The growing role of commercial health insurance in China

With economic growth, healthcare expenditures in China are rising rapidly, and reforms by the government have enhanced basic medical insurance coverage.¹ Nevertheless, a significant health protection gap remains.  We believe commercial health insurance can play an expanded role in contributing to a multi-tiered protection and comprehensive health ecosystem, and thereby help reduce the nation's aggregate protection gap. ²

Healthcare expenditure reached CNY 9.06 trillion in 2023, up 9.9% in compound average growth rate (CAGR) terms since 2014. ³  Healthcare spending as a share of GDP grew to 7.2% from 5.5% over the same period, though that is still lower than in many developed markets (eg, US (16.5%), Germany (12.6%) and Japan (11.4% in 2022).⁴ We expect spending will continue to grow, driven by increased use of medical services, rising drug and treatment costs, and an ageing population.

Mandatory basic medical insurance covers more than 95% of the population and reduced the share of out-of-pocket healthcare costs to 27.3% in 2023 from 33.2% in 2014 in 2023.⁵ However, the annual surplus of the basic medical insurance fund fell over two consecutive years to CNY 0.47 trillion in 2024.⁶ Contributing factors include the ageing population (increased morbidity, deteriorating dependency ratio), higher reimbursement rates, broader drug coverage and reduced company premiums for employee coverage.

The government has implemented systematic reforms to enhance the sustainability of the medical insurance fund. Key aspects include: 1) centralised volume-based procurement to reduce drug costs; 2) regular dynamic adjustments to the medical insurance drugs catalogue; and 3) the introduction of diagnosis-related group (DRG) and diagnosis intervention package (DIP) classification mechanisms. These changes create standardised treatment pathways, disease-specific payment limits, reduced drug costs and better quality supervision, thereby providing patients with more cost-effective treatment options.

As China continues to deepen its medical and health system reforms to strengthen public health provision, individuals, particularly from middle and high income groups, are increasingly demanding services beyond those available under basic cover. Commercial health insurance has played an expanding role in bridging some of this gap. Commercial health insurance premiums were USD 133.9 billion in 2023, up 20% CAGR from 2014, the share of GDP rising to 0.7% from 0.2% over the same period. Claims grew to USD 54 billion in 2023 (4.2% of total healthcare expenditures) from USD 9.2 billion in 2014.⁷

Over the past decade, commercial health insurance penetration (premiums as a share of GDP) has surged by a factor of four, and density (premiums per capita) has grown eightfold. Nonetheless, China remains some way behind developed markets in terms of penetration and density (see Figure 1). Moreover, commercial health premium growth has softened in recent years (2024: 8.2% vs 2016-19 CAGR: 20.5%), driven by factors including slower economic growth, market competition, limitations on data availability and the growing risk of adverse selection.

The growth in commercial insurance contributed to a nearly 2-percentage-point improvement in health insurance resilience from 2014-2024. However, the health protection gap is still widening. Swiss Re Institute analysis suggests a 2024 health protection gap of an estimated USD 377 billion (in premium terms), around double the gap in 2014. This equates to around 30% of potential healthcare risk being uncovered.⁸

As has been seen in other countries, medical reforms like DRG and DIP reshape commercial health insurance business and provide opportunities for further growth. For example, Germany's DRG payment reform led to an increase from 17% to 31% (2000-2018) in health insurance coverage, that is the percentage of the insured to total population.⁹

• Actuarial practices in China are being upgraded with the integration of DRG medical data and clinical pathway insights into commercial health insurance data platform. This marks a milestone that breaks data silos between public services and commercial insurance. A blockchain framework enables real-time access to over 20 types of medical data via de-identified and encrypted transmission, significantly reducing underwriting time from days to under 1 hour, and accelerating claim processing by 70%. The breakthrough in data integration helps insurers optimise actuarial models, design tailored products and reduce fraud risk.
• Addressing unmet medical needs beyond DRG unlocks new growth opportunities. Healthcare payments are shifting from traditional out-of-pocket reimbursements to value-based models. These need to cover costs beyond DRG coverage such as hospice care or orphan drug treatments. In the case of Japan, its Diagnosis Procedure Combination has incentivised preventative and pre-hospitalisation initiatives between insurers and healthcare providers, such as physical checkups, vaccinations, chronic disease management as well as care insurance.
• In addition, future integration with DRG/DIP and health data will drive dynamic pricing and health service innovation, enhancing "medical-insurance-healthcare" collaboration. Further, China is well positioned for the provision of mid-to-high end insurance products as more quality medical services become more available in tandem with the opening-up of the healthcare sector. Meanwhile, health insurers are poised to deepen collaborative partnerships with medical institutions and health management service providers, delivering tailored protection and service solutions to meet users’ health needs across all life stages.

Healthcare reforms have provided commercial health insurers in China with new business pools to strengthen their role as service enablers. Broader risk coverage tailored to evolving healthcare demand, DRG data integration, and delivery of full-cycle healthcare services, offer insurers growth opportunities that will also contribute to a narrowing of the nation's health protection gap.