CITIC SEC: Commercial Health Insurance Is a Growing Trend, Valuation System of Medical Health Industry is Expected to be Reshaped.

CITIC SEC released a research report stating that basic medical insurance is the main source of healthcare expenditure in China, currently facing structural pressures. The development of commercial health insurance is a breakthrough. Currently, various factors are accelerating the industry's development, and the development of "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 945/3000 billion yuan in incremental payments to China's medical and health industry. Over the next 5-10 years, China's annual medical expenses are expected to increase by 5%-10%, with the payment growth rates of innovative drugs and medical equipment, integrated service providers, and medical services all exceeding the industry average. CITIC SEC's main points are as follows: Commercial health insurance is the trend, and the valuation system of medical and health industry is expected to be reshaped. Currently, social health expenditure accounts for the majority of healthcare spending in China, with basic medical insurance being the main source of funds. Resident medical insurance is currently facing pressure from surplus, and under the wave of aging population, the burden of elderly care expenses is severe. Commercial health insurance meets the demands of branding, comfort, and convenience, is a major source of diversified payments, and is the way to break through. The slow development in the past was due to reasons such as information asymmetry, lack of credit, high channel and operating costs, with the core issue being the lack of availability of epidemiological data leading to lack of innovation in insurance products. With policy support, bottlenecks on the data and demand side are expected to be gradually broken, jointly driving the accelerated development of the commercial health insurance industry: under the government's guidance and support from the medical insurance bureau, the opening of the data end is expected to further improve the actuarial accuracy of insurance, a one-stop payment system for medical insurance and commercial health insurance is expected to further reduce intermediate costs, and the commercial health insurance industry is expected to accelerate its development. Learning from overseas: Rooted in the local national conditions, commercial health insurance plays an important role In the global welfare system, the commercial health insurance under the American model is the most developed. Comparing Japan, Germany, and the United States, the analysis by the bank found that in countries where the proportion of medical expenses to GDP is higher, the funding for the medical and health industry is more abundant, and the index of the medical and health industry in the development process of commercial health insurance in the United States, Japan, and Germany all significantly outperformed the overall market. Specifically: Japan: Basic medical insurance is the main body, supplemented by financial subsidies, followed by commercial insurance. The coverage of Japan's medical insurance is large and wide, and the Ministry of Health, Labor and Welfare determines the unified prices of prescription drugs nationwide through the NHI pricing system. In the early stages, patients were forced to be diverted, and after the 1990s, the development of commercial health insurance continued to expand beyond its boundaries, mainly due to: 1) the relaxation of policies restricting the "ban on mixed medical principles"; 2) the increasing financial burden brought about by the increase in medical insurance fund expenditure; 3) the ability of the medical insurance catalog to expand lags behind the patients' demand for new drugs/new technologies. Under the model of substantial financial subsidies in Japan, local global pharmaceutical companies such as Daiichi Sankyo and Takeda Pharmaceutical have emerged, with the pharmaceutical commercial and drugstore format market values evenly matched, currently in the range of 3-5 billion US dollars. Germany: Basic medical insurance is the main body, supplemented by commercial insurance, and a dual-track system of medical insurance and commercial insurance is implemented. The operation of medical insurance is highly market-oriented, with laws requiring all residents to have health insurance, and residents have the right to freely choose to join the statutory health insurance fund. Government officials, self-employed individuals (excluding farmers, artists), and high-income employees can switch between medical insurance and commercial health insurance, but once individuals over 55 years of age decide to choose commercial health insurance, the law prohibits them from returning to statutory health insurance. The German medical insurance catalog is negotiated through negotiations between hospital doctors and medical insurance fund associations. Under the German model, it has produced international pharmaceutical giants such as Bayer. United States: Commercial insurance is dominant, with high payment amounts complementing innovation in pharmaceutical research and development, but the ALLIED GROUP of insurance-pharmaceutical integration leads to an overpricing of the US drug pricing system. Leading companies in the American commercial insurance sector have vertically integrated to cover commercial health insurance, drug benefit management, and pharmacy operations, forming an ALLIED GROUP. Health insurance groups have strong negotiating power over drug prices, on the one hand, the high retail prices of drugs in the United States drive residents to purchase commercial health insurance, but under the negotiation of Pharmacy Benefit Managers (PBM), the drug purchase prices of the insurance ALLIED GROUP are pushed to lower levels, with profits being obtained by various segments of the ALLIED GROUP; on the other hand, the insurance ALLIED GROUP has the authority to review prescriptions, manage doctors' medical behavior, and achieve the goal of controlling insurance risks. In the American model, drug prices are artificially high, and innovative pharmaceutical companies and insurance ALLIED GROUP become large market value leaders. The development of "government-guided commercial health insurance" is more in line with China's national conditions, and the catalog management is expected to 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 first promoted in first-tier cities, gradually expanding nationwide later on. Government departments, insurance companies, and other parties are all willing to participate. The bank estimates that by 2027E/2030E, commercial health insurance is expected to contribute 945/3000 billion yuan incremental payments to China's medical and health industry, with the forecasted CAGRs for innovative medical devices payments/integrated service provider fees/medical service payment fees from 2023 to 2030E being 50.1%/12.0%/10.3%. Investment strategy: The medical and health industry is expected to experience a "double hit" and the valuation system is expected to be reshaped. The bank estimates that China's medical expenses are expected to increase by an average of 5%-10% annually over the next 5-10 years, and commercial health insurance is expected to contribute to the payment growth of innovative drugs, integrated service providers, and medical services all above the industry average. Therefore, the bank recommends investing in the health industry.The following three investment themes:1) The subsequent release of the innovative medical devices in the commercial health insurance catalog is expected to cover innovative medical devices. Innovative medical devices are expected to benefit from the incremental payment brought by commercial health insurance and the improvement in valuation system. 2) Integrated service providers enable health insurance product design and the secondary negotiation ability of pharmaceutical companies. 3) Private medical end-points, such as hospital terminals and pharmacies, are expected to welcome new payment methods, opening up future growth space for performance, with the possibility of an increase in valuation. Risk factors: Policy implementation falling short of expectations; Data sharing and utilization falling short of expectations; Overseas review may pose risks that can be learned from; Consumer education of commercial health insurance falling short of expectations; Integration progress of social insurance and commercial health insurance falling short of expectations.