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[Abstract] The paper presents the economic analysis of the development of China’s health care system based on the methodology of political economy. The paper explores the analysis from three perspectives—the historical context, contemporary crisis and economic challenges.
[Key words] Axis of power Economic inefficiency
Introduction
Concerns with regard to the delivery of health care services to populations on a national scale are seemingly universal. In western countries, for example, the news media frequently highlight concerns with regard to health care as one of the most continuing of national problems. This being said, however, it may be argued that the situation with respect to health care in China is profoundly more serious than being experienced by any industrialized and newly industrialized countries. While many countries around the world are currently reforming their health care systems, the future stability of these states is not dependent on the success of these reforms (Hsaio, W. 2007). In contrast, the crisis of health care in China today underlines perhaps the great challenges to the economic development of the country: increasing economic inequality and the urban/rural divide.
This paper will approach an economic analysis of China’s health care system from three important perspectives. The historical context will be explored, to understand how the economics of China’s health care has historically been interwoven into the ideological model of economic and political equality of the state. From this basis, the economic parameters of the contemporary crisis will be outlined, in order to understand how it was precisely those same reforms that have famously transformed China into a contemporary economic powerhouse, which have interfered China’s universal health care system. Finally, the economic challenges China faces in reforming its health care system in the future will be explored. The argument will be made that, in terms of an economic analysis, addressing bureaucratic inefficiencies and the bias towards urban health care delivery is even more important than increased state funding to reforming and truly “universalizing” China’s health care system.
An economic history of health care in China
It is of critical importance, in understanding the significance of the contemporary economic crisis in China’s health care system, that we address the historical context of this crisis. For some western countries, for example, health care issues are understood in terms of both individual concerns and public policy. For the People’s Republic of China, however, national health care policy is deeply interwoven into the ideological fabric of the state (Hsaio, W. 2007). As critics note: The health care system of the PRC was developed not only as a measure to promote health, but also with a symbolic meaning, which signalled the realization of people’s liberation and collective ownership in China (Wong, V. And Chiu, S. 1997). This context is essential for those outside China, and non-China specialists, to grasp the extraordinary significance of the economics of health care to China. Preceding from the First National Health Conference of the People’s Republic of China in August 1950, in 1951 the PRC instituted a three-level health care system for the entire nation. The first level was a state-owned and state-financed health protection system termed “public medicine” for China’s current and retired public and military officials. The second level of the system was termed “collective medicine” and was aimed at employees and retirees of state and collective enterprises. While the hospital and health services for this group were state-provided, funding was obtained through “welfare funds” set up by the different collective enterprises. The third level was termed “co-operative medicine”. In contrast to the first two—which were heavily oriented towards urban China—this last level was oriented towards rural China. Health care services were provided by village (brigade) health stations, commune health centres, and county hospitals, which together comprised a three-tier rural health care system. This was funded through collections from peasant households, village (brigade) and county (commune) welfare funds, and small subsidies from local governments. (Wong, V. And Chiu, S. 1997)
Economic analysis of health care in China has paid particular attention to this last level – the “co-operative medical system” (CMS)—and its importance in Chinese history. While this system was primitive by Western standards—its doctors commonly referred to as “barefoot doctors” with only three months training in health care—it efficiently delivered health care knowledge and services to hundreds of millions of rural Chinese who had never possessed access to health care before. The establishment of co-operative medicine was a very important development in China which guaranteed the majority of rural population access to essential health care on the one hand, and on the other consolidated the three-tier rural health network in which disease prevention and health promotion were afforded a high priority (Wong, V. And Chiu, S. 1997, p.78).
