insurance, medical insurance, long-term care insurance, and disability income loss insurance). Tax-advantaged health insurance is positioned after basic medical insurance and supplementary medical insurance, serving to cover out-of-pocket medical expenses.
Format:Adopting the Universal Life Insurance Format. Individual tax-advantaged health insurance products adopt the universal life insurance format, covering two liabilities: medical insurance and personal account accumulation.
Discount:Funds used to purchase insurance are exempt from individual income tax. For individuals in pilot regions who purchase compliant commercial health insurance products, the expenditure is allowed as a pre-tax deduction when calculating taxable income for the current year (or month), with a deduction limit of RMB 2,400 per year (RMB 200 per month).
Scope:Pilot programs are being implemented across the entire municipalities of Beijing, Shanghai, Tianjin, and Chongqing. Other pilot regions include Shijiazhuang in Hebei Province, Taiyuan in Shanxi Province, Hohhot in Inner Mongolia Autonomous Region, Shenyang in Liaoning Province, Changchun in Jilin Province, Harbin in Heilongjiang Province, Suzhou in Jiangsu Province, Ningbo in Zhejiang Province, Wuhu in Anhui Province, Fuzhou in Fujian Province, Nanchang in Jiangxi Province, Qingdao in Shandong Province, Zhengzhou (including Gongyi) in Henan Province, Wuhan in Hubei Province, Zhuzhou in Hunan Province, Guangzhou in Guangdong Province, Nanning in Guangxi Zhuang Autonomous Region, Haikou in Hainan Province, Chengdu in Sichuan Province, Guiyang in Guizhou Province, Qujing in Yunnan Province, Lhasa in Tibet Autonomous Region, Baoji in Shaanxi Province, Lanzhou in Gansu Province, Xining in Qinghai Province, Yinchuan (excluding its administered counties) in Ningxia Hui Autonomous Region, and Korla in Xinjiang Uygur Autonomous Region. With the exception of the four municipalities, the remaining pilot programs are primarily centered on provincial capital cities, with tax-advantaged health insurance initially rolled out in economically developed regions.
Requirements:Insurers shall not deny coverage based on the insured’s pre-existing medical conditions and must guarantee policy renewal. Insurance companies shall adhere to the principle of “breaking even with minimal profit”; if the simple loss ratio for medical insurance falls below 80%, the difference shall be refunded to the personal accounts of all insured individuals.
Three Positive Signals
First, this marks the first time that specific implementation rules for commercial health insurance policies eligible for individual income tax deductions have been issued at the national level in China. This signifies that commercial health insurance will receive greater policy support going forward, and is expected to achieve deeper integration with basic medical insurance programs and healthcare institutions in the future.
On March 17, 2009, the Central Committee of the Communist Party of China and the State Council issued the “Opinions on Deepening the Reform of the Medical and Healthcare System,” proposing to “actively develop commercial health insurance.” On September 28, 2013, the State Council released the “Several Opinions on Promoting the Development of the Health Service Industry,” setting forth the goal that by 2020, “commercial health insurance products would be more diverse, the number of insured individuals would increase substantially, the proportion of commercial health insurance expenditures in total health spending would rise significantly, and a relatively comprehensive health insurance mechanism would be established.”
Although the RMB 2,400 tax incentive falls somewhat short of prior industry expectations, a more positive perspective reveals that the policy door has now opened, paving the way for additional favorable measures in the future.
Secondly, the commercial health insurance market will be further invigorated, with more specialized health insurance companies emerging.However, at present, the commercial health insurance sector remains in a blue-ocean stage of competition. Currently, more than 100 insurance companies across China are engaged in commercial health insurance business, offering over 2,300 products. Yet there are only five specialized commercial health insurance companies: PICC Health, Kunlun Health, Hexie Health, Ping An Health, and CPIC-Allianz Health.
Moreover, for a long period, a significant portion of health insurance was offered as riders to life insurance and other products, resulting in a relatively limited number of individuals purchasing standalone health insurance policies.
Although traditional insurance companies have certain advantages, latecomers may still surpass them.
Third, commercial health insurance is expected to evolve from a light luxury item into a mass-market product.
