Social insurance versus private medical insurance in China

Foreigner participation in China’s social insurance system and its impact on the purchase of international private medical insurance plans

At the beginning of last month, China’s Ministry of Human Resources and Social Security finally issued the interim measures for foreign employee’s participation in China’s social insurance system. As of October 15, 2011, foreign employees in China were required to pay into the country’s public social insurance scheme that provides pensions, healthcare, work injury, maternity and unemployment benefits. Foreigners were previously exempt from enrolling in China’s social insurance system.

Reactions to the law amongst foreign companies and their expat employees in China have been mixed with some commentators calling it “very fair”, citing similar laws that exist for foreign employees working in the United States and Europe. Most commentators, however, pointed to how the law is going to increase overnight the cost of expatriate labor in China by as much as Rmb5,600 (US$880) per month, with little apparent benefit to the company or to the foreign employees.

Just the facts, please

Information regarding the implementation of new laws in China can be difficult to verify with conflicting interpretations of the new laws depending on who you speak to, laws being interpreted in different ways in different regions, and information about exaclty how the laws should be implemented coming in bits and pieces from various different sources.

Here are some of the facts at this stage:

  • The new Social Insurance Law, as it relates to foreigners, came into effect from October 15, 2011, and requires that companies enroll their employees in five insurance programs – retirement, medical, work-related injury, unemployment and maternity.
  • For the purposes of this new law, a “foreigner” is defined as a person who (1) is not a Chinese national; and (2) holds a work permit and a residence permit in the PR China, or a PR China permanent residence permit; and (3) is employed lawfully in China. The definition of a “foreigner” does not however include nationals of Hong Kong, Macau and Taiwan. Foreign employees may be exempted from enrolling in the social insurance scheme in accordance with a social insurance treaty between their home country and the PR China. To date, only Germany and South Korea have reached such bilateral social insurance treaties, though we understand other countries are in talks to set-up similar agreements.
  • The contribution rates vary from city-to-city. Foreign companies and foreign employees in every city should learn the actual contribution rates applicable in their area of operations, though the following table should offer a general guideline of contribution rates in Shanghai and Beijing:

  • The maximum amount of salary per month that employers/employees will have to account for in terms of social welfare contributions is Rmb11,688 in Shanghai and Rmb12,603 in Beijing, which means a maximum contribution in Shanghai, for example, from the employer of Rmb4,325 per month and from the employee of Rmb1,286. Given that the majority of foreign employees in Shanghai earn well in excess of Rmb11,688 per month, these are the contributions employers and employees in Shanghai should expect to be paying.
  • Employers who fail to register their foreign employees for social insurance or fail to pay fees on their behalf will be penalized.

A replacement for private medical insurance?

As a specialist medical insurance broker, One World Cover has been getting a lot of questions from our clients on whether the medical insurance portion of China’s social insurance system can act as a replacement for the international private medical insurance plans that many of our clients purchase for their foreign employees and senior management. A recent article in The Economist was right to point out that “the new rules force foreign companies to pay for, and give their employees access to, the local health system. Should they then stop offering international insurance plans, which pay for treatment at the handful of world-class hospitals in China?”

The reality is that foreign companies and foreigners living in China do not purchase private medical insurance so they can access and utilize the country’s local health system, which was described by the China-based writer of that same article in The Economist as “shoddy by rich-world standards and slapdash about protecting patients’ privacy.” Further to this, one thing that is already very clear is that the medical insurance portion of the Social Insurance Lawis very different from an international private medical insurance plan, both from a coverage and benefit point of view.

For one thing, the program currently excludes cover altogether for treatment at the international-style hospitals and clinics in China that are frequented by expats and are typically fully-covered by private medical insurance plans. The program would therefore not cover treatment at hospitals and clinics such as United Family Hospitals, ParkwayHealth, Shanghai East International Medical Center, Beijing International Medical Center, Global Doctor and International SOS.

The medical insurance portion of the Social Insurance Law currently only covers participants at a number of government-approved hospitals in the local health system and we understand that it is unlikely the international-style hospitals and clinics in China will ever be accepted into the scheme due to the comparable high-costs of treatment there.

Furthermore, the benefit limits are expected to be very low. KPMG, a global network of professional firms providing audit, advisory and tax services, estimates the annual maximum benefit limit to be around Rmb100,000, or around USD63,500 (as opposed to a limit of Rmb6,350,000 or more for international private medical insurance plans). Outpatient benefits are expected to be lower still and, as already mentioned, outpatient consultations with doctors at hospitals and clinics such as United Family Hospital and ParkwayHealth will not be covered. It is further expected that the program will be modeled on the current social medical insurance scheme for Chinese nationals, which include co-pays/co-insurances of typically around 50%.

Another important factor that needs to be considered is the portability and geographical area of cover of the social medical insurance, which will restrict cover to mainland China only. When moving back home or to another country you can typically take your international private medical insurance plan with you, or even “bridge your cover” to another insurer without suffering any penalties regarding exclusions or the cover of pre-existing conditions, or waiting periods. When you are moving from a social medical insurance scheme however, insurance companies generally will not be willing to accept a “bridging of cover”.

Finally, the government has to date made it clear that companies cannot opt out of the medical insurance portion of the Social Insurance Law by showing evidence of a medical insurance plan with a private medical insurance provider.

It is our opinion that foreign companies that forgo the purchase of private medical insurance plans for their foreign employees and choose to only provide them with the government-stipulated social medical insurance could therefore face a significant liability risk.

It’s an understatement to say that an additional cost on the balance sheet of more than Rmb4,000 per month for each foreign employee is something companies operating in China could do without. Many companies will have to review their hiring practices and whom they hire. But it’s an unavoidable hit and one that needs to be managed as best as possible. Our clients are always telling us that if they want to hire and retain the best foreign talent for their business in China then including comprehensive, international private medical insurance as part of their employee’s benefits package is an absolute minimum requirement. This was true before the introduction of the new social insurance law for foreign staff on October 15 and is still true now.


AUTHORS: David Bortz, director, One World Cover and Michael Pennington, client services director, One World Cover.

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