The long-awaited details of the proposed Voluntary Health Insurance Scheme (VHIS) were announced on 1 March 2018. This followed reference to tax deductions as an incentive for the VHIS in the Financial Secretary's 2018/2019 budget speech on the previous day.
What is VHIS?
The VHIS is a government-regulated health insurance scheme to be rolled out in Hong Kong in which insurers and consumers can choose to participate. The VHIS has been in development for a number of years including public and industry consultation. It will be formally launched following the necessary amendments to the Inland Revenue Ordinance. VHIS will be implemented by the Food and Health Bureau (FHB).
The VHIS is aimed at regulating individual hospital insurance products and encouraging Hong Kong consumers to use private healthcare services with the intention of:
- improving consumer confidence in, and the protection level of, individual indemnity hospital insurance products;
- balancing commercial viability and market flexibility with consumer protection and choice;
- providing additional choice to the Hong Kong public of using private healthcare services through the use of hospital insurance; and
- in the long term, relieving pressure on the Hong Kong public healthcare system through increased use of the private healthcare system for inpatient and day case procedures.
What are certified plans?
Under the VHIS, participating insurers will offer certified individual indemnity hospital insurance plans to Hong Kong consumers. It will not apply to group plans. Certified plans will be required to meet the conditions and coverage specified by the FHB.
Indemnity hospital insurance plans provide for benefits on an indemnity basis against the risk of loss to the insured person from sickness or infirmity requiring hospitalisation. They may be standalone health insurance policies or additional cover added on to a life insurance policy.
There are two proposed types of VHIS certified plans:
- standard plans will provide standardised basic insurance protection according to the minimum terms and benefits requirements of VHIS as updated from time to time, and
- flexi plans will provide enhanced insurance protection beyond the standard plan, such as higher benefit amounts or a variety of product choices to appeal to different consumer needs. It is intended that the VHIS will allow broad flexibility in order to promote product development by, and competition amongst, participating insurers and choices by customers.
Key features of certified plans
It appears at this stage that the standard plans and the basic coverage of flexi plans will provide the following product features:
- standard policy terms and conditions including standard benefit coverage and benefit amounts;
- guaranteed renewal up to the age of 100 without re-underwriting;
- no 'lifetime benefit limit';
- cooling-off period of 21 days – policyholders can avail of a 21-day cooling-off period during which time they can cancel the policy with full refund of premium. Currently a cooling-off period only applies to life insurance products;
- premium transparency – participating insurers will be required to publish their age-based premium rates. To enhance transparency and to promote price comparison and competition, VHIS participating insurers offering certified plans will be required to publish the age-banded premium schedules of their certified plans;
- coverage to include:
- unknown pre-existing conditions. Currently pre-existing conditions unknown to applicants are commonly excluded from benefit coverage. A waiting period will apply. Standard plans will provide partial incremental coverage during a 3-year waiting period and full coverage from year four onward (0% reimbursement of claim amount in year one, 25% in year two and 50% in year three). Flexi plans may have a shorter waiting period or a higher reimbursement ratio;
- investigation and treatment of congenital conditions where they manifest or are diagnosed after the insured person is aged eight or above. A waiting period will apply on the same basis as for unknown pre-existing conditions;
- day case surgical procedures which are not conducted in hospital;
- prescribed advanced diagnostic imaging tests including CT/CAT and MRI scans which are not conducted in hospitals, subject to 30% co-insurance;
- prescribed non-surgical cancer treatments including radiotherapy, chemotherapy, targeted therapy, immunotherapy and hormonal therapy; and
- inpatient psychiatric treatment in local hospitals.
Details of the standard plan policy product design and the basic coverage of flexi plans are set out in the draft Standard Plan Policy Template which includes standard terms and conditions, a benefit schedule and a schedule of surgical operations. It will be binding on participating insurers.
To supplement the VHIS Standard Plan Policy Template, the draft Code of Practice sets out the required conduct and practices. It deals with product availability; migration arrangements when an insurer registers with the VHIS; sales and marketing; applications; underwriting and issuance of policies; and after-sales services. When the VHIS comes into operation, the finalised Code of Practice will apply to all certified plans (and renewals by previously-registered VHIS providers if they cease to be registered).
Why would customers be interested?
One of the attractions for consumers is the lifelong renewal guarantee (up to 100 years of age) without re-underwriting.
The headline incentive is the tax deductions which will apply per insured person. The Financial Secretary announced that insurance premiums paid by an individual for himself/herself and an unlimited number of his/her dependants will be allowed for tax deduction. The limit of the tax deduction on relevant premiums paid is a total of HKD 8,000 per insured person per year irrespective of the number of policies. For the purposes of the tax deduction, a dependent is the tax payer's spouse, child, parent, grandparent, brother, sister, and (other than a child) those of his/her spouse.
There will be broader choice of healthcare options for consumers between public and private healthcare systems and the free choice of healthcare providers under the standard plan and basic coverage under flexi plan options. Better benefits may be provided in respect of selected healthcare providers in which case the VHIS participating insurer will inform the consumer of this.
Consumers who have already bought individual hospital insurance will have the opportunity to switch to certified plans if their insurer subsequently registers as a VHIS participating insurer.
Are certified plans attractive to insurers?
Participation in the VHIS increases the pool of potential policyholders as previously uninsured persons will be incentivised to take up certified plans, including young people, and already-insured persons may be encouraged to augment their level of protection by availing of the tax deductions and potentially scaling up from entry level plans with flexi plans.
Premium levels for certified plans are not prescribed. Insurers can set their own premiums. The standard premiums of certified plans can differ by age and gender and the overall premium level can be adjusted annually taking into account benefit revision and medical inflation.
Although consideration of applications in respect of Hong Kong residents aged between 15 days and 80 years is generally required, acceptance by a VHIS participating insurer of an application for a certified plan will not be mandatory. It can assess the applicant's risk and decide whether to:
- accept the application unconditionally;
- accept the application with premium loading and/or case-based exclusions; or
- reject the application.
The Inland Revenue Ordinance will be amended to introduce the new tax deduction under the VHIS. When the legislation is passed, the VHIS implementation date will be announced. The tax deduction will take effect from the financial year after the amending legislation has been passed by the Legislative Council.
The list of participating insurers will be published on the VHIS website.
In the meantime, individuals can find out more about the VHIS and the tax deduction at www.vhis.gov.hk.
At this stage, insurers should consider the business case for registering with the VHIS and start developing VHIS-compliant hospital insurance plans based on the draft Standard Plan Policy Template and Code of Practice. The FHB will in due course separately issue registration rules for insurers looking to become participants in the VHIS which we understand will include detailed arrangements for product compliance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.