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Chinese health care reform: An overview
Greta Mikelonis
Last updated: 28 September 2009
Written by: Greta Mikelonis, Jeffrey Fan

Health care reform has become a global topic due to 2 major factors.

■ Health care costs are escalating in most countries, applying increased pressure on the sustainability of health care
systems and on the affordability of health care.
■ Ongoing debate about the way to implement the best model for funding and delivering health care. This
debate has been intensifying even as governments around the world attempt to stimulate their economies and rescue Greta Mikelonis is a
consulting director
large private firms. for Mercer's health &
benefits business in China
The recently announced health care reform in China has been planned for several years, and its launch in early April
reflected both global trends in health care and the current economic environment. In fact, the injection of RMB 850 billion E- mail
(US$124 billion) into the system over the next three years was structured as a significant component of the aggregate RMB
4 trillion economic stimulus package announced earlier this year. Jeffrey Fan

Health care in China

Health care spending in Asia has a long way to go before it catches up with spending in the developed world. In recent
years, China has been consistently spending less than 6 percent of GDP on health care, with less than half of that funded by
the government. Total health care spend was US$161 billion in 2007 (the most recent year for which official data is
available), and per capita spending that year was around US$122. This number compares to over $6,000 per capita in the
US, about $3,000 in the UK and Canada and approximately $2,500 in Japan . Government direct funding of total health
1

care was about 20%, and approximately 35 % is assumed by social plans with contributions from both employers and
employees (or residents with subsidies from the government). Individual out-of-pocket cost (household cash) continues to Jeffrey Fan is the business
represent about 45% of the aggregate cost, which is an issue even for those with social and supplemental coverage, as leader for Mercer's health &
both are subject to limitations on coverage and services. Compounding, or perhaps due to, this problem is the fact that benefits business in China
only slightly more than half of those with a health issue actually seek professional care, preferring to ignore or self-treat the
symptoms. Medical facilities are improving in tier-one cities like Beijing, Shanghai, Guangzhou and Shenzhen, but rural E- mail
hospitals and outlying areas continue to lack basic services.

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Challenges
Health care challenges that exist in China can be divided into 3 distinct categories: access, quality and cost.

Access: Large and comprehensive hospitals and clinics are typically located in metropolitan areas, forcing rural residents to
travel long distances for substandard care or to wait in long lines at a few key facilities. Moreover, when those residents
move to cities, unless they are officially registered, they are not eligible for social benefits and thus are excluded from the
urban coverage schemes. Because of these factors and the fact that rural schemes are currently voluntary, more than 200
million individuals are without any type of coverage. Benefits and coverage levels also vary by city, leading to additional
confusion, especially as the workforce becomes more mobile.

Quality: Medical resources are concentrated in large urban hospitals, but even at those facilities the quality of care can be
compromised by long lines that create a poor environment and lead to insufficient doctor-patient consultation time. Outside
of major hospitals, the quality of medical staff and equipment varies greatly. Community hospitals and rural clinics are not
trusted. Even at key facilities, overprescription of drugs and tests is common, as hospitals rely on drug markups and service
fees to make ends meet, since government funding is minimal. There is no network of primary care physicians – all care
takes place at the hospital, which means that preventive care is not common either.

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Cost: In recent years, government funding for hospitals has stayed flat at around 10 percent of total operating budget.
Major sources of additional revenue include tests and prescription drugs outside of the social medical scope. In urban
schemes, the contributions for social insurance can be high – around 10 percent of capped salaries (usually three times the
average city salary), with the employer contributing more than the employee. However, the coverage is still low, with an
annual deductible equal to 10 percent of the annual average city salary, an annual maximum that is a multiple of the
average city salary and coinsurance between the deductible and the maximum. Government investment in rural areas is
even lower, and rural residents currently only have access to partial catastrophic coverage through rural social medical
schemes.

Evolution of social medical benefits

China maintained a government-mandated and assisted health care system that was enterprise-based until the 1980s,
when the government started the transformation process toward societal market reforms. After successful pilot programs in
the mid-1990s, the government introduced urban employment-based compulsory schemes in 1998 and voluntary rural
schemes in 2003. Urban resident schemes also have emerged recently in large cities, and the government officially
announced phased expansion of urban schemes across China starting in 2007. However, rural schemes continue to offer
only catastrophic coverage with increasing but still very limited funding, including both an individual contribution and a
multilevel government subsidy.

Health care reform – the details

Growing public criticism of soaring medical fees, lack of access to affordable medical services, poor doctor-patient
relationships and low medical insurance coverage compelled China to launch a new round of reforms. After more than two
years of internal discussions and external consultation, China’s State Council issued on September 10, 2008, amended draft
guidelines of medical and health care system reform to solicit public opinion. The question and answer period closed on
November 14, 2008.

On April 6, 2009, the State Council unveiled a comprehensive set of health care reform guidelines and established a 3-year
goal of covering 90% of the Chinese population by 2011 and achieving universal health care by 2020. The reform plan
clarifies the government’s responsibility in saying that government plays the dominant role in providing public health and
basic medical services. It aims to return to nonprofit national health care, an idea that was largely abandoned in the 1980s.
Through the reform, the country hopes to be able to provide basic health care services covering both rural and urban
residents.

The reform consists of 4 key pillars:

■ Public health service

■ Medical treatment
■ Medical insurance
■ Medicine supply

The 3-year plan comprises an investment of RMB 850 billion (approximately US$124 billion) into the health
care system, with 5 major priorities:

■ Improve basic medical insurance

■ Establish a basic prescription drug system
■ Expand the network of local-level hospitals and clinics
■ Improve the access to and equality of public health services
■ Initiate pilot programs to reform select public hospitals

More detailed plans addressing various aspects of the reform agenda will be released later this year.

Mercer’s point of view

■ In the immediate future, employer-sponsored supplemental benefit plans should not be affected, except that
dependent coverage may become less expensive to provide.
■ If successful, prescription drug price control initiatives will lead to lower claims costs for employers and less out-of-
pocket expense for individuals.
■ More and improved community-level hospitals and clinics will be developed to provide easier access to care, but it will
take some time for patients to trust the facilities and professionals at the community level.
■ Reforming the large public hospitals will be very difficult, since the operation and prescription patterns are closely
linked to the survival and financial performance of those hospitals.
■ As the scope and reach of social medical insurance increase, total government expenditures will inevitably increase
over time or social medical pools may eventually run deficits.
■ Private-sector development in commercial insurance and health care services will be key to stimulating competition
and promoting innovative products and services.

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Future outlook
The planned health care reform has ambitious goals for the next 10 years. Whether this round of reform will succeed
depends on how the current challenges of access, quality and cost are tackled. Substantial progress is crucial in the five
prioritized areas over the next three years, while new funding is distributed into the system and further non financial
measures are implemented. Uncertainty still remains as to how much additional government funding will be allocated
beyond 2011 to continue the reform, so as much as possible must be done now.

Reasonable expectations indicate that the reform will lead to improved coverage and services for both urban and rural
areas in the short term. Medium-term success will be built on the short-term actions, requiring additional funding and
resources to significantly close the gaps in access, quality and cost of health care. Achieving the goal of meaningful
universal health care by 2020 would then be possible, but only if it is built on the success of short- and medium-term
actions.

Three future state scenarios

Source:

1. OECD

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