China’s Hospital Admission Paradox: Institutional Design and Perverse Incentives

In 2023, China witnessed a remarkable phenomenon in its healthcare system: 301 million hospital admissions, representing a staggering 21.4 percent of its population. This means that for every one hundred Chinese people, more than twenty-one hospital admissions occurred—a figure that far exceeds global norms and raises serious questions about the sustainability of China’s healthcare system.

The surge becomes even more striking when compared to historical data: in 2003, only 4.7 out of every 100 people in China required hospitalization. Among retirees, the current rate is particularly alarming, reaching 50 percent—effectively meaning one in two retired individuals faces hospitalization annually. This unprecedented level of hospital admissions places enormous pressure on China’s healthcare system. While the average cost per hospitalization showed a slight decline to slightly over 10,000 yuan in 2023, the total expenditure continues to climb due to the sheer volume of admissions. Chinese scholars estimate that maintaining a hospital admission rate 7 percentage points higher than the OECD average of 14 percent requires an additional 6-7 percent healthcare spending—a significant burden during an economic slowdown, particularly for debt-ridden local governments.

Several hypotheses have been proposed to explain this surge in hospitalizations. One points to the tendency for extended hospital stays, particularly among retired government officials. State media reported in 2013 that approximately two million government personnel were on extended medical leave, with 400,000 occupying special hospital wards, rehabilitation centers, and holiday resorts—generating annual expenses of about 50 billion yuan. In an extreme case in Shanghai, a retired senior official reportedly occupied an ICU bed for four years. However, such cases, while concerning, represent a small fraction of the total admissions and do not explain the high rate of new admissions.

China’s rapidly aging population might seem an obvious culprit. By the end of 2023, individuals aged sixty and above constituted 21.1 percent of the population (296.97 million), with those sixty-five and older representing 15.4 percent (216.76 million). An aged population is typically associated with higher disease burden and greater utilization of inpatient services, particularly for chronic conditions and complex medical needs. However, this demographic shift alone cannot explain the high admission rates in China. Japan, with nearly 30 percent of its population aged sixty-five or older, maintains a hospital admission rate of only 12 percent.

The root causes of China’s hospitalization crisis lie in three interrelated institutional design problems. First is the structural bias in China’s health insurance system toward inpatient care. The system covers approximately 70 percent of hospitalization costs, with annual payment limits reaching six times the local average disposable income. In contrast, outpatient services receive less coverage, often requiring out-of-pocket payment or drawing from individual medical savings accounts. This stark disparity has created a perverse incentive structure where both patients and hospitals routinely convert outpatient cases into hospitalizations to secure better insurance coverage. This practice of “hospitalization for insurance benefits” (guachuang zhuyuan) has become so widespread that it helps explain why western China, where outpatient reimbursement rates are particularly low, saw hospital admission rates exceed 20 percent as early as 2018.

Second is the relentless expansion of public hospitals, which has fundamentally altered China’s healthcare landscape. Prior to Covid-19, China already had 6.03 hospital beds per 1,000 population—substantially higher than both the OECD average of 4.7 and the U.S. figure of 2.4. The pandemic catalyzed even more aggressive expansion. Perceiving the “success” of China's initial COVID response as validation of its public hospital-centric model, policymakers doubled down on what they term the “public benefit feature” (gong yixing) of healthcare delivery, pushing to make public hospitals “bigger and stronger” (zuoda zuoqiang). This policy shift manifested in dramatic regulatory changes, such as doubling the permitted maximum bed capacity for provincial-level urban health centers from 1,500 to 3,000 beds. By 2023, China’s bed density had surged to 7.23 per 1,000 population—a 20 percent increase in just five years. While private hospitals numerically constitute two-thirds of China’s medical facilities, public hospitals command 73.7 percent of total bed capacity. This expansion has created a classic “supply-induced demand” effect, where hospitals admit patients for inpatient care simply to utilize available capacity. The siphoning effect of large public hospitals is striking: by 2021, 74 percent of employee medical insurance hospitalization expenditures and 51 percent of resident insurance hospitalization spending flowed to tertiary hospitals.

The third institutional problem stems from the flawed implementation of new payment systems. The 2019 introduction of Diagnosis-Related Groups (DRG) and Diagnosis-Intervention Packets (DIP) was meant to promote efficiency by establishing standardized payments for specific conditions. However, China’s version bases payments on hospital workload points without upper limits. This has spawned two problematic practices: the conversion of outpatient cases into inpatient admissions to qualify for DRG payments, and “admission splitting”—artificially dividing single courses of treatment into multiple admissions, each generating a fresh DRG payment. Government officials have acknowledged that these strategic responses to payment reform have contributed to rising hospitalization rates.

These three institutional problems—biased insurance coverage, unchecked hospital expansion, and flawed payment reforms—have created a perfect storm of over-hospitalization in China. The situation not only strains medical resources and insurance funds but also raises fundamental questions about the quality and efficiency of care delivery. As China confronts the challenges of an aging population and rising healthcare demands, addressing these systemic issues becomes increasingly urgent. Reform efforts must focus on rebalancing insurance coverage between outpatient and inpatient care, implementing effective controls on hospital expansion, and refining payment systems to discourage unnecessary admissions. Without such comprehensive reforms, the sustainability of China’s healthcare system remains at risk, compromising its ability to meet the genuine medical needs of its population in the long term.