CITIC Securities: Commercial health insurance is an inevitable trend, and the valuation system of the medical and health industry is expected to be reshaped

According to the Zhitong Finance APP, CITIC Securities has released a research report stating that basic medical insurance is the main source of health expenditure in China, currently facing structural pressures. The development of commercial health insurance is the way to break the deadlock. Currently, multiple factors are catalyzing the marginal acceleration of the industry. Developing "government-guided commercial health insurance" is more in line with China's national conditions. It is predicted that by 2027E/2030E, commercial health insurance is expected to contribute an incremental payment amount of 94.5 billion/300 billion yuan to China's medical and health industry. In the next 5-10 years, the annual growth rate of medical expenses in China is expected to be between 5% and 10%, with the payment growth rates for innovative drugs and devices, comprehensive service providers, and medical services all expected to exceed the industry average.

CITIC Securities' main viewpoints are as follows:

The trend of commercial health insurance is unstoppable, and the valuation system of medical health is expected to be reshaped.

Currently, social health expenditure is the main component of China's health expenditure, with basic medical insurance being the primary source of funding. The resident medical insurance is currently facing surplus pressure, and the burden of pension expenditure is severe under the aging wave. Commercial health insurance meets the needs for branding, comfort, and convenience, serving as an important source of diversified payments and a way to break the deadlock. The previous slow development was due to reasons such as information asymmetry, insufficient credit, high channel and operational costs, with the core issue being the lack of innovation in insurance products due to insufficient availability of epidemiological data.

With policy support, bottlenecks on the data and demand sides are expected to be gradually broken, jointly driving the marginal acceleration of the commercial health insurance industry: With government leadership and support from the Medical Insurance Bureau, the opening of data ports is expected to further enhance the accuracy of insurance actuarial calculations. One-stop payment for medical insurance and commercial health insurance is expected to further reduce intermediary costs, and the commercial health insurance industry is expected to experience marginal acceleration in development.

Learning from overseas: Rooted in local national conditions, commercial health insurance plays an important role.

In the global welfare system, the commercial health insurance model in the United States is the most developed. Comparing Japan, Germany, and the United States, the analysis found that countries with a higher proportion of medical expenses to GDP have more abundant funding for the payment side of the medical health industry, and the development process of commercial health insurance in the U.S., Japan, and Germany has significantly outperformed the market. Specifically:

Japan: Basic medical insurance as the mainstay, fiscal subsidies as a supplement, with commercial insurance as secondary. Japan's medical insurance has a wide coverage, and the Ministry of Health, Labour and Welfare determines the uniform price of prescription drugs nationwide through the NHI pricing system. In the early stages, patients were forced to be diverted, and after the 1990s, the boundaries of commercial health insurance continued to expand, mainly due to: 1) the loosening of policies restricting the "prohibition of mixed medical treatment"; 2) the increased fiscal burden brought about by rising medical insurance fund expenditures; 3) the capacity of the medical insurance catalog to expand lagging behind patients' demand for new drugs/new technologies. Under Japan's model of substantial fiscal payment subsidies, global local pharmaceutical companies such as Daiichi Sankyo and Takeda Pharmaceutical have emerged, with the market value of pharmaceutical commerce and drugstore formats being evenly split, currently in the range of 3-5 billion USD.

Germany: Basic medical insurance as the mainstay, commercial insurance as a supplement, implementing a dual-track system of medical insurance and commercial insurance. The marketization degree of medical insurance operations is relatively high, and laws stipulate that all residents must have health insurance, with residents having the right to freely choose to insure with statutory health insurance funds. Government employees, freelancers (excluding farmers and artists), and high-income employees can switch between medical insurance and commercial health insurance, but individuals over the age of 55 who choose commercial health insurance are legally prohibited from returning to statutory health insurance The German health insurance catalog is developed through negotiations between hospital physicians and health insurance fund associations. The German model has fostered international pharmaceutical giants such as Bayer.

United States: Commercial insurance dominates, with high payment amounts complementing pharmaceutical research and innovation, but the multi-power integration of insurance-pharmaceutical conglomerates leads to an inflated drug pricing system in the U.S. Leading U.S. commercial insurance companies have formed insurance conglomerates through vertical integration, covering commercial health insurance, drug benefit management, and pharmacy operations. Health insurance groups have significant bargaining power over drugs; on one hand, the high retail prices of drugs in the U.S. drive residents to purchase commercial health insurance, but under PBM negotiations, the drug procurement prices for insurance conglomerates are suppressed to lower levels, with intermediate profits captured at various stages by the conglomerates. On the other hand, insurance conglomerates have the authority to review prescriptions, managing doctors' medical behaviors to achieve insurance risk control. Under the U.S. model, the drug pricing system is inflated, with innovative drug companies and insurance conglomerates becoming large-cap leaders.

"Government-guided commercial health insurance" is more in line with China's national conditions, and the new payment end is expected to contribute an incremental payment of 300 billion yuan to the healthcare industry.

In comparative analysis: 1) Insurance coverage: The coverage rates of health insurance in China, Germany, and Japan are all at a high level, approaching universal coverage. 2) Medical expenditure: The proportion of personal payments in China's medical expenditure is significantly higher than that in the U.S., Japan, and Germany. The Japanese model faces significant fiscal subsidy pressure, while the German model, due to the introduction of market competition mechanisms for health insurance and commercial health insurance, has relatively less fiscal pressure, resulting in well-managed health insurance funds. 3) Health insurance models: The U.S. operates a medical insurance system dominated by commercial health insurance, while Japan and Germany have a dominant health insurance system, with commercial health insurance serving as a supplementary medical security model.

Developing "government-guided commercial health insurance" is more in line with China's national conditions, and catalog management will drive the standardized development of the commercial health insurance industry. Residents in first-tier cities have relatively higher payment capabilities, and commercial health insurance is expected to be promoted first in first-tier cities, gradually expanding nationwide. Various parties, including government departments and insurance companies, have strong incentives to promote this. The bank estimates that by 2027E/2030E, commercial health insurance is expected to contribute an incremental payment of 94.5 billion/300 billion yuan to China's healthcare industry, with projected CAGRs for innovative drug and device payments, comprehensive service provider fees, and medical service payments from 2023 to 2030E at 50.1%/12.0%/10.3%, respectively.

Investment strategy: The healthcare industry is expected to experience a "Davis double play," with the valuation system likely to be reshaped.

The bank estimates that in the next 5-10 years, China's annual growth rate of medical expenses will be between 5% and 10%. It is expected that the growth rate of commercial health insurance payments for innovative drugs and devices, comprehensive service providers, and medical services will all exceed the industry average. Therefore, the bank recommends focusing on the following three investment themes:

1. Innovative drugs and devices—The subsequent launch of the commercial health insurance catalog is expected to cover innovative drugs and devices, which are likely to benefit from the incremental payment amounts and the enhancement of the valuation system brought by commercial health insurance

2. Comprehensive service providers - empowering health insurance product design & pharmaceutical companies' secondary bargaining power;

3. Private medical terminals - hospital terminals and pharmacies are expected to welcome new payers, opening up future performance growth space, with the valuation center likely to rise.

Risk factors: Policy implementation not meeting expectations; data sharing and utilization not meeting expectations; overseas review applicability risks; commercial health insurance consumer education not meeting expectations; integration progress of social security and commercial health insurance not meeting expectations