 OpinionTaking CareChina's Health Reform and Policy Dynamicsby Gordon G Liu, Ph. D Health reform has recently become a top policy agenda for China’s government which is exploring institutional changes to meet the increasing challenges of inflation, lack of insurance and limited access to care. Healthcare costs have become extremely high relative to average incomes. In 2006, for example, a single average hospital admission at state hospitals (so-called Ministry of Health or MOH hospitals) cost RMB 12,650, nearly 90 per cent of the per capita GDP of RMB 14,040 in the same year. Furthermore, over 600 million people, nearly half of the total population, had no insurance coverage and were thus fully exposed to catastrophic health and financial risks.
Increasing Public FinancingIn response, the State Council called for a national health reform in late 2006, charging a 14-ministry joint task force to lead reforms to the state health system. After intense public debate, some consensus has been reached, although many disputes and challenges still remain. Amongst others, there is high consensus for increasing public financing for investment in healthcare for two major reasons: The first is for government to assume its responsibilities. According to the Chinese National Health Survey, government financing contributed only 17 per cent to total health expenditures in 2003; employment-based social insurance contributed 27 per cent; and individual out-of-pocket payment contributed over 56 per cent. Compared with most other countries, China ranks amongst the lowest in terms of public financing, pointing to major government failure. The second reason is based on the notion of human development and China’s stated goal of developing a harmonious society, where achieving healthcare for all is a committed core objective. Therefore, increasing public financing in healthcare would directly serve that goal.
Some critical disputes remain, however, as to how state investment should be allocated to the health sector. Two major schools of thought lead the debate. The first is the school of “supply subsidy”, arguing that public funds be budgeted directly to public providers which in turn can provide free or partially free basic care for all through community facilities. This approach has two implications: Individuals would bear full responsibility for any non-basic care obtained mostly at tertiary facilities. Private supply for basic care would be excluded due to the lack of mechanisms for public financing.
In contrast, the second school of “demand subsidy” argues for an approach of empowering patients by establishing social insurance programs with public funds as an initial endowment to encourage individual participation, with self-contribution as well. This approach would allow all who are insured to obtain benefits coupled with varied co-payments, but there would be no need to exclude those for the use of non-basic care. Also, such a social insurance approach would allow an equal opportunity for all providers, regardless of ownership, to join the supply capacity under the same reimbursement policies.
Service DeliveryTo a great extent, health service delivery in China is still dominated by state-owned providers. Of the nearly 18,000 hospitals nationwide, over 90 per cent are state hospitals. As a result of long governance as a planned economy, government bureaucracy still heavily regulates state hospitals. Such government controls are usually administered for almost all aspects of hospital management and authorities; two aspects are worth noting.
First, doctors are officially defined as public servants and thus are subject to government administrative controls, especially over welfare and salary base, and work unit. As such, a doctor’s salary is generally set at the social average of public servants, with little consideration for their human capital investment and the risk involved in medical care. This standard salary largely discourages doctors from reaching their fullest potential in terms of productivity and quality.
Second, the state government exercises tight price regulations for medical services. However, much of the medical service unit prices still remain at levels set decades ago when most non-medical goods were extremely inexpensive. As a result, most state hospitals can only sustain themselves with government subsidies or soft budgets which often are uncertain and limited. Under such policy-driven financial constraints, hospitals and doctors are forced to seek other sources of revenues which mostly lead to an oversupply of services, especially prescriptions. This explains why prescriptions in China usually account for 45-50 per cent of total health expenditure.
Service FinancingOn the one hand, people’s demand for healthcare has inevitably increased over time as can be expected, largely due to disease transition, income growth, demographic transition and most importantly, technology diffusion into China. On the other hand, total service supply capacity has not responded accordingly, largely due to constraints imposed by government controls that are still dominant in the hospital sector. The result is that most Chinese people have had to face healthcare cost inflation. During 1980-2005, GDP per capita increased 27-fold, total health expenditures per capita increased 40-fold, but total out-of-pocket health expenditure increased 102-fold. At the same time as facing high health cost inflation, more than one-third of the Chinese population has had no insurance coverage and thus has been fully exposed to high health and financial risks.
From a policy perspective, there were only two formal insurance policy arrangements before 2007. One is the Urban Employee Basic Medical Insurance (UEBMI), an employment-based program for the urban employed. UEBMI is a mandatory comprehensive program where a large regional pool of premiums is contributed to by both employer and employee. The other is the New Rural Cooperative Medical Insurance (NRCMI). It insures the rural population primarily for inpatient care on a voluntary basis, pooling the insurance risk at the county level with a yearly RMB 50 contribution per person, consisting of RMB 40 from government and RMB 10 from the individual. The state safety net, however, completely left out a third of the population – unemployed urban residents, mostly the elderly and children.
In the face of these enormous challenges and unequal access to healthcare, the state government took a major initiative in healthcare financing. On 10 July 2007, the State Council issued “Policy Document No. 20” calling for a pilot experiment of the Urban Resident Basic Medical Insurance (URBMI), with 79 cities selected for the first pilot effort in the summer of 2007. This policy effort yields two significant implications. First, a social insurance-based approach seems to lead the way to health reform in China. Second, the URBMI is expected to develop a natural platform that can merge with the existing UEBMI and NRCMIS, paving the way to a universal health insurance program in China.
Based on the success of the pilot experiment, in his State Report to the 2008 People’s Congress, Premier Wen Jiabao set the goal of implementing the URBMI pilot model for half of the cities nationwide by the end of 2008, and for all by 2010. This shows that the newly initiated URBMI, together with the UEBMI (180 million people enrolled in 2007) and the NRCMI (720 million people enrolled), serves as a milestone in shaping the direction of healthcare financing in China, leading towards a universal coverage policy for all by 2010.
Shifting GearsAs noted by economics Nobel laureate Kenneth Arrow, healthcare bears a number of unique characteristics: They include uncertainty, heterogeneity and asymmetric information, and therefore healthcare calls for government intervention. While the necessity of government intervention is commonly shared, many disputes remain as to where and how intervention should best be made. In China’s case, primary intervention has been focused on healthcare financing by initiating the URBMI program to fill a policy gap, and towards developing a universal insurance coverage goal by 2010. While it has been successful thus far, further reform will confront many challenging tasks when shifting gears to the service supply side which will inevitably involve transitions in hospital ownership, organisational management, pricing and reimbursement, as well as a contracting basis with compatible incentives to promote value, rather than cost competition for service delivery.
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