In terms of health care delivery, the above system proved very effective. Consider, for example, the fact that the annual death rate in China declined from 17 per 1000 in 1952 to 6.34 per 1000 in 1980. During the same period, life expectancy in China increased from 40.8 in the early 1950s to 65.3 years by the late 1970s (Chow, G. 2006). Moreover, from a political and social perspective, this three level system brought egalitarianism to China that had been severely lacking previously. While it appears clear that urban health care was more sophisticated than that available to the rural population of China, the fact that the system delivered universal health care to a country the size of China is undeniably remarkable. Prior to the reforms launched under the reform and open policies, China had a planned, centralized economy where the means of production—both urban and rural were state or collectively owned. There was a universal, if rudimentary, welfare system including medical care and education (UNDP 2005 2-4). This is essential to understand the sensitivity of health care reforms in modern China: Egalitarianism was not only the dominant ideology, but also a goal that the state pursued actively. To minimize income inequality, in the urban economy, workers' wages were centrally planned and administered, with the central government setting unified wage standards and scales. As the concept of egalitarianism gained increasing popularity, differences between high and low wage scales diminished. (UNDP 2005 2-3)
The importance of the health care system before reform and open policies was thus not only in that it delivered health care to hundreds of millions, but that it was a key element in the equality ideology of the state. Of course, China's general economic and social development was low, with an incredible 250 million people living below the poverty line. Moreover, during this period there were clear divisions between urban and rural China, with health care, incomes and education in urban China being superior to rural China (UNDP 2005 2-3). Nonetheless, universal health care represented a key component of the state.
This being said, however, from an economic perspective it is clear that the weakest elements in this three-level system were the systems of funding; in particular those for the working classes in urban and rural China. As the above description makes clear, China’s universal health care was—on both its “collective” and “co-operative” levels—dependent upon the economic viability of two structures of economic organization that were ideologically defined by the Communist orientation of the People’s Republic of China. In other words, were China’s economy during this period open to economic competition from the outside world, the comparative inefficiencies of the “collective” and “co-operative” systems would not only mean their failure, but the failure of the health care systems dependent upon them for funding. In essence, this is what occurred with the economic reforms of China that began in the late 1970s.
The economic parameters of the contemporary crisis
By many measures, the economic and social transformation of China over the past thirty years has been one of the great economic success stories of all time. For example, in 1978 China’s per capita Gross Domestic Product (GDP) was 379 RMB (US$219). By 2003 this had increased to 9101 RMB (US$1099) (IBM) (Chow 2006). An integral part of the reforms of the late 1970s was an effort to increase agricultural production. The communal and collective farms were obviously inefficient, as were the collective industries in urban areas. To remedy this economic problem, the household contract responsibility system was instituted in rural China in 1978. Within five years, by the end of 1983, the system of economic production in rural China that had been in place for a generation had disappeared. The production brigades and communes effectively disappeared, and the agricultural production of rural China began – as the government had hoped – to increase dramatically (Wong, V. And Chiu, S. 1997). By most economic terms, life in rural China began to improve during the same period. For example, while in 1978 some 250 million rural Chinese were reported as living in poverty, but 1985 this number had dropped to 125 million and, by 1999, to 32 million (Saich, T. 2001). However, in terms of the China’s health care system, the disappearance of the collectives and communes also meant the disappearance of the sources of funding for China’s “collective medical system” and “co-operative medical system”.
This had an astonished impact upon the economic foundations of China’s health care system for hundreds of millions of Chinese. As the World Bank noted in 1997: The shift away from a communal system deprived the rural cooperative medical system of its sources of community-based financing. As communes gradually disappeared, so did the cooperative medical system. Only about 10 percent of the rural population is now covered by some form of community-financed health care, down from a peak of 85 percent in 1975 . . . As a result, some 700 million rural Chinese must pay out of pocket for virtually all health services. Without insurance, medical expenses can lead to deferral of care, untreated illness, financial catastrophe and poverty (Chow, G. 2006).
As noted above, the bulk of medical services in the PRC were, for decades, supplied by the so-called “barefoot doctors”. However, with the collapse of sources of funding, hundreds of thousands of these local doctors – the only sources of reasonably qualified medical care for countless rural Chinese – ceased practicing (Wong, V. And Chiu, S. (1997).
The economic reforms initiated in the late 1970s and 1980s did not only mean the eradication of the “welfare funds” that were the financial basis of China’s national health care system. Another important consequence of these reforms was the movement towards the privatization of enterprises at all levels of China’s economy. Even at the village (brigade) level, local health stations or clinics were privatized at an incredible rate. For example, in 1992 alone, 434,375 health clinics were sold or licensed to private contractors. This made private health care the dominant form of medical services delivery for most of China. In the same year, the total number of health clinics still operating on some sort of communal funding basis was 294,417, or about 37 percent of all health clinics in the country (Wong, V. And Chiu, S. 1997).
