for 1.3 Billion › assets › ... · 76.8 years for women and 72.5 for men. Not coincidentally, over the past quarter-century China’s primary burden of disease has shifted definitively

16 The Milken Institute Review

China’s Remarkable Work in Progress

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Second Quarter 2012 17

But the pace of change never fails to astonish. In

1960, China’s population of half a billion was very

young (36 percent younger than 15), poorly educated

(one-third were illiterate) and incredibly poor (per

capita income was probably just a few hundred dollars

a year in terms of today’s purchasing power). Some 80

percent lived in rural areas. Half a century later, China’s

1.3 billion people were more urbanized (50 percent

lived in cities), far older (just 17 percent were under

15), highly literate (96 percent) and, by the World

Bank’s reckoning, enjoyed middle-income status (over

$7,000 per capita GDP).

China, needless to say, has come a long way since the Communist revolution.

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Of course, the sort of health care this older, richer and better-informed population ex-pects – and can afford – has changed radically. And the way the system evolves in coming years to meet that challenge will play a big role in determining the quality of life in the largest country on earth.

Expanding China’s health care coverage and redressing problems in delivering it will require difficult and thorough restructuring of the distorted incentives embedded in the current system, which arose early in the re-form era. Paralleling Deng Xiaoping’s dual-track (part socialist, part capitalist) reforms in other sectors of its economy, China en-acted health policies intended to protect a

“plan track” of access to basic health care for even the poorest citizens, while at the same

time encouraging the growth of a “market track” offering sophisticated, high-tech ser-vices to those able to pay for them. But basic access was not well defined, and the govern-ment did not organize an effective market for insurance as a means of pooling risk among large groups. So when state-sponsored fi-nancing largely collapsed (because it had gone to the abandoned agricultural com-munes and to state-owned enterprises now required to compete with the private sector), there was no plan B.

For some 20 years, the majority of Chinese were uninsured, and were forced to pay for medical care when they needed it. Over the past decade, however, China’s top leadership has devoted considerable attention (and a lot of money) to health sector reforms, with promising results. But real success will de-pend in large part on changing the distorted incentives in the current fee-for-service sys-tem to make quality care accessible and ex-panded insurance sustainable.

Karen eggleston is the asia Health Policy Program Director at stanford University’s Walter H. shorenstein asia-Pacific research Center. shannon Davidson and rong li provided research assistance for this article. pr

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The Milken Institute Review18

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health care under mao and beyond During the Maoist era (the 1950s through 1970s), China’s mostly rural population had access to basic health care under the govern-ment’s Rural Cooperative Medical Scheme (RCMS), with service delivery managed by agricultural cooperatives. The fabled “bare-foot doctors” of the late 1960s and 1970s pro-vided core services, like immunizations, to China’s vast rural population. (The relatively small but growing urban population was largely covered by work-unit-based health care.) Al-though the standards were minimal

– doctors usually had only a few months’ training after secondary school – there was a lot of low-hanging fruit to pick. Widespread availability of basic medicines and emphasis on controlling infectious disease (along with better nutrition, improved sanita-tion and more education) led to dramatic health improvements. Indeed, the increase in life expectancy at birth (from 40 just after the Communist revolution to 66 in 1980) repre-sents the most rapid sustained increase ever documented.

But with Deng’s market-based economic reforms of the 1980s, health care abruptly changed direction. Financial responsibility for care was shifted to local governments and individual enterprises, which in turn shifted most of the burden to individuals – who lacked any way to pool the financial risks. Vil-lage doctors, previously part of the RCMS, became private, fee-for-service providers.

demographic and epidemiologic transitions The switch to personal financing was not the only radical change in the health care environ-ment in the years after Mao’s death. The tran-

sition from a high-mortality, high-fertility milieu to a relatively low-mortality, low-fertil-ity one occurred in just a few decades. (The number of children the average Chinese woman bears in a lifetime declined from around six in the early 1950s to around two in the early 1990s, with the most rapid decline taking place in the 1970s, prior to the imposi-tion of the well-known one-child policy.) Al-though the pace of health improvement was

The fabled “barefoot doctors” of the late 1960s and 1970s provided

core services, like immunizations,

to China’s vast rural population.

