What Money Failed to Buy: The Limits of China’s Healthcare Reform

In 2009, China unveiled plans to invest $124 billion to launch its healthcare reform. Four years later, the government has actually spent more than $371 billion. The central government has spent $100 billion on funding programs related to healthcare insurance, public health, public hospitals reform, and strengthening community healthcare institutions alone.

The immediate result of this increased government spending has been expanded health insurance coverage. The percentage of people covered by health insurance surged from 30 percent in 2003 to 95 percent in 2011. As a result, the share of out-of-pocket spending decreased from 56 percent to 36 percent in that same period. The reform also generated increased demand for healthcare, with hospital bed utilization rate up from 36 percent to 88 percent.

Yet contrary to the rosy picture portrayed by the government and some scholars, the reform has failed to fundamentally address the problem of access and affordability. According to a survey released by the independent Horizon Research Consultancy Group in October 2013, Chinese people continue to have difficulty in accessing health coverage. About 81 percent of the survey respondents said it was difficult to see a doctor, and more than 57 percent said it was more difficult than it was four years earlier to see a doctor (compared to 20 percent who said it has become easier). On the affordability front, 95 pecent of the respondents noted that it was expensive to seek care, with 87 percent saying that the cost was higher than it was four years earlier. Despite the overall increase in utilizing healthcare services, access and affordability problems have suppressed demand for healthcare unnecessarily. Of the respondents, 27 percent said that they opted out of hospitalization, with 74 percent attributing this to the high cost of inpatient care and 41 percent attributing it to the difficulty of being assigned a hospital bed.

In my book, I did not give China’s healthcare reform high marks. Still, I am struck by the overwhelmingly negative feedback on the reform outcome. Why and how did the well-intended and well-invested healthcare reform go awry? First of all, only one-third of the government investment went to the demand side (e.g., the patients and consumers). The irony is that even with two-thirds of the money going to the supply side (i.e., healthcare providers), the government contributes less than 10 percent of the revenues of public hospitals. As a result, not only is the overall benefit level of the health insurance quite low, but the government investment is also unable to leverage the behavior of public hospitals. Second, the central government thus far has only spent 2 percent of the funding in implementing the essential drug list (under which public hospitals are expected to sell essential drugs at zero-profit margin). That is far from enough to compensate the potential financial loss of public hospitals adopting the list—this is estimated to be about ten times the existing government investment. Not surprisingly, 45 percent of total hospital revenues are collected from selling drugs, and total healthcare cost continues to increase at an annual rate of 10 percent. Third, significant progress has not been observed in reforming the public hospitals, widely considered the sine qua non of the healthcare reform. Government health departments remain the owners and general managers of public hospitals, which still provide 90 percent of outpatient and inpatient services, even though 43 percent of the hospitals nationwide are owned by non-public entities. Among the non-public hospitals, 80 percent are controlled and owned by farmers in a small town in Fujian Province. Most of them are small clinics staffed by retired health workers or quacks.

A fundamental solution to affordability and access problems therefore requires China to invest more in the demand side and deepen the healthcare reform to change the behavior of healthcare providers. This type of reform can be exceedingly difficult—as those familiar with U.S. efforts will agree—but by moving in the right direction, the juice will be worth the squeeze.