Star Magnolia Capital
How China’s Mutual Aid Program is Filling the Gap of the Health Insurance Scheme?
Updated: Jun 20, 2020
By Jiawei He and Shinya Deguchi
Amid COVID-19, China’s health insurance system drew our attention so we decided to study China’s healthcare insurance scheme. We found that China has a well established and functioning public health insurance scheme, but it does not address all needs. While a private health insurance system is growing rapidly, another type of privately-funded insurance-like scheme called Mutual Aid Program is also growing.
How does the public health insurance scheme work in China?
China does have free public healthcare which is under the country’s social insurance plan. The healthcare system provides basic coverage for the majority of the people living in China, but the actual coverage depends on the region.
The medical insurance scheme is broken down into two types: Urban Employee Basic Medical Insurance and Urban-Rural Resident Basic Medical Insurance. The latter was created as a result of a merger between Newly Cooperative Medical Scheme (for rural residents) and Urban Resident Basic Medical Insurance in 2016 and the transition is still underway. As of 2011, approximately 95% of the Chinese population was covered under one of the schemes.
In 2018, China spent approximately 5.0% of GDP on healthcare, or CNY 5.9 trillion (USD 1.6 trillion), compared to United States’ 16.9%, Germany’s 11.2%, and Japan’s 10.9%. On a per-capita basis, China spent $498 for healthcare, which is only 5% of the United States.
In 2018, 28% of China’s healthcare spending was financed by the central and local governments, 44% was financed by publicly funded health insurance, private health insurance, or social health donations, and 28% was paid out-of-pocket (mostly to cover drugs).
What is Covered by the Public Healthcare Scheme?
The coverage is often defined by the local governments and may vary greatly, however, public financed basic medical insurance typically covers:
Inpatient hospital care (selected provinces and cities)
Primary and specialist care
Mental health care
Emergency care (but not emergency transportation)
Traditional Chinese medicine
A few dental and optometry services (but mostly out-of-pocket)
Home care and hospice care are often not included.
Private Health Insurance
The private health insurance premiums accounted for 5.9% of total health expenditure as of 2015. At present, the coverage ratio of private health insurance is relatively low in China as many people do not realize how the health insurance system works, they did not want to buy commercial insurance because they thought the government insurance scheme is good enough to cover their cost.
Normally private health insurance covers the rest of the cost after the government reimbursement, and it typically costs around RMB 7,000-10,000 per year.
Mutual Aid Industry
As Chinese households seek wider medical coverage, the mutual aid (sometimes it’s called mutual protection) plans expanded through the online channels. It is one of the traditional “crowdfunding” scheme dating back a few hundred years. The general idea is that small amounts of money can be pooled into large sums. China’s large population means the cost of coverage can theoretically be spread across hundreds of millions of people at negligible cost to each individual.
According to Ant Finance’s research, users of online mutual aid programs in China are primarily from low-income or middle-income households, according to the white paper. Among those surveyed, who took part in Mar 2020 by responding to an online questionnaire, 80% earn less than RMB 8,333 (USD 1,180) per month while 72% come from third or lower-tier cities and rural areas.
According to iiMedia Research shows, 95.2% of online mutual aid plan participants paid less than RMB 10 per month. The compensation could differ among platforms, but the amount is typically up to RMB 300,000. With the characteristics of low threshold and low cost, online mutual aid can cover lower-tier cities and more low-income groups, and gradually become an important part of the health insurance system. The mutual aid plans are functioning as a substitute for expensive private health insurance plans, which will cover the expensive treatment of severe illness.
The model of mutual aid companies used to be very similar. First, users have to register on the platform (some platforms also require users to make a deposit in their accounts), then when there is a mutual aid event occurs (typically a serious illness like cancer), then all registered users on the platform will share the cost together (some companies put a limit on the amount like RMB 3). There would be a third-party institution verifying the information of events.
The revenue model for most companies is still not clear as some of them charge a certain amount of “management fee” to cover the cost. This was considered a scandal by the public as people do not think mutual aid companies should take commissions.
It could be difficult for users to get a large amount of compensation from platforms, some of these companies are even involved in fraudulent activities.
More people are getting into the platforms without proper verification some people might commit frauds such as registering for mutual aid after acknowledging themselves being sick
Transparency of mutual aid platforms (compensation system, the authenticity of information)
The security issue of the fundraised for mutual aid events because there is no monitor on the “cash pool” of mutual aid platforms
As more internet giants get involved in the industry, the business is becoming more and more regulated. Such as Xianghubao (相互宝), by relying on the ecosystem of Alibaba, especially Ant Finance, Xianghubao can actually evaluate the credit risk and secure the fundraising process. And the government also stepped in trying to enhance the regulations on mutual aid platforms, as they realize this would be an important part for health insurance system, they put some rules in the industry, such us prohibiting mutual aid platforms from charging pre-payments or collecting cash-pool before any mutual-aid events occur. But there is still uncertainty as no formal laws or regulations carried out yet.
As Chinese society matures demand for better healthcare coverage will increase. While the current government-sponsored health insurance system is better than most of emerging markets, it does not address all needs. Similarly, private health insurance is too expensive for the low-income populations. China’s mutual aid program is a unique way of Chinese society to resolve the problem. The internet helped to lower the operational and administrative costs of such programs thus it became more affordable. The mutual aid program does not solve all the problems and does not address all needs of Chinese households, but we believe it will play an increasingly more important role in China’s healthcare system in the future.