Previously, the beneficiaries of commercial health insurance were predominantly high-net-worth individuals, with Ping An Health Insurance being a prime example. Prior preferential tax policies for commercial health insurance included exemptions from business tax on health insurance policies with terms of one year or longer underwritten by insurers, and allowed corporate group supplementary medical insurance premiums to be deducted before tax up to 5% of total payroll. Clearly, low- and middle-income populations were unable to access such insurance products. The prohibitively high costs also disincentivized insurers from developing products tailored to these demographic segments.
Following the introduction of tax-preferential commercial health insurance, enterprises and individuals will be encouraged to purchase such policies. In particular, many companies have already adopted the provision of commercial health insurance for employees as a benefit.
“How Far Away Is ‘Internet Healthcare + Insurance’?”
A consensus has emerged in the industry that insurance is one of the largest payers for internet healthcare, and integrating with insurance represents one of the primary revenue models for internet healthcare companies. Many internet healthcare firms aspire to become China’s Kaiser Permanente, while numerous insurers aim to emerge as China’s Oscar Health.
Apart from well-funded players such as WeDoctor Group and Ping An, which keep the entire “healthcare + insurance” model under their own control, most internet healthcare companies opt to partner with insurance providers.
For insurance companies, individual tax-advantaged health insurance undoubtedly expands the pool of potential policyholders. As more companies enter the market competition, it also helps collectively enlarge the overall market size. For internet healthcare companies venturing into health insurance, this will clearly increase the number of potential buyers as well.
However, what insurance companies currently need most is a larger population sample for data analysis to design optimal health insurance products. Zhang Weiqun, founder of Junyuan Health, stated that the data available to internet healthcare companies at this stage is limited in volume, and specific applications are still being explored.
“Insurance companies collect health insurance premiums. Internet healthcare companies must prove the effectiveness of their health management services with data support before insurers are likely to pay them accordingly,” said Xu Feng, co-founder of Tang Doctor.
Bi Lei, co-founder of Chunyu Doctors, believes that the development of internet healthcare has been limited in time, and big data needs to accumulate, requiring a focus on longer-term applications. “The earlier insurance companies get involved, the more dividends they will be able to share in the future.”
For internet healthcare companies, unlocking insurance as a profit model first requires people to purchase insurance policies, which then enables the provision of subsequent internet-based medical services.
From the perspective of existing policy regulations, insurance companies have limited incentives. The core reasons are the excessively high costs and risks, making it highly likely that operations aiming for capital preservation with slim profits will turn into loss-making endeavors.
Consider the series of regulations outlined in policies regarding tax-advantaged individual health insurance: for instance, insurance companies offering individual tax-qualified health insurance products are required to establish an independent health insurance division and staff it with specialized professionals. At least 50% of the personnel in the health insurance division must have prior experience in health insurance operations, and no less than 30% must possess a medical background. The simple loss ratio for medical insurance must not fall below 80%. Furthermore, insurers are expected to operate within a range of break-even or modest profitability. The regulatory prohibition against denying coverage based on pre-existing conditions also increases insurers’ risks and costs to some extent. On the other hand, domestic commercial health insurance faces objective challenges, including a late start, insufficient customer data, and limited actuarial experience, forcing reliance on foreign health insurance product designs for reference. However, data from overseas reinsurers, which are based on global populations, exhibit low applicability to China’s local population.
Clearly, insurance companies must rely on scale to achieve profitability.
However, Zhou Lei, CEO of Da Te Bao, told VCBeat that while the policy on tax-advantaged individual health insurance is beneficial to both the insurance and internet healthcare industries, achieving significant scale in the short term remains challenging. The greater significance of the policy’s introduction lies in drawing market participants’ attention to the commercial health insurance sector, thereby stimulating demand in this market.
On December 14, Ping An Bank and WeDoctor Group signed a strategic cooperation agreement. The two parties will jointly explore the creation of family health accounts for WeDoctor’s vast user base, integrating three core functions: medical consultation, payment settlement, and financial services. WeDoctor’s medical resources will provide healthcare services to Ping An Bank’s customers, while Ping An Bank will offer capital appreciation solutions for WeDoctor’s health accounts.
It is foreseeable that the story of “Internet Healthcare + Insurance” has only just begun.