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less dramatic than the pace of economic growth in the reform era, privatization hardly led to a public health Armageddon. People were able to spend a lot more on health care because they earned more. Meanwhile, im-proving sanitation and education continued to blunt the spread of a variety of diseases. By 2010, life expectancy stood at a respectable 76.8 years for women and 72.5 for men.

Not coincidentally, over the past quarter-century China’s primary burden of disease has shifted definitively from infectious dis-eases to chronic non-communicable mala-dies. In both urban and rural areas, cancer and cardiovascular diseases are now the top killers. Diabetes will eventually join the list; in 2008, roughly 10 percent of adults were diabetics, with the majority of cases undi-agnosed. Thus, along with overhauling the structure of a health care system for 1.3 billion people, China faces the chal-lenge of making the transition from a sys-tem focused on acute care and control of communicable disease to one that sup-

ports prevention and cost-effective manage-ment of chronic illness.

money mattersAt 5 percent of GDP, China’s spending on health still represents a relatively modest share of national income – more than India or Indonesia, but far less than the average of 9.5 percent among nations in the Organiza-tion for Economic Cooperation and Develop-ment. However, the rate of growth of spend-ing on health has been one of the most rapid in world history.

As noted earlier, this growth came primar-ily at individuals’ expense in the 1980s and 1990s. But in recent years, China has reversed the trend, greatly increasing government fi-

China faces the challenge

of making the transition

from a system focused on

acute care and control of

communicable disease...

c h i n e s e h e a l t h c a r e

nancing through a program of public subsi-dies for voluntary insurance under the rubric of the National Cooperative Medical Scheme (NCMS). Private spending as a share of total health care spending had reached almost two-thirds in 2001.

It has since declined gradually, to 46 per-cent in 2010. Thus, public spending now con-stitutes a little over half of China’s total health spending – a much higher percentage than in many other middle-income countries, but a significantly lower one than the average of 72 percent for OECD countries. Note, moreover, that the bulk of government financing has changed from direct subsidies paid to govern-ment doctors, clinics and hospitals to subsi-dies for households that choose to buy gov-ernment-sponsored insurance.

These aggregate statistics offer only a rough metric of where the system stands, since regional variations are large. Health care financing, like the financing of many other public services, is quite decentralized. And while poorer provinces receive some fi-nancial support from the central government,

redistribution is rather limited and large dif-ferences in spending persist. In 2000, outlays in cities were 3.6 times greater per capita than those in rural areas. The difference has de-clined since the adoption of the subsidized NCMS insurance system, but the urban/rural spending ratio was still 2.7:1 in 2010.

This gap did not grow because health care spending in rural areas stagnated after the

market-based reforms of the 1980s; indeed, rural per capita spending increased 17-fold (that’s right, 17-fold) over the past two de-cades in nominal terms. But urban spending

– like urban incomes – increased even faster. Indeed, the gap between rural and urban health care spending is actually lower than the difference between urban and rural incomes.

delivery Contemporary China inherited a largely hospital-based delivery system managed through the Ministry of Health and local governments, which was supplemented by a vast cadre of village doctors and a newly de-veloped system of grass-roots providers in urban areas. Like many other health systems in East Asia, a large share of outpatient care takes place in hospitals. But inpatient services still account for the lion’s share of spending – currently about 62 percent of the total.

This intensive use of hospitals is (rightly) seen as wasteful. Hence, the latest round of reforms focuses on developing a primary health care system and strengthening the quality of and funding for village clinics, township health centers and urban commu-nity health centers – as well as launching a program designed to bring “barefoot doctors” into the 21st century in terms of training and quality.

The effort to shift care toward nonhospital- based primary care is meeting resistance, since patients have a well-founded distrust of the quality of primary care providers. Unlike some other developing countries, however, China does not face the challenges of ram-pant provider absenteeism and crumbling health care infrastructure.

The vast majority of China’s hospitals are government-owned and managed; the latest statistics, covering January through October 2011, show that private hospitals accounted

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for just 6 percent of inpatient discharges and 8 percent of outpatient visits. But the private sector does deliver a lot of services at the local level – almost half of visits to grass-roots pro-viders were to privately owned village clinics.

