Published on: 14 January 2014 by Michael Lamb
In order to help alleviate the increasing burden being placed on Hong Kong public hospitals, the Government has revealed a scheme focused on tax breaks for individuals purchasing Private Health Insurance coverage in the city.
According to the South China Morning Post* current Hospital Authority spending is running at approximately double the inflation rate having risen in 2013/14 by 63 per cent to HK$ 44.4 billion from the HK$27.2 billion seen in 2006/07. This revelation follows recent reports of unsettling statistics at HK’s public hospitals, and is the latest proposal in a lengthy attempted-reform process starting in 2006.
In order to assist in alleviating the stress being placed on the public healthcare system in the city, the Hong Kong government has proposed a comprehensive system of tax breaks which would enable individuals who purchase health insurance policies, covering all their dependents, to receive additional tax deductions.
One of the biggest problems currently facing Hong Kong’s public healthcare system is the fact that the overall population is aging at an extraordinary rate. As individuals age they generally require more medical care, which will increase the strain on a system that is just barely coping with current levels of demand.
Additionally, the public healthcare system faces extreme challenges with healthcare staffing for doctors and nurses. The staffing issue is so severe that the head of Hong Kong’s Public Doctor Association recently cited staff turnover levels, coupled with the increasing service hours being placed on junior employees as a key cause for the higher than expected mortality levels at Tuen Mun hospital*.
To help improve the overall quality of service at Hong Kong’s public hospitals, and to address the major problem of overcrowding and increased demand at these facilities, the Hospital Authority is proposing a system of tax breaks which would incentivize the purchase of private medical insurance within the city.
Individuals who purchase comprehensive insurance coverage for all their dependents (including their spouse, children, and any dependent parents) would be able to receive a tax deduction according to a statement given by a Food and Health Bureau spokesman to the South China Morning Post.
According to the spokesman “The [tax deduction] is effective and well-targeted in the sense that most of the taxpayers fall within the working population.”
The move to implement tax credits for health insurance coverage is part of the Hong Kong government’s Health Protection Scheme (HPS). The HPS will regulate the coverage offered by all health insurance products eligible to receive tax credits, and will enforce minimum coverage requirements for locally produced health insurance options.
The option to provide tax credits and/or deductions for health insurance purchases has been floated previously, both by the Hong Kong government and governments elsewhere in the world – Ron Paul was a proponent of this type of scheme during the 2008 American Presidential Elections. However, opponents to the scheme have cited a number of problems.
Chan Kin Por, legislator for the Insurance Sector Functional Constituency, was sceptical about the overall impact of the tax breaks, suggesting that as only 37 per cent of the Hong Kong population paid income tax and that as the average overall salary tax was around 8 per cent per year the scheme would not be popular with the general public.
Mr. Chan stated that it was his belief that a tax allowance of up to HK$ 20,000 per year would be needed in order to make the proposal realistic.
Additionally, Peter Yeun Pok-Man, professor at Polytechnic University in charge of the Public Policy Research Institute, said that there were political barriers on the implementation of a tax break for medical insurance system. Professor Yuen stated that the current administration was weak and did not have a mandate for change on this issue. He also went on to state that Hong Kong residents were unlikely to support a scheme which required them to pay for private coverage.
“Mandatory medical savings are the most desirable financing mechanism for an ageing population. However, the political climate in Hong Kong is such that it is almost impossible to implement that at this stage,” said Professor Yuen.
Further to the statements by Professor Yuen and Mr. Chan, there are a number of serious potential barriers to the tax break proposal actually within Hong Kong’s medical insurance market.
Locally provided health insurance products in Hong Kong tend to have some serious limitations which could prevent the wide-spread rollout of the HPS reform.
The first major area of concern is with regards to the renewal caps which are imposed, almost universally, throughout Hong Kong’s health insurance market.
Most locally regulated health insurance providers will not offer continuing coverage to policyholders over a certain age, typically individuals between 65 to 70 years of age. This may be a small part of the current ageing problem being faced by public medical facilities in the city as individuals who have held private medical insurance coverage locally for many years will often be forced off the plan after they reach a certain age.
Compounding this problem is the fact that older individuals are more likely to have some form of chronic medical condition. As such, individuals who are no longer being offered the option to renew their local Hong Kong health insurance plan are turning to the public medical system for their healthcare needs, which in turn is finding that they are unable to cope with the increased demand.
