Private indemnity health insurance — held by 40 million Koreans and often called a "second national health insurance" — draws starkly divided opinions. Critics call it the chief driver of medical waste, arguing it encourages overuse of non-covered services and entrenches moral hazard. Defenders counter that it fills the gaps left by national health insurance and shields patients with serious illnesses from financial ruin, making it an indispensable social safety net.
Strictly speaking, both sides are right. The same system can simultaneously generate excessive medical consumption for some and serve as the last financial lifeline for others. The right question, therefore, is not "is it a culprit or a bulwark?" but rather "how do we reduce waste while preserving its social value?"
For years, the government and the insurance industry have focused on "generational management" — successive product overhauls from the first through fourth generations that raised cost-sharing requirements and introduced premium surcharges. Yet the results have exposed clear limits. Older and chronically ill policyholders resist switching to newer products because of higher premiums, while healthier young enrollees migrate freely, driving up the risk profile of older-generation products in a classic adverse-selection spiral. By the fourth generation, loss ratios on covered services had also risen, creating the perverse effect of encouraging overuse.
Non-covered medical services are growing at more than 10 percent a year, and supplier-induced demand is increasingly visible in areas with high indemnity insurance penetration. Overuse by a minority pushes up premiums for all policyholders, and as the insured pool ages and accumulates higher risk, the cycle could ultimately end in market collapse. The generational management paradox is, at its core, a systemic failure — one in which the medical supply structure, the regulatory and supervisory framework, and policyholder incentives have never been made to work in concert.
The fifth-generation indemnity product marks meaningful progress: it sharply narrows coverage for non-serious non-covered services and ties outpatient cost-sharing to national health insurance contribution rates. Even so, history shows that providers reliably develop new non-covered services or bundle them with covered treatments to sustain utilization — a balloon effect that has repeated itself across every reform cycle. Product restructuring alone has its limits; a robust non-covered services management regime must accompany any structural change.
Two fundamental shifts are needed as a lasting solution.
The first is a thorough overhaul of the non-covered services management regime. More non-covered items should be brought under national health insurance coverage, prices should be standardized, and a real-time data-sharing system linking hospitals' non-covered billing records to insurers should be built. Problematic non-covered services should be reclassified quickly as managed-benefit items to block the balloon effect, and legislation should mandate information-sharing between public and private insurers.
The second is a paradigm shift from after-the-fact controls to upfront incentives. By linking indemnity insurance to prevention-oriented digital health management and rewarding policyholders who make rational healthcare choices with tangible social and financial benefits, the industry can build a cooperative ecosystem that naturally curbs moral hazard.
When insurers move beyond a passive role and become active contributors to public health and the efficient allocation of medical resources, a three-way virtuous cycle becomes possible: policyholders gain better health, insurers stabilize their loss ratios, and society averts the depletion of medical resources. It is time for indemnity insurance — held by 40 million Koreans — to shed its reputation as the chief driver of medical waste and reestablish itself as a genuine national healthcare safety net.
By Jeong Seong-hee, vice president of the Korea Insurance Research Institute
psj@heraldcorp.com