In part, this privatization—and its accompanying “downloading” of health care costs from the national to the regional and lower-branches of government in China—was an inescapable consequence of the great economic transition accompanying the dramatic reforms of China’s economy. During the early transitional years of the reform period—the 1980s—the Chinese government actually experienced a rapidly reduction in its revenues. As a result, the government began to seek ways of reducing the subsidies it provided to the health care system at various levels, including the top tier “public medical system”. By the early 1990s, funding from the national government amounted to only 10 percent of the total funding of public health care facilities in China (Hsaio, W. 2007). At the same time, however, state bureaucracies in the 1990s instituted a special health service and drug regulatory pricing system that seems a sort of “shell game” in which the government manages to conceal the real costs of Chinese health care through innovative billing methods. For example, health care service providers in China must – by law – set their service prices below the actual cost of these services. The cost billed to a patient for a visit to a doctor’s office can only be 40-50% of the actual cost. This would seem, in a superficial analysis, to be a sign of the Chinese government’s attempting to alleviate the cost of health care for Chinese. However, a more complete economic analysis of this provision of health care would indicate the unusual fact that the government system accepts a 15 percent profit mark-up on costly Western drugs, and a 30 percent profit mark-up on far more inexpensive Chinese traditional medicines (Hsaio, W. 2007).
The effect of this has been catastrophic at the local level of health care, particularly in rural China, where the emphasis has tended to be on the use of Chinese traditional medicines for preventative rather than curative procedures. Instead, the Chinese government’s health care pricing regulatory system—that has been termed economically “irrational” by some economists and observers (Hsaio, W. 2007) – has shifted the orientation of Chinese medicine from less expensive preventative medicine using Chinese drugs to more expensive curative medicine using Western drugs. Moreover, this “irrational” economic system has produced a crisis in Chinese health care that is familiar to many Westerners: the increasing resistance of disease vectors due to the over-prescription of antibiotics. Consider the fact that while only about 30% of hospital patients internationally are prescribed antibiotics, an incredible 79% of Chinese hospital patients are prescribed antibiotics (Hsaio, W. 2007).
From the perspective of hospitals and doctors, this over-prescription makes economic “sense” as drug profits are the only means by which Chinese health care providers can compensate for their legally mandated provision of basic services to their patients below costs. As a consequence of the economic reforms of the 1970s and 1980s, hospitals—much like the farming households of rural China—became autonomous economic entities. To make this increasing autonomy attractive to workers at hospitals, the government introduced the “responsibility system” which mandated bonuses for hospital workers that foster greater efficiency and productivity. In effect, for hospitals this has meant that the revenues of administrators and doctors are now dependent, not upon the amount of work or services that they deliver to patients—which, as noted above, are capped below cost – but upon the amount of revenue they bring in to the hospital. The only two sources of revenue, beyond the capped patient fees, are those from drug costs and high technology equipment and services costs (Wong, V. And Chiu, S. 1997). As noted above, it is widely recognized in China today that the drug pricing system is incredibly inefficient in economic terms. For example, some studies have found that an incredible 40 percent of all drugs prescribed in China are prescribed unnecessarily (Wong, V. And Chiu, S. 1997). Perhaps even worse is the use of high-technology western medical equipment – such as CT scans, ultrasound and MRI – which is spreading across China at a rate that is amazing even by Western standards. While from one perspective the Chinese government finds this to be a praiseworthy sign of China’s technological and social progress, economists in the Chinese government argue that it is actually a sign of the incredible inefficiency of the Chinese government’s regulatory pricing regime. For example, a report of the Research Office of the State Council observes: In recent years, many hospitals have introduced high-tech equipment or facilities from western countries. As far as Beijing is concerned, the number of CT scans and MRI totals 65 and 8 respectively, whereas in London, which is of similar size, there are only 5 CT scans and 1 MRI. ... According to available statistics, among those patients who received CT scanning, only 10 percent of them were detected to have serious illness, which is far lower than the same figure of 50 percent in overseas countries. As a result, much economic resource is wasted in unnecessary diagnostic procedures (Wong, V. And Chiu, S. 1997).
