What’s Happening In…China?

It’s a well-known fact that China is the most populous nation in the world. But here’s a question for you: how the heck does a country—especially one in the midst of breakneck economic development—provide health care to 1.3 billion people? The answer is “not all that well,” thanks to a decades long bout of capitalism-gone-wild that’s reduced Chinese health care to a shadow of its former self.

For most of the 20th century, China was a communist society. But in 1978 the government introduced market-based economic reforms aimed at liberalizing the economy. These changes included the creation of open markets for farmers to sell their crops, the creation of pricing systems, bank reforms, and an embrace of foreign direct investment. 

These reforms, along with many others, have produced some spectacular economic results; but by the 1980s they also demolished China’s traditional health care system, which had been in place for some thirty years.

The now-defunct cooperative medical system (CMS) was a three-tiered framework centered on rural communities, the population of which has long constituted the majority of Chinese. According to Gregory Chow, a noted Princeton economist and China expert, the first-tier of the CMS consisted of “part-time [and salaried] barefoot doctors in health clinics [who] provided preventive and primary care.” Despite being farmers who received only minimal medical training, these barefoot doctors were the Chinese equivalent of primary care physicians—the point of first contact for patients with medical concerns.

Barefoot doctors referred patients with relatively serious illnesses to the second tier of care, commune health centers staffed by junior doctors. Communes were groups of households organized into labor teams who worked on common projects and pooled their income. From this pool, each commune set aside funds for specific purposes; the “welfare fund” provided the funding for CMS.

Chow estimates that each commune health center had about “10 to 30 beds and an outpatient clinic serving a population of 10,000 to 25,000.” Although these centers offered a more formal system of care than the barefoot doctors, commune centers weren’t equipped for serious illnesses. Such cases were sent to “county hospitals staffed with senior doctors”—the third tier of care.

Since it was so reliant on the commune system to operate, CMS fell apart in the early 1980s, when market reforms extinguished communes. With the elimination of China’s social structure, de-centralization became the name of the game across the economy, including health care. By the 1990s, says Chow, “health care became the responsibility of the local governments”—a problem, given that “in poor regions, [local government] did not have the financial resources from taxation to supply adequate healthcare.”

Almost overnight, the Chinese health care system vanished, leaving some 900 million Chinese without a safety net. Indeed, over the years the rates of health coverage amongst rural Chinese—who today still make up about two-thirds of the nation’s population—plummeted: In 1997 the World Bank estimated that a mere 10 percent of China’s farmers had community-based health coverage, down from a high of 85 percent in 1975. Even today, less than one-third of the total Chinese population can feel secure that it has a place to go for care.

The dissolution of CMS also meant the elimination of China’s barefoot doctors, and thus the snuffing out of primary care. Lacking a system in which to work, most of the barefoot doctors “found it more profitable to work full-time in farming or to set up private practices outside the system.” Many village doctors who wanted to remain in medicine hightailed for urban centers, where wealthier citizens could afford their services—which were now provided on a for-profit, fee-for-service schedule. This disappearance of rural doctors occurred just as standards of living began rising. As farmers grew richer, they demanded better care; but, since supply was increasingly limited, the price of health care increased.

Today, the few doctors who have remained in villages now operate independently. They have little oversight, no stable compensation, and no real infrastructure for service delivery—all of which they had under CMS. The health care they once provided as a public good is now a commercial endeavor, and doctors often make their money by peddling black market drugs and costly treatments to patients, whether they need them or not.

While it’s tempting to condemn these village doctors for their moral failings, in truth this kind of wasteful, profit-seeking behavior is built into the modern Chinese system, and even doctors affiliated with hospitals—and hospitals themselves—engage in such activity.

By the mid-1990s, the government provided only 10 percent of the funding for public health facilities in China. Put another way, modern Chinese hospitals have to secure 90 percent of their budget on their own, through so-called “revenue-generating activities.”

Most of the government’s meager support comes in the form of reimbursement based on staff size and number of hospital beds—a set-up that encourages excessively large staffs and construction. In this way public assistance actually hurts more than it helps—a pattern evident across Chinese health care today.

Most hospitals are government-owned, and the doctors who work there are on salary—and paid very poorly. Today, a junior doctor can make less than $120 a month.  A doctor’s biggest payday comes with his yearly bonus, which is tied to the revenue he brings in for his hospital or facility. Thus not only do hospitals have an incentive to have a lot of beds, but doctors also have an incentive to fill them—all to turn a profit.

To help doctors and hospitals generate revenue, the Chinese government has set prices for two services—high-tech diagnostic services and prescription drugs—above the cost of delivery, meaning providers can charge more for scans or medications than it actually costs to provide them. The government’s price setting scheme also allows for a 15 percent profit margin on drugs.

The idea is to give hospitals and doctors a duo of cash cows from which to generate funds. But there’s an obvious downside: providers have a huge incentive to scan and prescribe, especially because doctors make so little and want to increase their income.

