A long-sought restructuring of one of China’s two national medical insurance programs is racing against the clock as the demands of an aging population drain the fund that provides healthcare for more than 360 million urban residents.

As of early July, all of China’s 31 province-level authorities have revised rules for the Urban Employee Basic Medical Insurance System, the plan undergoing the changes that were proposed in 2020. The state-backed program is supported by a 3.5 trillion-yuan ($487 billion) fund that is fueled by contributions collected from employers and the monthly salaries of workers.

Many residents are now seeing the effects of the new rules. Liao Hong, a 63-year-old corporate retiree in Wuhan, Hubei province, noticed in June that the reimbursement ratio for her hypertension medicine increased to 75% from 68%. Moreover, a previous 500-yuan deductible threshold was eliminated. As a result, she was responsible for paying just 88.5 yuan of the 354-yuan cost of the treatment.

China’s other national health insurance system — which serves rural residents and the unemployed in urban centers — relies heavily on government subsidies. Together, the two programs cover 95% of the nation’s 1.4 billion people and reimburse 50% to 90% of their medical expenses.

As of the end of last year, 362 million Chinese participated in the Urban Employee Basic Medical Insurance System, the one under revision. Annual spending by the plan totaled 1.5 trillion yuan, according to data from the National Healthcare Security Administration (NHSA).

The program consists of two parts — a mutual account that pools money from a portion of the contributions for public spending, and personal accounts that can be accessed only by individual contributors.

Employers typically contribute between 6% and 10% of urban worker salaries for healthcare, with 70% of the withholdings going to the public account. The remaining 30% of employer collections are directed to the personal accounts of employees, who in turn contribute 2% of their pay to these funds.

The public accounts are mainly used to reimburse inpatient costs for every person covered by the program, while the personal funds may be used to pay for outpatient services and drug costs.

By the end of 2022, the mutual account totaled 2.15 trillion yuan, while personal accounts held 1.35 trillion yuan, NHSA data show.

This system was designed to encourage individuals to join the program because many employees saw their accounts as personal savings for future medical needs, experts said. But problems with the system started appearing as the aging population and growing healthcare demands pushed up spending by the public accounts while personal accounts went untapped. At the same time, people increasingly complained of limited coverage of costs for outpatient and chronic disease care.

The changes proposed in 2020 were designed to address these issues. According to the plan, almost half of the contributions that previously went into personal accounts — mainly the employer contributions — will be shifted to the mutual account for public use. Meanwhile, coverage of people’s spending for outpatient services will be expanded, tapping the additional contributions to the public account.

Redirecting employer contributions has led to a decline in deposits to personal accounts, angering the public.

In February, when several cities including Wuhan and Guangzhou kicked off the revamp, groups of retired seniors took to the streets to complain about their shrinking personal accounts. As a result of the changes, retirees in Wuhan will receive almost 2,000 yuan less per year in contributions to their personal accounts, according to the Wuhan Municipal Healthcare Security Administration.

But the restructuring is a necessary revision for the 25-year-old program to shift its protection focus from personal accumulation toward expanding the functions of mutual aid, analysts said.

Chen Jinfu, former deputy director of the NHSA, said in a 2021 policy briefing that the reform was designed to improve fund efficiency and enhance access to outpatient medical services, particularly for elderly patients.

As the reform unfolds, people like Liao have experienced positive changes, with an increase in the reimbursement rate and expanded coverage on outpatient spending, despite receiving reduced contributions into their personal accounts.

Mounting pressures

Keeping the insurance fund afloat remains a challenge for policymakers as expanding coverage adds pressure to an already stretched system. While the new plan will add 600 billion yuan annually to the mutual account, that will barely meet the increased spending, analysts said.

“Many regions may register mutual account deficits for outpatient service coverage,” one medical insurance expert said.

China’s Urban Employee Medical Insurance System has largely remained stable, but some localities have felt the squeeze of slowing contributions and rising expenditure. In 2021, prior to the latest reforms, the insurance program in the eastern city of Jiujiang recorded a deficit, according to the city’s healthcare security bureau.

The aging population and slowing economy has added another drag on contributions and challenge to policymakers seeking to balance expanding protection and sustainable spending. New enrollment in the Urban Employee Medical Insurance Program has declined for three straight years, according to official data. The number of participants increased 2.3% in 2022, compared with a 4.6% growth in 2020.

Analysts are warning of a looming capital shortfall in the system, which is likely to be expected in just a few years. Guo Youde, a professor of public policy at Fudan University in Shanghai, said it is an urgent issue for policymakers to optimize mutual account management through various means to delay the arrival of deficits as much as possible.

