China’s Path to Health Policy Reform

July 28, 2014 • GLOBAL ECONOMY, Healthcare Reform, In-depth, China, Unprotected Post

By Åke Blomqvist

Serious problems arose in the health care sector when China introduced market-based methods of economic management, as rising out-of-pocket costs impoverished families and many went without needed care. In response, China has expanded its social insurance system, with different plans now covering 95% of the population. Since 2009, government is more actively managing the primary care system, and controlling the cost of pharmaceuticals. Below, Åke Blomqvist discusses how China’s health policy has drawn on the experience of many different countries, and local governments use a variety of approaches in implementing central health policy guidelines, and suggests that lessons learned from local experiments will influence the system’s future direction.

In the dramatic transformation of China’s system of economic management that took place in the late 20th century, the health care sector was deeply affected. Consistent with the general strategy of less central planning and more use of competitive markets in allocating resources, hospitals and clinics were given more freedom to raise revenue from the patients they treated, or from markups of the drugs they sold, and to rely less on resources passed on from the state. The result was extremely rapid growth of aggregate health care costs: Even though national income was growing at double-digit rates, health care spending grew even faster, and its share of GDP rose from about 3.5% to well over 5% between 1995 and 2012.

While health care costs have been rising at a faster rate than GDP in other countries as well, China was unique in that most of the increased spending came directly out of the pockets of patients and their families. Before the 1980s, most health care costs had been paid for by the state, either directly or through patients’ work units and the state-sponsored insurance programs to which they belonged. As rural communes were dissolved and more urban residents were employed in private firms, these forms of third-party coverage gradually diminished, so that by 2001, over 60% of total health care costs were paid directly out of patients’ pockets. Even in the U.S. where private financing accounts for a larger share of health care costs than in any other high-income country, government covers more than 45% and most of the rest is covered through private insurance, so the out-of-pocket share is less than 15%.

With rapidly rising costs and limited coverage through government or private insurance, the result was that many sick people had to forego urgently needed care as they couldn’t afford it, or families being reduced to poverty when they were struck by a serious and costly illness. Although the market-based strategy of economic management was enormously successful in general, with some 600 million people being lifted out of abject poverty, its extension to the health care sector was widely regarded as a failure as the 21st century began.

From the vantage point of western health economics, the problems that arose as China moved toward an increasing role for private markets in health care came as no surprise. In order to be efficient and equitable, a well-functioning health care system must have some type of risk-pooling mechanism that helps spread the cost of serious illness across the population, and guarantees ready access to urgently needed health care even to those who don’t have the means to pay for it themselves. Private insurance can accomplish this to some extent, but development of effective insurance markets takes a long time and in any case is unlikely to happen without a fair amount of government regulation. Moreover, it is not reasonable to expect sick people who urgently need care to play the role of well-informed purchasers who shrewdly compare the offers of competing sellers before deciding what services or drugs to buy. As China’s health service providers were given incentives to raise more revenue from patients while risk-pooling through the government diminished and private insurance played only a minor role, catastrophic health care costs became a major reason for families falling into poverty and a major concern of people fearing that future illness would ruin their efforts to create a better life for themselves.


International Experience and Expertise

The question of how government should best respond to these problems has been vigorously debated, and China has drawn extensively on international experience and expertise in seeking answers. During the first decade of the 2000s, the main thrust was to create a system of risk pooling through expanded social insurance, beginning with a set of plans covering urban formal-sector workers in government and large firms (Basic Health Insurance, or BHI), and continuing with separate plans for rural residents (New Collective Medical Schemes, or NCMS) and for urban residents outside the formal sector (Urban Residents Insurance, or URBMI). In principle, enrollment for formal-sector urban workers is compulsory, with the BHI plans being funded by mandatory contributions that are shared between employers and employees. Enrollment in the NCMS and URBMI plans is voluntary, but the plans are heavily subsidised by the state and local governments, and most of those eligible for coverage have signed up. By 2012, it was estimated that between them, the three types of plans covered 95% of China’s population.

There is considerable decentralisation in the management of the plans, to city governments for the urban plans, and to the county level for the rural ones, subject only to central guidelines and oversight by the Ministry of Labor and Social Security and the Ministry of Health, respectively. As a result, there is considerable variation from place to place with respect to what is covered, patient co-payment rates, upper limits on benefits, and so on. The annual contributions required for enrolment in the NCMS and URBMI plans are relatively small, so that even with the contributions from government, these plans have limited revenue and therefore can only offer fairly limited benefits, meaning that patients still run the risk of large out-of-pocket expenditure or may have to forego needed services or drugs in serious cases. Nevertheless, the expansion of the social insurance system has resulted in a substantial reduction in the share of health care costs that are paid out of patients’ own pockets, from more than 60% in 2001 to around 35% in 2012.


While health care costs have been rising at a faster rate than GDP in other countries as well, In China was unique in that most of the increased spending came directly out of the pockets of patients and their families.