When there are more CT scanners and MRIs in Beijing than in a major Western metropolis of similar size, but these are being used indiscriminately to detect far fewer illnesses among the fewer and fewer Chinese who can afford these services, we can see how the economic foundations of China’s health care system is in crisis. Doctors and hospitals have an incentive to act in a way that increases their revenues but which, due to the state permitting much higher pricing of these services to Chinese than they cost, this has introduced incredible economic inefficiency into the overall health care system in China.
In this analysis, it is clear that by the late 1990s the Chinese government was becoming aware of a looming crisis in health care in China. As a direct consequence of the reforms of the 1970s and 1980s, the previous universal health care system had effectively collapsed as its sources of funding ceased to exist. Privatization and the downloading of costs, together with inefficient pricing regulatory structures, meant that not only were hundreds of millions of Chinese going without basic medical care, but that the medical care that was being provided was economically inefficient for the country as a whole. The challenges of health care reform in China
As many observers of China have noted, the Chinese government has taken notice of the growing popular discontent with the changes in the country’s health care system as a result of the economic reforms of the late 1970s and early 1980s. One of the most needs reforms lay in government health care funding which, by 2003, had dropped to 0.95 percent of GDP, when, according to the World Bank, it should more appropriately be about 2.5 percent considering China’s economy and population (Zhengzhong 1).
In March of 2007, in response to growing criticism, Chinese central government announced a sweeping plan for state reinvestment in Chinese health care, reversing years of cuts and downloading of health costs: With a significant growth in tax revenue from a booming economy, China plans to inject an additional US $25-38 billion of government funding—the equivalent of 1-1.5% of GDP—into health, with the goal of providing free or nearly free universal basic health care that consists of primary and secondary prevention, primary care in outpatient clinics, maternal and child health care, home health services for the disabled and elderly, emergency hospital services, and essential drugs (Hsaio, W. 2007).
This massive increase in government funding would appear to be a significant step in the right direction. It is accompanied by a dramatic programme of restructuring in the delivery of health care in rural China. The system that existed in the 1990s and early 2000s—of a patient pay for service-privatized health care—would be replaced by a system supported by the state. The national government has recognized that rural health care at the village level is incapable of being self-supporting. Thus, in central and western China the central government will support the costs of delivering services to the rural poor on a means tested basis (Kelaher, D. And Dollery, B. 2003).
However, the situation in urban China remains much the same. The most recent reforms in the early 2000s in urban health care delivery have attempted to remedy obvious inefficiencies in this system—for example, in unnecessary services and costs—by fostering competition among hospitals and better management of the drug system. While this has been effective, if we consider the case of Shanghai—China’s primary urban centre—we can see the limitations of these reforms. While Shanghai has the most sophisticated medical system in China, hundreds of thousands of its population—unemployed, the working poor, retirees and migrants from rural China—receive no medical care at all as they are unable to pay medical fees even with government subsidies . Indeed, medical costs in Shanghai are so great that American health insurance companies will not offer services to residents of Shanghai as they could never afford to operate profitably. Significantly, many Chinese insurance companies echo this complaint, and refuse to offer health care insurance in Shanghai and other urban areas (Dong, W. 2002). Conclusion
Economists argue that the optimal solution to China’s health care crisis requires government intervention to eliminate the structural inefficiencies in the system. While increased funding is important, perhaps even more important is bureaucratic reform to eliminate what observers have termed the “medical axis of power” in China between key state ministries—the Ministry of Health and the Ministry of Human Resources and Social Security—hospitals and private health care providers. It is this “axis” that has been responsible for the “irrational” system of excessive pricing for drugs and high technology in China’s medical system, as well as the deficient rural China’s health care system. Economic inefficiency has flourished under this system, while hundreds of millions of Chinese have been deprived of health care. While observers note that the demonstrated power of this “axis” is an essential factor to consider for health care reforms, such reforms are absolutely essential to setting China’s health care system on the sound economic foundation and future.
Bibliographies:
[1] Chow, G. (2006). An economic analysis of health care in China. Centre for Economic Policy Studies. Princeton University. 1-26.
[2] Dong, W. (2002). Health care reform in urban China. Comparative Program on Health and Society: Munk Centre for International Studies at the University of Toronto. 1-24.
[3] Hsaio, W. (2007). The political economy of Chinese health reform. Health Economics, Policy and Law, 2: 241-249.
[4] IBM Institute for Business Values. Healthcare in China: Toward greater access, efficiency and quality.