Expanding coverage

One of the major changes in the revamp to expand the benefits for urban employees is to include outpatient services into the coverage offered by the mutual account.

Since the Urban Employee Medical Insurance System was set up in 1998, outpatient services have remained outside the mutual account coverage, leaving patients mainly responsible for their own expenses or reliant on the deposits in their personal accounts.

Such arrangements reflect the idea that the insurance system was mainly tasked to protect people from hefty medical burdens caused by major diseases requiring costly inpatient treatments.

Experts have argued that such a system has encouraged excessive treatment as people often prefer to receive care that’s covered by the mutual account rather than tapping from their personal accounts. In 2019, nearly 19% of China’s urban employees who received medical treatment were hospitalized, compared with 10% in the rich-country block of the Organization for Economic Cooperation and Development, indicating a waste of medical resources.

As China’s demographics change, the prevalence of chronic diseases requiring outpatient treatment will become more frequent. In 2021, China had 20.56 million people aged 65 and above in 2021, about 14.2% of the population. Thus, the demand for outpatient care for common and chronic diseases among the elderly, such as hypertension, diabetes, and Alzheimer’s, has increased significantly and outpatient spending has increasingly emerged as a burden for families.

Due to the limited capacity of personal accounts, some low-income patients may choose to give up medical treatment uncovered by the mutual account reimbursement or face an unaffordable burden, said Zhang Xiaojuan, an analyst at Chinese Academy of Medical Sciences.

In 2021, Chinese patients made a total of 8.04 billion outpatient and emergency visits, among the highest in the world, official data showed. But the average use of outpatient service in China remains low and is below the global average, studies found.

“Outpatient medical treatment is too expensive, and the waiting times are long. We are all reluctant to go,” Liao said.

The State Council in 2021 issued a set of guidelines to outline the roadmap of the reform and pledged to gradually include the ordinary outpatient expenses for common and frequently occurring illnesses into the coverage of mutual account reimbursement. Coverage of outpatient treatments for chronic and special diseases will also be expanded, according to the document.

Ultimately, the system will shift from disease-based coverage to expense-based coverage. The document provided a three-year transitional period.

The 2021 guidelines didn’t specify detailed payment plan related to the reform such as deductible threshold and the maximum reimbursement amount. Instead, it told local authorities to decide based on their own capacities. Local authorities, mainly city and county level governments, are responsible to manage payments for their residents under the medical insurance system.

All the 31 provincial-level governments have published insurance coverage rules for outpatient services. Richer provinces in the east coast usually offered lower deductibles, higher upper limits and reimbursement rates than peers in the central and western regions, according to public information.

A healthcare insurance official in an eastern province told Caixin that the provincial government provided a range for major payment indicators while lower-level authorities worked out local plans based on patient medical data, population health conditions and the size of medical insurance funds.

Striking a balance

A major debate is whether the deductible threshold should be scrapped across the country, as in Wuhan and several regions, steps that the insured applaud.

Some experts warn that doing so may encourage unnecessary medical spending and cause a waste of medical resources.

“The core of medical insurance funds is to provide coverage for major and severe illnesses,” said Zhu Minglai, a medical insurance policy expert at Nankai University in Tianjin. “If minor illnesses costing only a couple of hundred yuan are also reimbursed, how can we achieve maximum efficiency.”

Zhu suggests that for elderly individuals or low-income groups facing genuine difficulties, targeted policies like medical assistance can be implemented, instead of completely removing the deductible threshold for everyone.

Currently, a prevailing academic view is to set a moderate deductible threshold and a high maximum reimbursement limit. This ensures affordability for those with significant medical needs and prevents overutilization of healthcare for minor illnesses, experts said.

Local authorities are carefully tweaking the policies step by step. Zhang Shaoqing, an official at the Jiangxi provincial healthcare security bureau, said the province first set a 600-yuan deductible threshold and 2,000-yuan reimbursement limit based on studies of urban residents’ average healthcare spending over the past three years. After months of assessment on the new system’s capacity, the province in early July halved the deductible threshold and increased the upper-limit.

“In the future, we will make appropriate optimizations and adjustments based on the fund’s income and expenditures,” said Zhang.

“The revamp is in its early stages, and most regions lack experience,” said a health insurance expert. “Our medical insurance treatment design is relatively basic and requires enhanced precision management in the future.”

This piece was originally published by Caixin Global. It is republished here with permission.

Reporters: Zhou Xinda and Han Wei.

(Header image: Medical staff and patients at a hospital in Shanghai, August 9, 2022. Alex Plavevski/EPA via IC)