China, like other East Asian countries, has eschewed gatekeeping requirements. Patients have traditionally been free to seek care from whomever they wish, though government-

subsidized health insurance offers only lim-ited coverage for providers outside the local area.

a hybrid health care systemAs noted earlier, out-of-pocket health spend-ing increased to three-fifths of total spending in the reform era (even without including the ubiquitous, under-the-table “red-packet” payments to doctors). In 1996, the central government called for local governments to re-establish cooperative medical programs in rural areas. However, significant expansion of insurance coverage did not occur until 2002, when Beijing announced direct budgetary support for the National Cooperative Medi-cal Scheme, the aforementioned insurance subsidies that supplemented premium con-tributions from local governments as well as individual households. Between 2003 and 2008, premium subsidies quadrupled, from 20 renminbi per capita (about $5 in terms of purchasing power) to 80, and are expected to increase further. The governments of wealth-ier regions, it’s worth noting, offer more-

generous benefit packages (and subsidies) than the national minimums.

In cities, the Urban Employees’ Basic Med-ical Insurance system was established in 1998 to replace enterprise-based insurance with municipality-level risk pooling. At the end of 2006, that system covered 64 percent of em-ployed urban residents, but only 31 percent of the total urban population. So in 2007, the government introduced the Urban Residents’

Basic Medical Insurance program in several cities, and extended it to all municipalities soon thereafter. This insurance broadens cov-erage to a far higher proportion of city dwell-ers, including students, retirees and other non-working individuals. The government subsidy in 2009 ranged from 40 to 80 ren-minbi per capita, depending on the region’s economic status and demography. Migrant workers – the tens of millions of Chinese who go wherever there are jobs to be found – can obtain insurance through NCMS, URBMI, or, in some cities, through programs specifically designed for them.

In 2009, the government’s push to broaden insurance coverage was backed with total fi-nancing of some 850 billion RMB. And it has worked: more than 95 percent of Chinese now have some sort of health coverage. The voluntary programs (NCMS and URBMI) have lower premiums and less-generous ben-efits than do the mandatory, longer-standing insurance programs for urban and govern-ment workers. China has thus chosen to start

“wide but shallow” coverage, with the intent

The latest round of reforms focuses on launching a program designed to bring “barefoot doctors” into the

21st century in terms of training and quality.



of improving benefits down the road. The goal is summed up in a government slogan:

“equal access by 2012 and universal coverage by 2020.”

The lack of a legacy of private insurance has meant that government-subsidized insur-ance programs are not competing with pri-

vate insurers and are not crowding out private coverage. Commercial insurers’ in-volvement in the reforms has been mostly as marketers of supplementary coverage for the wealthy, or as purveyors of insurance for spe-cific dread diseases (like cancer), or as con-tractors supplying administrative services for some social health insurance plans.

In July 2011, the State Council announced

that a general practitioner system would be implemented throughout China by 2020. The idea is to raise minimum acceptable skill lev-els, standardize training and set and enforce strict requirements for licensing. The plan also calls for bringing minimum numbers of general practitioners – two or three for every

10,000 residents – to all localities. To do that, the government will subsidize general practi-tioners willing to work in remote areas in the central and western parts of China.

In sum, China has achieved wide coverage, and is proceeding to deepen it while putting in place additional mechanisms to ensure that the additional health care spending is not wasted. The next phase of reforms, to be co

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detailed this year, will reportedly focus on enriching benefits, improving the por-tability of coverage, encouraging private-sector delivery, reforming county-level hospitals and ensuring access to essen-tial medications through private pri-mary care providers.

reform, china’s wayHealth system reforms in China are not only important in their own right, but also offer insight into the strengths and weaknesses of China’s unusual style of gover-nance – what Chenggang Xu, a Harvard-trained economist at the University of Hong Kong, calls “regionally decentralized authori-tarianism.” Beijing dictates parameters and goals for reforms, but delegates implementa-tion. The Health Reform Office of the State Council signs “accountability forms” with provincial governments that delegate tasks through contracts with local governments down to the county level.

Bureaucrats’ evaluation criteria for pro-motions have been expanded to include some targets of health reform – notably the over-90-percent enrollment goal in the voluntary social health insurance programs. So, not sur-prisingly, local officials spend considerable time and resources to encourage enrollment. Keeping enrollment voluntary, in turn, gives Beijing an important signal about whether the populace perceives the new insurance programs to be worthwhile and effective.