[5] Kelaher, D. And Dollery, B. (2003). Health reform in China: An analysis of rural health care delivery. University of New England: Working Paper Series in Economics. 1-28.
[6] Saich, T. (2001) Governance and politics in China. London: Palgrave.
[7] UNDP (United Nations Development Programme) (2005). China human development report 2005. China Development Research Foundation.
[8] Wong, V. And Chiu, S. (1997). Health-care reforms in the People’s Republic of China. International Journal of Public Sector Management, 10.2: 76-92.
[9] Zhengzhong, M. ( ). Health system of China: Overview of challenges and reforms. Sichuan University, China. 1-8.
[Key words] Axis of power Economic inefficiency
Introduction
Concerns with regard to the delivery of health care services to populations on a national scale are seemingly universal. In western countries, for example, the news media frequently highlight concerns with regard to health care as one of the most continuing of national problems. This being said, however, it may be argued that the situation with respect to health care in China is profoundly more serious than being experienced by any industrialized and newly industrialized countries. While many countries around the world are currently reforming their health care systems, the future stability of these states is not dependent on the success of these reforms (Hsaio, W. 2007). In contrast, the crisis of health care in China today underlines perhaps the great challenges to the economic development of the country: increasing economic inequality and the urban/rural divide.
This paper will approach an economic analysis of China’s health care system from three important perspectives. The historical context will be explored, to understand how the economics of China’s health care has historically been interwoven into the ideological model of economic and political equality of the state. From this basis, the economic parameters of the contemporary crisis will be outlined, in order to understand how it was precisely those same reforms that have famously transformed China into a contemporary economic powerhouse, which have interfered China’s universal health care system. Finally, the economic challenges China faces in reforming its health care system in the future will be explored. The argument will be made that, in terms of an economic analysis, addressing bureaucratic inefficiencies and the bias towards urban health care delivery is even more important than increased state funding to reforming and truly “universalizing” China’s health care system.
An economic history of health care in China
It is of critical importance, in understanding the significance of the contemporary economic crisis in China’s health care system, that we address the historical context of this crisis. For some western countries, for example, health care issues are understood in terms of both individual concerns and public policy. For the People’s Republic of China, however, national health care policy is deeply interwoven into the ideological fabric of the state (Hsaio, W. 2007). As critics note: The health care system of the PRC was developed not only as a measure to promote health, but also with a symbolic meaning, which signalled the realization of people’s liberation and collective ownership in China (Wong, V. And Chiu, S. 1997). This context is essential for those outside China, and non-China specialists, to grasp the extraordinary significance of the economics of health care to China. Preceding from the First National Health Conference of the People’s Republic of China in August 1950, in 1951 the PRC instituted a three-level health care system for the entire nation. The first level was a state-owned and state-financed health protection system termed “public medicine” for China’s current and retired public and military officials. The second level of the system was termed “collective medicine” and was aimed at employees and retirees of state and collective enterprises. While the hospital and health services for this group were state-provided, funding was obtained through “welfare funds” set up by the different collective enterprises. The third level was termed “co-operative medicine”. In contrast to the first two—which were heavily oriented towards urban China—this last level was oriented towards rural China. Health care services were provided by village (brigade) health stations, commune health centres, and county hospitals, which together comprised a three-tier rural health care system. This was funded through collections from peasant households, village (brigade) and county (commune) welfare funds, and small subsidies from local governments. (Wong, V. And Chiu, S. 1997)
Economic analysis of health care in China has paid particular attention to this last level – the “co-operative medical system” (CMS)—and its importance in Chinese history. While this system was primitive by Western standards—its doctors commonly referred to as “barefoot doctors” with only three months training in health care—it efficiently delivered health care knowledge and services to hundreds of millions of rural Chinese who had never possessed access to health care before. The establishment of co-operative medicine was a very important development in China which guaranteed the majority of rural population access to essential health care on the one hand, and on the other consolidated the three-tier rural health network in which disease prevention and health promotion were afforded a high priority (Wong, V. And Chiu, S. 1997, p.78).
