Xiang Hu Bao: lessons from the chinese healthcare consortium for the healthcare market

A mix of health insurance and fintech, that was the idea for Xiang Hu Bao (XHB), the mutual assistance program developed by Ant Financial, the financial arm of Alibaba Group, in 2018.

In Chinese, “Xiang Hu Bao” means 'shared protection' and consisted of a kind of consortium to compensate and treat people with up to 100 types of critical illnesses - such as thyroid cancer, breast cancer, lung cancer, serious brain injury, and others.

At the time, the inauguration of XHB was the result of the aging population trend — which, consequently, puts even more pressure on health systems combined with a period of rise of insurtechs, term used to describe insurance startups that use technologies to create innovative strategies.

But, after all, what's different about XHB?

How it worked

In Brazil and most countries, the most common are health insurance that requires prior payment time before it is possible to obtain compensation. However, Xiang Hu Bao didn't work like that.

As a platform for mutual aid, where members came together to share the costs associated with treating critical illnesses, XHB allowed members to receive compensation payments as soon as they joined the program. Thus, the platform paid compensation for members who were diagnosed with one of the 100 critical illnesses included in the coverage - such as various types of cancer and serious brain injuries.

In this sense, the amount of coverage varied according to age: participants under 40 could receive up to CNY 300,000 (R$ 251,188.56), while those aged 40 and over were eligible for CNY 100,000 (R$ 83,719.87).

To pay compensation in such amounts, each member contributed 0.03 yuan (R$ 0.8344) every two weeks, in addition to an administrative fee of 8% — an amount that increased over time and changes in the claim rate.

As for becoming a member of the XHB, the main eligibility criteria was to be a person aged between 30 days and 59 years, but provided that they met the basic health and risk criteria. Due to the breadth of the criteria and the low cost, access was easy and motivated many people to participate, which contributed to the rapid growth of the platform.

The XHB business model

In Xiang Hu Bao's business model, to be able to maintain health insurance without collecting advance premiums, the strategy consisted of relying on the possibility of having a large number of members, which would allow balancing risks. Thus, with a strategy focused on membership, in less than a year it had already acquired 100 million members.

Considering that China has 1.4 billion people - the second most populous country in the world, second only to India - the number of people seemed to be a positive point for insurance like XHB.

In the beginning, the objective was to reach around 300 million users, an amount equivalent to 20% of the population. However, from 2018 to 2022, the amount varied from 97 million to 150 million. After an impressive start, public enthusiasm diminished over the months.

What happened?

Well, if you were attentive throughout this text, you must have noticed that I talked about Xiang Hu Bao in the past. So yes, the insurance was terminated. The end came in 2022, after several factors showed that XHB was an unsustainable business model and that it came under the sights of regulatory bodies.

From the perspective of researchers Hanming Fang, Xiao Qin, Wenfeng Wu, and Tong Yu, presented in this article, the factors that caused the end of XHB were:

• regulatory pressure;
• growth-dependent business model;
• low contribution rate;
• high risk of fraud and adverse selection.

With regard to regulatory issues, pressure from the authorities on consumer protection and financial solvency was one of the main factors in ending the program. Among the arguments, it was pointed out that the absence of formal regulation and the practices of “improper innovation” could compromise consumer rights and market stability.

In addition, the model of pooling the risk of XHB depended on a constant growth to maintain balance between income and expenses. After a significant increase in the number of members in the first few years - more than 12 million in the first 10 days and exceeding 100 million at its peak - growth slowed down until, in 2020, it became negative. This scenario raised questions about the insurance's ability to keep the number of healthy people needed to cover claims.

Along with that, there was also the rate of contribution at a very low amount, an element that also compromised the accumulation of financial reserves. While this pricing worked for a while — allowing XHB to pay more than 20 billion yuan in damages throughout its history — it also made long-term financial sustainability unfeasible.

In parallel, the risk of fraud and adverse selection it was also increasing. This happened because the model attracted more and more people with serious health conditions. Thus, the amounts spent on the claims began to exceed the amount collected with contributions.

In this sense, the claims were relatively low in the beginning, which helped to keep the accounts balanced. However, as the values were adjusted, the young and healthy public lost interest in contributing, fueling a moment of loss of members in the XHB.

Understanding Mutualism in Health

The concept of mutualism is common in branches where there are major risks. It is an old concept and “the same everywhere in the world, which emerged from the need to divide risks in catastrophic contexts, such as navigation at the time of the caravels”, he explains Rogério Scarabel, lawyer specializing in health, former Substitute President of the National Supplementary Health Agency (ANS) and Green Rock Advisor.

As an example, the lawyer says that “when a boat was lost, the loss was enormous. Then, the owners started creating groups to finance the trips collectively, reducing the risk of total losses”.

Therefore, in the health sector, mutualism follows the same logic: a group contributes financially, even without using immediate resources, to cover high-cost events for the few who need it.

However, it is worth paying attention, because “health insurance and mutualism are not savings. Money is not capitalized for the future. It is used to cover catastrophic needs, such as high-cost hospitalizations or complex surgeries”, explains the lawyer. Thus, “if only the people who plan to use the services enter the system, it becomes unsustainable”, adds Scarabel.

This phenomenon, known as adverse selection, can undermine the financial balance necessary for mutualism to work. “You need a lot of people contributing and little use for the model to be viable. Otherwise, the system collapses”, points out the lawyer.

Xiang Hu Bao vs Insurance in Brazil

When compared to what we see in Brazil, Xiang Hu Bao presents fundamental differences between supplementary health and the SUS. “In the SUS, you have two sources of payment: the rich pay for the poor and the younger for the older”, explains Rogério Scarabel.

Meanwhile, the brazilian private sector maintains contracts with defined deadlines that are designed to meet catastrophic events. “A health plan is not a savings. The money you pay monthly is to cover the needs of others. And in the future, when you need it, other people will be paying for you”, Scarabel reiterates.

Thus, one of the most important lessons that Xiang Hu Bao shows is the importance of structuring systems with a broad base of contributors, combined with regulatory mechanisms that minimize misuse. As the lawyer points out, “mutualism is, above all, an act of collective solidarity. It depends on trust and a strict balance between contribution and use”, concludes Scarabel.

In the end, Xiang Hu Bao sought to fill a gap in China's health coverage. And in fact, for a while it managed to help thousands of people. However, its closing suggests that there are limits to innovation in the insurance sector. Without a structured regulatory framework and a financially viable business model, long-term sustainability may not happen.