Unfortunately, many characteristics of an equitable and efficient health system are not so easily defined by observable, quantifiable targets. One particular quandary for China is how best to improve the management of health service providers – especially the government-owned urban hospitals that con-stitute the “commanding heights” of China’s

health care system. The central government has called for “bold and innovative” local ex-periments, including ownership restructur-ing. However, the interest-group politics en-gulfing hospitals is potent and complicated, the financial flows are large, and the perceived risk of missteps on the part of local officials appears to outweigh the rewards from truly bold initiatives. Many analysts privately ex-press doubts that much will happen until Bei-jing articulates a clearer direction for policy.

Of the major goals for health reform set in 2009, expansion of insurance coverage has al-most surely been the most successful. The central task of health insurance is to shift the financial risk from individuals to the group. Along with risk pooling, of course, insurance also supports wider access to services. How-ever, third-party insurance may also induce overuse of the system, since patients can ef-fectively buy services for less than their true cost and providers have more discretion to pad their bills with unnecessary services. Note, too, that, with voluntary coverage, “ad-verse selection” – the greater incentive for sick people to sign up for insurance – could lead to a vicious cycle in which high costs lead to higher premiums and thus to ever-lower en-rollment rates of ever-sicker people.

So far, the reformers have largely (if not wan

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entirely) dodged these bullets. The reforms have achieved relatively high enrollment, avoided crippling adverse selection without imposing legal mandates to buy insurance, improved access to care and spared house-holds the financial consequences of cata-strophic illness – albeit with wide regional and sub-population disparities.

But some anomalies have shown up. For example, Adam Wagstaff and Magnus Linde-low of the World Bank used surveys from the early years of China’s insurance expansion to show that coverage actually increased the risk of big spikes in out-of-pocket spending. Wid-ening coverage, they found, had encouraged the use of expensive, higher-level providers, but the benefit packages weren’t rich enough to offset the resulting increase in medical bills. Similarly, Wagstaff and his colleagues found that NCMS boosted both access to care and township health centers’ revenues, but did not decrease out-of-pocket spending or expendi-tures per case at township health centers.

One of the first economic analyses of the URBMI used household survey data to show that participation was highest among the very rich and the very poor, and that the most sig-nificant beneficiaries were the poor. Insur-ance has also increased access for the elderly, thereby reducing financial burdens for family members. On the other side of the ledger, in-dividuals who were heavy users of inpatient hospital care, along with sufferers of chronic diseases, were more likely to enroll in the pro-gram; that implies some adverse selection.

Coverage for migrant workers has been es-pecially problematic, but localities have made progress in integrating migrants into the ex-isting patchwork of social insurance funds.

For example, there is evidence that Urban Employee Basic Medical Insurance has been effective in lowering out-of-pocket inpatient cost, increasing the number of physical exams, and improving self-rated health for migrant workers enrolled in that program.

According to a study by Xiaoyan Lei and Wanchuan Lin of Beijing University, NCMS has increased preventive care, but it has not improved overall health status, decreased out-of-pocket expenditure or increased utili-zation. Somewhat more encouragingly, Kim-berly Babiarz and her colleagues found that NCMS did significantly decrease the risk of huge out-of-pocket payments for rural resi-dents, encouraged utilization of village and township facilities rather than urban hospi-tals and increased the income of grass-roots providers. Serious challenges to improving access remain, though – among them, the lack of portability of benefits, relatively low reimbursement ceilings, inadequate cata-strophic coverage and incentives for unneces-sary care and waste.

fixing incentivesThe government understands that changes in the incentives of both patients and providers are needed in order to increase the productiv-ity of the system and deepen coverage at rea-sonable cost. For example, one key to strengthening primary care (and thereby re-ducing the demand for more expensive care) is to improve the performance-appraisal sys-tem for workers in government-owned pri-mary care organizations. But that is no small undertaking in a huge decentralized system.

Efforts to control communicable diseases offer another example of inefficiency (and

One particular quandary for China is how best to improve

the management of health service providers — especially

the government-owned urban hospitals that constitute the

“commanding heights” of China’s health care system.


the difficulty of getting rid of it). Disease con-trol is almost a pure “public good” in the sense that individuals need not pay in order to get the full benefit. Economists rightly argue that public goods should be paid for by government; otherwise, too little will be pro-duced because everyone will have an incen-tive to ride free on the efforts of others. But public financing of disease control took a huge hit in the early reform decades. And even now, long after the humiliation of the SARS epidemic, the organizations responsi-ble for disease control must scrounge 40 per-cent of their modest budgets from nongov-ernment sources.