In terms of health care delivery, the above system proved very effective. Consider, for example, the fact that the annual death rate in China declined from 17 per 1000 in 1952 to 6.34 per 1000 in 1980. During the same period, life expectancy in China increased from 40.8 in the early 1950s to 65.3 years by the late 1970s (Chow, G. 2006). Moreover, from a political and social perspective, this three level system brought egalitarianism to China that had been severely lacking previously. While it appears clear that urban health care was more sophisticated than that available to the rural population of China, the fact that the system delivered universal health care to a country the size of China is undeniably remarkable. Prior to the reforms launched under the reform and open policies, China had a planned, centralized economy where the means of production—both urban and rural were state or collectively owned. There was a universal, if rudimentary, welfare system including medical care and education (UNDP 2005 2-4). This is essential to understand the sensitivity of health care reforms in modern China: Egalitarianism was not only the dominant ideology, but also a goal that the state pursued actively. To minimize income inequality, in the urban economy, workers' wages were centrally planned and administered, with the central government setting unified wage standards and scales. As the concept of egalitarianism gained increasing popularity, differences between high and low wage scales diminished. (UNDP 2005 2-3)
The importance of the health care system before reform and open policies was thus not only in that it delivered health care to hundreds of millions, but that it was a key element in the equality ideology of the state. Of course, China's general economic and social development was low, with an incredible 250 million people living below the poverty line. Moreover, during this period there were clear divisions between urban and rural China, with health care, incomes and education in urban China being superior to rural China (UNDP 2005 2-3). Nonetheless, universal health care represented a key component of the state.
This being said, however, from an economic perspective it is clear that the weakest elements in this three-level system were the systems of funding; in particular those for the working classes in urban and rural China. As the above description makes clear, China’s universal health care was—on both its “collective” and “co-operative” levels—dependent upon the economic viability of two structures of economic organization that were ideologically defined by the Communist orientation of the People’s Republic of China. In other words, were China’s economy during this period open to economic competition from the outside world, the comparative inefficiencies of the “collective” and “co-operative” systems would not only mean their failure, but the failure of the health care systems dependent upon them for funding. In essence, this is what occurred with the economic reforms of China that began in the late 1970s.
The economic parameters of the contemporary crisis
By many measures, the economic and social transformation of China over the past thirty years has been one of the great economic success stories of all time. For example, in 1978 China’s per capita Gross Domestic Product (GDP) was 379 RMB (US$219). By 2003 this had increased to 9101 RMB (US$1099) (IBM) (Chow 2006). An integral part of the reforms of the late 1970s was an effort to increase agricultural production. The communal and collective farms were obviously inefficient, as were the collective industries in urban areas. To remedy this economic problem, the household contract responsibility system was instituted in rural China in 1978. Within five years, by the end of 1983, the system of economic production in rural China that had been in place for a generation had disappeared. The production brigades and communes effectively disappeared, and the agricultural production of rural China began – as the government had hoped – to increase dramatically (Wong, V. And Chiu, S. 1997). By most economic terms, life in rural China began to improve during the same period. For example, while in 1978 some 250 million rural Chinese were reported as living in poverty, but 1985 this number had dropped to 125 million and, by 1999, to 32 million (Saich, T. 2001). However, in terms of the China’s health care system, the disappearance of the collectives and communes also meant the disappearance of the sources of funding for China’s “collective medical system” and “co-operative medical system”.
This had an astonished impact upon the economic foundations of China’s health care system for hundreds of millions of Chinese. As the World Bank noted in 1997: The shift away from a communal system deprived the rural cooperative medical system of its sources of community-based financing. As communes gradually disappeared, so did the cooperative medical system. Only about 10 percent of the rural population is now covered by some form of community-financed health care, down from a peak of 85 percent in 1975 . . . As a result, some 700 million rural Chinese must pay out of pocket for virtually all health services. Without insurance, medical expenses can lead to deferral of care, untreated illness, financial catastrophe and poverty (Chow, G. 2006).
As noted above, the bulk of medical services in the PRC were, for decades, supplied by the so-called “barefoot doctors”. However, with the collapse of sources of funding, hundreds of thousands of these local doctors – the only sources of reasonably qualified medical care for countless rural Chinese – ceased practicing (Wong, V. And Chiu, S. (1997).