Simply put, in order for the Tax Credit scheme to have any chance of success under the current proposal, a sweeping change would need to occur within the Hong Kong health insurance market to implement guaranteed life time renewals – otherwise policyholders will simply return to the public system in their old age, creating a circular problem.
A second area which has the potential to scupper the HPS Tax Credit scheme is the fact that a vast majority of local Hong Kong health insurance plans will calculate their premiums based on an individual’s claims history under the policy.
As with the renewal issue, experience rated premiums pose a problem for older individuals and, if a person is supporting their dependent parents, may mean that these older individuals are simply too expensive to insure with a locally underwritten policy. This is due to the fact that an older person will have a lifetime of medical issues, which the insurance company will take into account if they decide to offer coverage.
With the provision that an individual must cover their Spouse, Children, and Dependent parents in order to receive a tax credit, many people who would otherwise wish to opt into the system will find the cost prohibitive, and remain within the public network.
Coupled to the issue of a claims-related premium calculation is the thorny problem of pre-existing medical conditions.
Individuals who have received medical treatment for serious medical conditions would likely be denied coverage from private health insurance providers due to the fact that a pre-existing medical condition is a fact rather than a risk. And under a strict definition of “insurance” (equitable exchange of risk for a pre-determined fee) cannot be covered normally under a plan.
Despite the government’s suggestion of creating a HK$4.3 billion scheme to cover patients being treated for long-term illnesses, the expected HK$7,200 in subsidies being given to these individuals to support the purchase of a private medical insurance policy will not go far – especially with the prevalence of experience rated products within the local market.
Renewal premiums (assuming that a chronic condition patient is of an age where they are able to renew their policy) will be massively inflated after a claims event under locally provided health insurance plans, and the premiums will far outstrip the offered subsidy over a short period of time – again forcing the individual back into the public healthcare system.
Many of the potential problems created for the HPS proposal by locally provided health insurance policies are negated through the use of an international health insurance plan. These policies will normally include a number of coverage provisions which avoid all of the issues presented by locally underwritten products, including:
However, despite the fact that a global medical insurance plan can provide solutions for the HPS tax break scheme, these policies come with their own set of issues which create barriers for Hong Kong residents seeking to take advantage of the reform proposal.
International Health Insurance plan policyholders will normally use premier medical facilities for their healthcare needs, and the costs associated with such facilities in Hong Kong is extremely high. In fact, Hong Kong has the second highest average private medical costs in the world, and while International health insurance policies have coverage limits allowing for comprehensive treatment at the very best private hospitals in the city, the costs associated with obtaining such a policy are typically much higher than those associated with a local health insurance plan.
This is due to the fact that many international health insurance products will have their premiums calculated on a community basis – all individuals of the same age, with the same plan, in the same coverage area will pay the same premium. Claims made under international policies (unlike local ones) do not impact the premium paid by a policyholder, which means that no unexpected cost increases will be placed on the coverage after a claim is made.
Because of this, IPMI products start expensive but have a much more manageable and consistent inflation rates than experience rated local health insurance plans, and are more likely to enable a consumer to fully utilize Hong Kong’s extensive private medical system. However, the cost involved with even the most basic IPMI policy may be far too high for many residents who would otherwise consider the purchase of such a plan.
Despite the fact that international health insurance offerings are generally much more robust than locally provided policies, and provide the solutions needed by the government if the general populace is going to make a move towards the city’s private medical facilities, these products are not provided on a local basis in Hong Kong – many of the underwriters offering international health insurance plans are located offshore, meaning that residents of Hong Kong purchasing such plans will have limited options for remedying any wrongs.
Additionally, with the requirement that individuals need to cover all of their dependents in order to receive the tax credits being offered by the HPS proposal, even the inflated option for a HK$20,000 annual tax write-off proposed by Mr Chan would not normally be sufficient to incentize the purchase of an IPMI product by an individual who was not predisposed to purchasing the plan in the first place.
The proposal under the Hong Kong Government’s Health Protection Scheme to regulate health insurance products, and provide tax credits with which to incentivize the use of the city’s private hospitals is a welcome start to overhauling and reforming a system which is increasingly overburdened by patient demand and staffing issues.
However, without comprehensive assessments of the suitability of medical insurance products for the scheme, or an investigation into the ability of at-risk groups to properly use the coverage when it is required most, the HPS proposal will only further clutter an already complicated healthcare system.