But procuring the newest gadgets and/or imported drug is expensive, which means that providers have to spend a lot in order to turn a profit. An article in the newest Health Affairs by Winnie Yip and William Hsiao, both professors at the Harvard School of Public Health, points out that a Chinese health care provider “has to dispense seven dollars’ worth of drugs to earn one dollar of profit.”

Yip and Hsiao note a striking example of this incentive to overdose. In China, 75 percent of patients suffering from a common cold are prescribed antibiotics, as are 79 percent of hospital patients—more than twice the international average of 30 percent. The piling on of prescriptions helps hospitals take advantage of high profit margins: a 2005 Washington Post story pointed out that pharmacies can provide up to 90 percent of hospital revenue. The result of these incentives has been a skewed system where primary care is all but non-existent, but which spends exorbitantly on designer drugs. Today the share of health care spending devoted to pharmaceuticals in China is more than three times that of most of the developed world.

Skewing incentives even further is the fact that, in order to make basic health care affordable to citizens, the Chinese government set the price of basic care lower than its service cost. That means that providers actually lose money when they do anything besides irradiating or medicating a patient. So not only is there an incentive to rely on high-tech services and prescription drugs, there’s actually a strong disincentive to do anything else.

With fewer Chinese insured and providers itching to undertake expensive care, it’s little wonder that out-of-pocket spending is so high in China: it accounts for a whopping 60 percent of the nation’s total health care bill.  It also should come as no surprise that waste has helped China’s health care spending grow at an annual rate of 16 percent over the past twenty years, a good 7 percent faster than the growth of China’s GDP over the same period. Yes, that means that China’s world-wowing economic boom is actually happening at a slower rate than the growth of its health care system.

With so many deep-set problems, does China’s health care system stand a chance of improving? The Chinese government would like to think so, as in recent years it’s undertaken some important—albeit insufficient—steps to reform the system for the better.

In the wake of its embarrassing and costly mishandling of the 2003 SARS outbreak, China launched its so-called “new cooperative medical system” (NCMS). Unlike the old commune-based scheme, NCMS is voluntary and operates at the county rather than at the local or village level. Working with larger pools of citizens allows the system to benefit from economies of scale.

The funding of NCMS is also different than its predecessor. CMS relied on worker contributions via welfare funds; NCMS gets part of its funding from government subsidies, with the central government helping poorer county governments pay for their share. Farmers covered under NCMS pay an annual premium to enroll in the plan.

NCMS has grown quickly since its introduction. Yip and Hsiao estimate that “by the end of 2007, the NCMS covered 86 percent of the rural population” and that this year the program “is projected to reach 100 percent” of villagers. This sounds pretty great, but NCMS hasn’t been a cure-all for China’s health care woes. For example, a World Bank analysis from last year found that NCMS “has not reduced out-of-pocket spending or the risk of catastrophic spending.”

As the authors note, this fact is “somewhat surprising,” because in theory, patients pay premiums to keep out-of-pocket costs down, and better access to care should keep people healthier—and thus reduce costs for everyone. But the problem is NCMS does little to address the “supply side” problems in China—the incentives to provide wasteful, ineffective care. And so the benefits of expanding coverage and increasing public assistance to providers are muted.

Further, because it’s organized at the county, rather than the village, level, NCMS doesn’t address the absence of community-based primary care in modern China. Another recent initiative, however—the 2006 creation of community health centers—does just this, and looks to essentially modernize the barefoot doctor approach of public health as a community service.

China’s community health centers integrate Western and traditional Chinese medicine under a six point framework of care: prevention, health education and promotion, birth control, outpatient evaluation and management of common illnesses, case management of chronic disease, and physical rehabilitation. Funding for NCMS will come primarily from local governments, and the ultimate goal is to have at least one community health center for ever 30,000 to 100,000 citizens, and in every municipality.

Taken together, NCMS and community health centers represent a decent starting point for health care reform. Also promising is the Chinese government’s renewed commitment to engaging with health care. Yip and Hsiao point out that, between 2006 and 2007, the Chinese central government increased its health budget by a whopping 87 percent. In January of this year, the government announced that it would inject another $25 to $35 billion of funding into health care—about 1-1.5 percent of the GDP—with “the goal of providing universal basic health care.” Government officials have also said that China is interested in developing a pay-for-performance compensation system for its health care providers.

More coverage, more community care, and more money are all good starts—but the truth is that China’s health care challenges are monumental. There’s a long way to go.

Right now pay-for-performance is nothing more than a nice idea. Price setting hasn’t been satisfactorily reformed. De-centralized care delivery still puts pressure on local governments, and if history is any guide, the central government might hurt as much, if not more, than it helps as it becomes more involved. Even the community health centers have a downside: they’re primarily being developed in urban centers rather than in rural communities, where health disparities are the most severe. 

As with every other sector of its economy, China has a lot on its plate when it comes to health care. The collapse of communism ushered in an age where providers were encouraged to make a buck in order to survive—at the expense of cost-effectiveness and health. Now China must find a happy medium between the communism of old and the do-anything-to-profit ethos of today. The search is bound to be interesting.

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