The economic reforms initiated in the late 1970s and 1980s did not only mean the eradication of the “welfare funds” that were the financial basis of China’s national health care system. Another important consequence of these reforms was the movement towards the privatization of enterprises at all levels of China’s economy. Even at the village (brigade) level, local health stations or clinics were privatized at an incredible rate. For example, in 1992 alone, 434,375 health clinics were sold or licensed to private contractors. This made private health care the dominant form of medical services delivery for most of China. In the same year, the total number of health clinics still operating on some sort of communal funding basis was 294,417, or about 37 percent of all health clinics in the country (Wong, V. And Chiu, S. 1997).
In part, this privatization—and its accompanying “downloading” of health care costs from the national to the regional and lower-branches of government in China—was an inescapable consequence of the great economic transition accompanying the dramatic reforms of China’s economy. During the early transitional years of the reform period—the 1980s—the Chinese government actually experienced a rapidly reduction in its revenues. As a result, the government began to seek ways of reducing the subsidies it provided to the health care system at various levels, including the top tier “public medical system”. By the early 1990s, funding from the national government amounted to only 10 percent of the total funding of public health care facilities in China (Hsaio, W. 2007). At the same time, however, state bureaucracies in the 1990s instituted a special health service and drug regulatory pricing system that seems a sort of “shell game” in which the government manages to conceal the real costs of Chinese health care through innovative billing methods. For example, health care service providers in China must – by law – set their service prices below the actual cost of these services. The cost billed to a patient for a visit to a doctor’s office can only be 40-50% of the actual cost. This would seem, in a superficial analysis, to be a sign of the Chinese government’s attempting to alleviate the cost of health care for Chinese. However, a more complete economic analysis of this provision of health care would indicate the unusual fact that the government system accepts a 15 percent profit mark-up on costly Western drugs, and a 30 percent profit mark-up on far more inexpensive Chinese traditional medicines (Hsaio, W. 2007).
The effect of this has been catastrophic at the local level of health care, particularly in rural China, where the emphasis has tended to be on the use of Chinese traditional medicines for preventative rather than curative procedures. Instead, the Chinese government’s health care pricing regulatory system—that has been termed economically “irrational” by some economists and observers (Hsaio, W. 2007) – has shifted the orientation of Chinese medicine from less expensive preventative medicine using Chinese drugs to more expensive curative medicine using Western drugs. Moreover, this “irrational” economic system has produced a crisis in Chinese health care that is familiar to many Westerners: the increasing resistance of disease vectors due to the over-prescription of antibiotics. Consider the fact that while only about 30% of hospital patients internationally are prescribed antibiotics, an incredible 79% of Chinese hospital patients are prescribed antibiotics (Hsaio, W. 2007).
From the perspective of hospitals and doctors, this over-prescription makes economic “sense” as drug profits are the only means by which Chinese health care providers can compensate for their legally mandated provision of basic services to their patients below costs. As a consequence of the economic reforms of the 1970s and 1980s, hospitals—much like the farming households of rural China—became autonomous economic entities. To make this increasing autonomy attractive to workers at hospitals, the government introduced the “responsibility system” which mandated bonuses for hospital workers that foster greater efficiency and productivity. In effect, for hospitals this has meant that the revenues of administrators and doctors are now dependent, not upon the amount of work or services that they deliver to patients—which, as noted above, are capped below cost – but upon the amount of revenue they bring in to the hospital. The only two sources of revenue, beyond the capped patient fees, are those from drug costs and high technology equipment and services costs (Wong, V. And Chiu, S. 1997). As noted above, it is widely recognized in China today that the drug pricing system is incredibly inefficient in economic terms. For example, some studies have found that an incredible 40 percent of all drugs prescribed in China are prescribed unnecessarily (Wong, V. And Chiu, S. 1997). Perhaps even worse is the use of high-technology western medical equipment – such as CT scans, ultrasound and MRI – which is spreading across China at a rate that is amazing even by Western standards. While from one perspective the Chinese government finds this to be a praiseworthy sign of China’s technological and social progress, economists in the Chinese government argue that it is actually a sign of the incredible inefficiency of the Chinese government’s regulatory pricing regime. For example, a report of the Research Office of the State Council observes: In recent years, many hospitals have introduced high-tech equipment or facilities from western countries. As far as Beijing is concerned, the number of CT scans and MRI totals 65 and 8 respectively, whereas in London, which is of similar size, there are only 5 CT scans and 1 MRI. ... According to available statistics, among those patients who received CT scanning, only 10 percent of them were detected to have serious illness, which is far lower than the same figure of 50 percent in overseas countries. As a result, much economic resource is wasted in unnecessary diagnostic procedures (Wong, V. And Chiu, S. 1997).
