3 Options for Bringing Private Health Insurance to China (Part 2 of 2)

In Part 1 (located here), I argued that there is a growing supply-demand gap at the center of Chinese healthcare. And that private health insurance is likely the lynchpin in solving this problem.

In this article, I lay out three models for launching reimbursement-style private health insurance in China. All three have worked in other locations and would require only incremental regulatory changes.

Option 1: Launch a PBM

One idea I think Ping An (discussed in Part 1) should be considering is creating a pharmacy benefit management (PBM) business. I have seen this idea mentioned in some of their documents but am unclear how they serious they are about it.

PBMs are typically several years ahead of full health reimbursement insurance, especially 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.

A PBM in China also offers the advantages of scale. A large PBM can offer customers lower pharmaceutical prices than a smaller PBM. It has the type of competitive advantages that make health insurance more attractive than life and other more commoditized insurance products.

All in all, a PBM is a logical first move for health reimbursement insurance to take root in Chinese. I suspect Alibaba Health Information Technology, an affiliate of Alibaba Group Holding, is likely watching this area, having already introduced a pharmacy app called Alijk.

Option 2: Create a capitated local health plan

Another approach for dealing with the challenges of Chinese health insurance -- especially creating a functioning 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 one city's residents. By offering access to desired local doctors and hospitals and tailoring services, it drew in several million local members, giving it enough market share to negotiate discounts with local providers.

Oxford proved that a local health plan can have most all the competitive strengths of a national one. This would be a good approach for transitioning from add-on health insurance products to full reimbursement policies in one city or region of China.

However, to make this work in a Chinese city, participating hospitals would probably need to be paid a fixed amount per member per month at the outset (basically taking most of the risk for care). This approach, known as "capitation," would avoid most claims processing, data access and data standardization problems. It would also position the health plan for a non-capitated product later when the technical architecture and hospitals become are more developed.

Option 3: Build a Kaiser-like integrated healthcare system with insurance.

A third model for health insurance in China is combining an integrated hospital and clinic network with its own insurance plan, as envisaged in the 1980s by Stanford economist Alain Enthoven (my old professor). In this model, the hospital / clinic network oversees and coordinates the full spectrum of care - and an in-house financing division provides insurance and marketing. This avoids the 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 work in China as it enables full reimbursement insurance immediately because the insurer is part of the actual delivery of care. There would be no need for public hospital cooperation or data sharing - 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 organic growth.

Final thoughts

Healthcare is famous for disappointing investors betting on significant change (or technological adoption). And there is a lot of that going on in China right now.

Big healthcare opportunities are frequently projected based on population sizes, aging, technology advancements, disease rates and demographics. The numbers always look great.

However, the true size of any healthcare opportunity is usually politically determined. Whether China's healthcare market becomes as large as its many big projections will ultimately depend more on politics and regulations than any other factors. And within this mostly political question, the emergence of private insurance could be the lynchpin for the development of the entire sector.

There has actually been a remarkable transformation of the Chinese healthcare system over the past 5-10 years. It has been slow and incremental - but sweeping. Basic government insurance has been expanded to cover the entire population. Private hospitals and private investment have surged (although private hospital beds are actually still quite small in number). Doctors and other professionals have been partly freed to work outside of the public hospital system. And most importantly, the wealth and expectations of Chinese consumers have increased dramatically with regards to healthcare quality and service. My argument is that the one critical remaining issue is the introduction of private healthcare insurance.

Thanks for reading. Part 1 of this article is located here. Cheers, jeff

(Article reposted from Nikkei Asian Review, located here.)

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I write and speak about the fight for Chinese consumers and digital China.

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If you would like my recommended China reading, you can get it at www.jefftowson.com. You can also get a free chapter of my One Hour China Book there as well.

Some previous posts include:

• I Took 20 Chinese Students to Meet Warren Buffett. Here's What Happened.
• Stop Calling Me an Introvert. I Prefer "Power Thinker"
• How I Went From NYC to Working for Prince Alwaleed

About: I am a Professor of Investment at Peking University Guanghua School of Management in Beijing. I am also an investor, consultant and former executive / slave to Prince Alwaleed.

Top photo by Jim Renaud, Creative Commons license with link here.