Dissenting Voices

But although expansion of the social insurance system was the main thrust of China’s policy response to the problems in health care, there were dissenting voices who questioned this approach. In particular, there were many who argued against the principle of linking the resources of providers (hospitals and clinics) to the revenue they were able to raise from patients, on the grounds that the main concerns of doctors and nurses should be for the welfare of the patients they treat, not for the revenue that their institution will get from them. It is widely believed that for patients who can pay, hospitals supply more services than strictly needed, or prescribe expensive drugs with high markups in preference to cheaper ones. What the critics favoured instead was a return to a system under which providers were paid directly from public funds, and managed by government officials without reference to the revenue they raised from patients. Clearly, among those arguing this way were some who believed that abandoning the strategy of central planning as the guiding principle for economic management was a mistake to begin with, or at least had been taken too far. However, they also included analysts who were broadly supportive of a market-based strategy in general, but who accepted the idea that the special characteristics of the health care sector necessitated a more active role for government management, consistent with the ideas in the western literature on health economics.

The debate between these competing visions of China’s future health policy was a lively one, and included an influential report by the Development Research Center of the State Council published in 2005, as well as a collection of proposals by universities, think tanks, and even an American consulting firm, commissioned by the authorities in anticipation of a set of health policy guidelines that were scheduled to be issued by the central government. When they were finally released in April 2009, these guidelines turned out to constitute a compromise between the two visions. The system under which the hospitals that dominate China’s current health care system would continue to be funded largely on the basis of what they charge patients for their services. However, patients would be better protected against the high cost of care through expansion of both the social insurance system and of supplementary private insurance. At the same time, the role of government would also be strengthened in several ways. Most importantly, plans were announced for the establishment of a network of township and urban community clinics to be financed and managed by government, in which all citizens will be able to receive care at low cost for a range of “common and frequently occurring diseases”. The government also announced plans for a more active role in managing the supply and cost of drugs, both through the use of lists of essential medicines to guide prescriptions in hospitals and clinics, and by requiring that drugs from these lists be available to patients at no or limited markups.


The expansion of the social insurance system has resulted in a substantial reduction in the share of health care costs that are paid out of patients’ own pockets, from more than 60% in 2001 to around 35% in 2012.

Substantial Progress

In the years since this announcement, there has been substantial progress in implementing these plans; notably, the coverage of the social health insurance system in China is now near-universal. As for many kinds of economic and social policy, however, local governments have considerable autonomy with respect to precisely how they apply the central guidelines, and there are large differences with respect to availability of health care resources and the extent of coverage under the local insurance plans across China. Although the increased emphasis on reducing economic inequality would imply a desire to move toward more uniformity in the system, for example, between coastal and interior regions or between urban and rural areas, tolerating diversity in the way central guidelines are implemented leads to more opportunities to learn from successful local experiments and pilot projects.

In fashioning its approach to health sector reform, China has drawn on a variety of international models, including the social insurance systems in the U.S. and Japan, and (especially in trying to strengthen the role of primary care), on the U.K. National Health Service model. As in Singapore, China’s social insurance plans incorporate an element similar to that country’s version of medical savings accounts. But Chinese health reform is still very much a work in progress, and many questions about the future remain unanswered. A key issue is how the management and funding of the new primary care clinics will be coordinated with the hospitals and the social insurance plans. Further, will there be some degree of convergence toward a similar degree of coverage for all residents, as in Japan or the countries in continental Europe? Will local governments tend to recentralise the management of the health care system, so it will more closely resemble the U.K. NHS? Will the trend toward an expanded role for private hospitals, partly through foreign chains, continue, and how will state-owned hospitals be managed?


International Firms

While health care itself is not internationally traded on a significant scale, China draws extensively on medical technology that has been developed elsewhere, and the evolution and management of China’s health care system is also of great interest to international firms that market new drugs and other medical technology. Because of its size, the Chinese market obviously is attractive, and even though there continue to be gaps in the enforcement of China’s intellectual property legislation, there are signs that it is improving. At the same time, the Chinese government will also draw on the stricter cost-effectiveness standards that are emerging throughout the world before new and expensive drugs and technology are accepted for widespread use; in pilot projects, the model used by U.K.’s National Institute of Clinical Excellence (NICE) has served as an inspiration. Over time, one can also expect that Chinese pharmaceutical firms, universities, and medical schools will become more engaged internationally in research and training, offering interesting opportunities for international exchanges.

Assuming that the leadership will be able to continue focussing on “China’s peaceful rise”, policies to reduce economic inequality, along with better protection of the environment, will be critical. The government’s success in reforming health care will be an important element in the efforts to accomplish this.


A book-length study of the material summarised in this article is Jiwei Qian and Åke Blomqvist, Health Policy Reform in China: A Comparative Perspective (World Scientific, 2014).

About the Author

Åke Blomqvist taught Economics in Canada for many years. From 2002-2011 he was with the National University of Singapore and the Central University of Finance and Economics in Beijing. He currently resides in Ottawa and is affiliated with Carleton University and the C. D. Howe Institute, Canada.

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