When there are more CT scanners and MRIs in Beijing than in a major Western metropolis of similar size, but these are being used indiscriminately to detect far fewer illnesses among the fewer and fewer Chinese who can afford these services, we can see how the economic foundations of China’s health care system is in crisis. Doctors and hospitals have an incentive to act in a way that increases their revenues but which, due to the state permitting much higher pricing of these services to Chinese than they cost, this has introduced incredible economic inefficiency into the overall health care system in China.
In this analysis, it is clear that by the late 1990s the Chinese government was becoming aware of a looming crisis in health care in China. As a direct consequence of the reforms of the 1970s and 1980s, the previous universal health care system had effectively collapsed as its sources of funding ceased to exist. Privatization and the downloading of costs, together with inefficient pricing regulatory structures, meant that not only were hundreds of millions of Chinese going without basic medical care, but that the medical care that was being provided was economically inefficient for the country as a whole. The challenges of health care reform in China
As many observers of China have noted, the Chinese government has taken notice of the growing popular discontent with the changes in the country’s health care system as a result of the economic reforms of the late 1970s and early 1980s. One of the most needs reforms lay in government health care funding which, by 2003, had dropped to 0.95 percent of GDP, when, according to the World Bank, it should more appropriately be about 2.5 percent considering China’s economy and population (Zhengzhong 1).
In March of 2007, in response to growing criticism, Chinese central government announced a sweeping plan for state reinvestment in Chinese health care, reversing years of cuts and downloading of health costs: With a significant growth in tax revenue from a booming economy, China plans to inject an additional US $25-38 billion of government funding—the equivalent of 1-1.5% of GDP—into health, with the goal of providing free or nearly free universal basic health care that consists of primary and secondary prevention, primary care in outpatient clinics, maternal and child health care, home health services for the disabled and elderly, emergency hospital services, and essential drugs (Hsaio, W. 2007).
This massive increase in government funding would appear to be a significant step in the right direction. It is accompanied by a dramatic programme of restructuring in the delivery of health care in rural China. The system that existed in the 1990s and early 2000s—of a patient pay for service-privatized health care—would be replaced by a system supported by the state. The national government has recognized that rural health care at the village level is incapable of being self-supporting. Thus, in central and western China the central government will support the costs of delivering services to the rural poor on a means tested basis (Kelaher, D. And Dollery, B. 2003).
However, the situation in urban China remains much the same. The most recent reforms in the early 2000s in urban health care delivery have attempted to remedy obvious inefficiencies in this system—for example, in unnecessary services and costs—by fostering competition among hospitals and better management of the drug system. While this has been effective, if we consider the case of Shanghai—China’s primary urban centre—we can see the limitations of these reforms. While Shanghai has the most sophisticated medical system in China, hundreds of thousands of its population—unemployed, the working poor, retirees and migrants from rural China—receive no medical care at all as they are unable to pay medical fees even with government subsidies . Indeed, medical costs in Shanghai are so great that American health insurance companies will not offer services to residents of Shanghai as they could never afford to operate profitably. Significantly, many Chinese insurance companies echo this complaint, and refuse to offer health care insurance in Shanghai and other urban areas (Dong, W. 2002). Conclusion
Economists argue that the optimal solution to China’s health care crisis requires government intervention to eliminate the structural inefficiencies in the system. While increased funding is important, perhaps even more important is bureaucratic reform to eliminate what observers have termed the “medical axis of power” in China between key state ministries—the Ministry of Health and the Ministry of Human Resources and Social Security—hospitals and private health care providers. It is this “axis” that has been responsible for the “irrational” system of excessive pricing for drugs and high technology in China’s medical system, as well as the deficient rural China’s health care system. Economic inefficiency has flourished under this system, while hundreds of millions of Chinese have been deprived of health care. While observers note that the demonstrated power of this “axis” is an essential factor to consider for health care reforms, such reforms are absolutely essential to setting China’s health care system on the sound economic foundation and future.
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