A Chinese doctor prescribes drugs for a patient. The medicine is perishable and the patient has no refrigerator. So the doctor adds a fridge to the prescription. This is an in-joke among insurance executives, who say it only slightly exaggerates the abuses to which private health insurance is prone in the mainland. Sales of health coverage are rising fast. Since 1999, health insurance premiums have grown at a compound annual rate of 43 per cent. Last year they totalled 31.23 billion yuan. Yet most insurers barely break even on the product. That is because unlike their foreign counterparts, they have no say in what treatments patients receive and how much hospitals and doctors charge for services. Only by raising premiums can insurers keep pace with costs. 'For most of the mainland hospitals, especially the prestigious ones, it's a seller's market. Health insurers don't even have an equal say with the hospitals, let alone the power to oversee their activities,' said Zhang Wenlu, the chief executive of Ping An Health Insurance. Still, the government is counting on private insurers to help cushion the impact on patients as it dismantles the cradle-to-grave welfare system. Its outline for the future of national health care points to a greater role for private insurers and hints at the introduction of more elements of the United States system of 'managed care', including the right for insurers to invest in hospitals. McKinsey & Co, the management consultancy which recently surveyed the Chinese system, said as much as 70 per cent of mainland health insurance premiums flowed into 'critical diseases' policies. These were essentially life insurance contracts that promise to pay out a fixed amount to policyholders when they become critically ill before they die, Ms Zhang said. Far too many health insurance policies were bundled in with life policies, said Xu Zhiwei, the general manager of health management at PICC Health, the mainland's original dedicated health insurer. 'Many insurers can't even figure out how they made a loss on their health insurance policies.' By international standards, mainland health insurance products are rudimentary. They provide either lump-sum cash benefits or indemnity coverage, neither of which gives insurers any control over the choice of health-care providers or treatment decisions, according to McKinsey. In the first case, patients get a pre-determined amount of cash when they fall ill, whether they seek treatment or not. In the second, the insurance companies reimburse patients for all services provided by a roster of health-care providers, without having any say in whether treatment is necessary or appropriate. China has yet to see any managed care plans of the sort that have proliferated in the United States, where patients attend hospitals and clinics either under contract to or owned by the insurers. The system gives insurers great influence over standard treatment protocols. Not everyone loves these managed care organisations. Some have been accused of delaying or denying necessary care in order to fatten their profit margins. But advocates give them credit for squeezing discounts out of hospitals, drug companies and doctors, cutting down on unnecessary tests and surgery and reducing the average length of hospital stays. The result, these supporters say, has been better cost controls for insurers, lower premiums for the insured and a greater focus on preventive medicine. However, Chinese law still forbids insurance companies from investing in non-insurance-related businesses, including health-care facilities, while the definition of hospitals as public, charitable organisations precludes them from entering into profit-sharing partnerships with insurers. The absence of managed care plans, and hence of standard treatment protocols, is seen by many as a critical flaw in the mainland system. Cuts in government funding for hospitals and wage pressures have increased the temptation for hospitals to order too many tests, prescribe too many drugs and keep patients in beds longer than necessary. Kickbacks to underpaid doctors by pharmaceutical and medical equipment suppliers have become so rampant that they are a target of this year's national anti-corruption campaign. 'Hospitals in general suffer from distorted treatment behaviour,' said Sankar Krishnan, a McKinsey partner who worked on the study. A mainlander who undergoes an appendectomy is hospitalised for 10 days on average, compared with six days in South Korea, four days in India and 2.4 days in the US, according to McKinsey. In 2002, antibiotics accounted for 36 per cent of pharmaceutical sales in the mainland, against 17 per cent in India. Globally, the average was 5 per cent. Over-prescription of antibiotics raises the spectre of drug resistance, which could have dire consequences for the mainland in the event of a global epidemic. There is also a dearth of general practitioners to determine who should be referred to specialists. Just 2 per cent of mainland doctors are in general practice, compared with 45 per cent in India and 34 per cent in Korea, McKinsey found. 'Particularly in top-end cities like Shanghai, people end up visiting specialists as their first port of call,' Mr Krishnan said. Because of their short operational history, commercial health insurance providers have limited data to fall back on. No information sharing scheme exists among the insurers, and they have almost no access to data from health-care and public health insurance providers, Ms Zhang said. 'Sometimes during claims processing and settlement, our employees have to rely on personal relationships with doctors - for example, if they were medical school mates - to obtain information,' said an official of China Life, the country's biggest life insurance firm. 'Claims settlement becomes largely a matter of verifying the authenticity of receipts because there are no standard treatment rules.' Despite all of these problems, there is no shortage of companies ready to test the health insurance market. Four dedicated health coverage providers have sprung up since last year. The potential for gains is enormous. Health insurance premiums represented just 3.4 per cent of China's national health-care spending of 750.93 billion yuan in 2004, the latest year for which both numbers are available. The ratio was 5.9 per cent in Korea, 7.6 per cent in Japan, and 14 per cent in the US in 2001, according to Ms Zhang. China's first health specialist, PICC Health, is owned 51 per cent by PICC Holdings - parent of dominant mainland non-life insurer PICC Property and Casualty - and 19 per cent by Germany's DKV. Ping An Health is part of the country's second-largest insurance group, Ping An Insurance. Two smaller dedicated providers, Kunlun and Rewood, have obtained licences but do not appear to have started selling policies yet. The fifth, Zhenghua, has received approval to prepare for its launch. The China Insurance Regulatory Commission earlier this month promulgated the country's first health insurance regulation. Last month, the State Council called for quicker expansion of commercial health insurance and endorsed the idea of insurers making equity investments in medical facilities. Such investments, however, await the redefinition of hospitals as corporate, instead of non-profit entities in the next round of health-care reform. Mr Xu cautions that in a vast country like China, it remains to be seen whether direct equity investments in hospitals are cost-effective for fledgling health insurers. Another issue that has to be addressed in the reform process is how to develop general practice and referral mechanisms. Market forces may push the least profitable so-called tier-1 hospitals towards a general practice role, according to T.C. Chu, a McKinsey director. Tier-2 facilities, which are starved for patients, may have to streamline their specialist departments in competition with the larger, better equipped but congested tier-3 institutions. Ms Zhang says tax holidays for insurers and the insured would help popularise health insurance. Health insurers are exempt from business tax but subject to the standard 33 per cent domestic corporate profit tax. Individuals' health insurance premiums are not tax-deductible.