The list of incentive problems goes on. Roughly half of health care providers’ in-comes is derived from the sale of high-profit-margin drugs. Some context here: China’s spending on pharmaceuticals as a share of total expenditures on health has been persis-tently high by international standards (though not so atypical for low-income coun-tries or for East Asian ones). Drug spending

was about half of all health expenditures in 1992, subsequently declining somewhat to 40 percent by 2010. No surprise, then, that an audit by Janet Currie of Columbia and her colleagues showed that Chinese physicians vastly overprescribe antibiotics. But there is no easy way to eliminate the perverse incen-tive to do so, since other means must be found to augment providers’ revenue if they are to be adequately compensated.

Grass-roots providers who have been de-nied revenues from high-margin drugs have

accumulated substantial debt in order to stay in business. Beijing responded last year with a plan for paying off their debts. Of course, providers could be supported with higher sal-aries. The concern there, however, is that compensating providers on a straight salary basis would undermine their incentives to offer quality services. Indeed, it would create incentives to pawn off patients on higher-level providers, exacerbating the crowding in China’s hospitals. This concern is very real; it partially explains why urban hospitals were overutilized in earlier periods.

A national policy document issued in April 2011 urged localities to continue to experi-ment with caseload-based payment methods, focusing on medical conditions that have clearly defined clinical pathways and health outcomes. The document explicitly mentions the problems arising in pilot implementation, calling for better supervision and oversight so that “health service providers do not turn away high-cost patients, or without cause re-duce length of stay or split treatment across multiple admissions.” Clearly, some providers

have responded to the incentives of payment by caseload in the pilots by selecting profit-able patients, discharging “quicker and sicker,” or discharging and readmitting patients so that they can bill for multiple admissions. All health care systems financed with third-party payments face this problem, of course. And evidence from other countries suggests that it can be contained.

the road to universal coverageLooking back, it is clear that most prosperous

The goal is summed up in a government slogan:“equal access by 2012 and universal coverage by 2020.”

The Milken Institute Review26


nations have chosen health care systems that are either predominantly based on insurance (a Bismarkian or national health insurance model) or utilize nationalized care (a Bev-eridge model) as a means of achieving uni-versal coverage. Among those going the insur-ance route, most have gradually expanded a core insurance package to an ever growing

share of the population, so that when cover-age reached the final groups of uninsured (typically self-employed and informal-sector workers and their dependents), the nation achieved universal coverage. Although some

“underinsurance” may remain in these sys-tems, out-of-pocket payments rarely account for a large share of total medical spending by the time universal coverage has been achieved.

China has pioneered a different approach. First, the primary care system is organized and financed increasingly like a British-style national health service, while more-advanced services are financed through a patchwork of voluntary (NCMS, URBMI) and mandatory (UEBMI) social health insurance programs.

Second, the expansion of social health insur-ance began by enrolling a large share of the population, but only covering a small share of expenditures. (Even “underinsured” was a generous term for NCMS back in 2003, when annual premiums were only 50 RMB – about $11 in purchasing power.) China has subse-quently built on that institutional foundation

to enrich both financing and benefits so that insured house-holds will face less hardship in paying for higher-quality health services.

A good seat-of-the pants defi-nition of universal coverage might be as follows: more than 90 percent of the population has health insurance, and more than 60 percent of the cost of care is covered through insurance or other risk pooling (that is, out-of-pocket spending is less than 40 percent of the total). By this defi-nition, China has achieved uni-versal coverage, since 1.3 billion out of 1.34 billion people have some form of insurance, and out-

of-pocket spending represents just 36 percent of total outlays. However, the system is still weak by developed-country standards be-cause service quality is often inadequate.

The challenge, then, is to continue to deepen risk pooling, strengthen primary care, raise clinical quality, improve incentives and re-engineer service delivery to better fit the needs of China’s increasingly urban, affluent and aging society. That will be no small feat. If China manages to sustain double-digit eco-nomic growth, though, it will soon be able to afford a first-class health care system. And the remarkable progress of the past decade sug-gests that China has the will to get the job done. mka

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Documents

for 1.3 Billion › assets › ... · 76.8 years for women and 72.5 for men. Not coincidentally, over the past quarter-century China’s primary burden of disease has shifted definitively