Under the proposal, insurance companies would provide clients with a basic plan featuring guaranteed renewal for life and coverage of packaged services at private hospitals. They would also be able to market 'top-up' plans with better coverage. Patients would pay a portion of their medical bills under an arrangement known as co-payments.

But coverage for high-risk people, such as the elderly, obese and smokers, or those with pre-existing conditions has been a stumbling block between the government and insurance companies. Officials say the scheme has to provide adequate coverage for such people, but insurers say the cost would be too high.

A government-commissioned consultancy report proposes setting up a 'high-risk pool', supported by a government subsidy, to finance the care of high-risk people and those with pre-existing conditions.

Insurers would put all their high-risk customers - defined as those whose medical costs were expected to be 200 per cent more than those of healthy people - into this pool.

To ensure the pool had enough cash to pay claims, insurers would contribute a certain percentage of the premium for reinsurance. The government would inject money into the fund in the event of a deficit. Any surplus would remain in the fund for future claims.

The consultant also proposes a special premium subsidy for the elderly to encourage them to stay in the voluntary insurance scheme.

People familiar with the situation said the introduction of a separate 'high-risk pool' could remove a major obstacle to the scheme.

'It serves two purposes: it enables the scheme to cover people with pre-existing conditions, and to make sure healthy people will not have to pay a very high premium to subsidise the high-risk group,' one said. 'Insurers are not expected to make much profit from this common high-risk pool because all the surplus will stay there.'

Another informed person said the government accepted the principle that high-risk people had to pay a higher premium, but the amount would be capped at 300 per cent of the standard rate. 'The injection of public funds into the pool is to absorb and buffer the risk. How much has to be put into the fund depends on the financial situation,' the person said.

The government would make sure the separate fund was regulated and transparent.

The consultant said the injection of public funds into the high-risk pool would be a 'potential recurrent expenditure' but annual funding might not be required in most cases.

There would be a three-year 'waiting period' before pre-existing conditions were fully covered, from zero in the first year, to 25 per cent repayment of bills in the second, 50 per cent in the third and a full coverage in the fourth. The voluntary medical insurance scheme would also have various features to avoid abuse.

Policy owners would have to pay a 20 per cent co-payment on the first HK$10,000 in benefits and 10 per cent for the next HK$90,000. No co-payment would be required for sums above HK$100,000, meaning the maximum was HK$11,000 per claim. The scheme would provide guaranteed renewal and a 'no-claim bonus' to encourage people to keep healthy.

The government has set aside HK$50 billion for health care financing reform, but how the money will be used has yet to be worked out.

Federation of Insurers executive director Peter Tam Chung-ho said the risk-pooling was a move 'on the right track'.

'Our ongoing discussion with the government has been very positive. There were some barriers in the earlier stage, now the government understands more about the market principles and how we can market a feasible product.'

Medical Association immediate past president Tse Hung-hing, who has worked with the government on the scheme, said the government had to make clear how much healthy people would subsidise the high-risk group so they could make a choice.

Healthy budget

The government is planning an overhaul of health care financing

The amount, in HK dollars, that it has set aside to spend on the reforms: $50b

Key features of the proposed scheme

Covers all Hongkongers, including those with pre-existing conditions

Covers hospital care but not primary care, non-medical cosmetic procedures or experimental procedures

Insurers will provide standard plans, plus a number of top-up plans with better coverage

High-risk people will be covered by a separate fund with a government subsidy

A three-year waiting period before pre-existing conditions will be fully covered

No-claims bonus of up to 30 per cent of premium for three consecutive years

Co-payment of up to HK$11,000 for each claim to avoid abuse

Guaranteed renewal for life

Annual premium proposed at HK$1,085 for people aged 20 to 24, up to HK$10,514 for over-85s

Source: government consultancy report