EC 100: Survey of the Chinese Economy EC 321: Comparative Economic Systems
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The Influence of Economic Liberalization on Urban Health Care Access

in the People's Republic of China

Brian A. Wong

Johns Hopkins-Nanjing University Center

Nanjing University, Nanjing, China


Satyananda J. Gabriel

Mount Holyoke College

South Hadley, MA


On December 9th, 1996 China held its first national conference on health in Beijing, At that event President Jiang Zemin and Premier Li Peng lauded the accomplishments of China's health care system of the last 40 years boasting that China had lowered its infant mortality rate from 200 to 31 deaths per 1000 live births and raised life expectancy from 35 years to 70 years. President Jiang Zemin emphasized the importance of the country's health in relation to its economic and socialist development and urged the people to create a competent health care workforce. Premier Li Peng advocated government leadership in shaping the nation's health care system and advocated reform as the country's impetus for health care development. These were not new themes for China's leadership. Indeed, one of the most notable achievements of the Maoist era (from 1949 to 1976) was the dramatic improvement in access to health care for China's citizens, particularly those living in the rural areas and the urban poor. Health care provision was greatly decentralized and diffused throughout the countryside and city neighborhoods during the Maoist era. The rapid economic growth that epitomized the first stage of the post-1949 Chinese society can be, in part, attributed to the decision of the Chinese government to "democratize" health care, with "barefoot doctors" and health clinics widely available to segments of the Chinese population that had never had such access before.


The failure of the grand Maoist-era experiments in restructuring the Chinese economy, in particular the late 1950s Great Leap Forward, and the political violence that occurred during the Great Proletarian Cultural Revolution eroded the support for political radicalism in China. This proved crucial in determining the outcome of political struggles after Mao's death. The more pragmatic rightists within the Communist Party of China (CPC), in particular Deng Xiaoping, would rise to a position of greater control over public policies, at least in part, because of the perception that the Maoist left had failed to develop an economic alternative to "pragmatism" and had created political chaos and personal suffering by their own pursuit of dominance within the CPC. The trial of the so-called Gang of Four was a pivotal moment in this decisive shift of power away from the leftists to the pragmatic rightists. One of the outcomes of this victory of the rightists has been a shift away from the Maoist-era objective of a more egalitarian access to social services, including health care, towards a more "Thatcherite/Reaganite" focus on dismantling "social welfare programs" in favor of "self-help."

As was the case with Thatcherism and Reaganism, the new policies were adopted in a climate of more generalized "liberalization" of economic policies, growing use of nationalism as a substitute for more populist themes in generating mass support for national policies, and a concomitant strategy of modernization of the military to meet external threats. In the case of China, liberalization took the form of dismantling the commune system in the countryside in favor of expanded self-exploitation and the growth of capitalist exploitation by a new breed of "rich peasants" and town-village enterprises (TVEs) and in the cities the Stalinist command and control economic bureaucracy gave way to decentralization of the state-owned capitalist enterprises (SOCEs), the creation of a share-holding system by which both SOCEs and other enterprises might be "owned" by relatively passive private parties (with the goal of eventually privatizing all SOCEs) and the development of financial markets within which "shares" of such enterprises might be floated, bought and sold, and the rapid expansion of private capitalist enterprises and smaller-scale ancient enteprises (of self-exploiting direct producers). Nationalism provided the leadership with an excuse for liberalization, since it was argued that the first priority must be to make China strong and the only possible route to strength was the liberalization of the economy along more traditional "capitalist" lines (but under the guidance of a "socialist-oriented" CPC). It was understood that modernization of the military could only be accomplished if economic success was achieved. To remind citizens of why this was important, a brief "war" with Viet Nam was initiated and periodic confrontations with the leadership of Taiwan were orchestrated. And there was also the more traditional, although not as explicitly stated, goal of the liberalization, to create more capital to feed the growth of heavy industry (which was, of course, critical to modernization of the military, but which was also considered one of the most fundamental prerequisites to the building of a modern industrial social formation).

These policies succeeded in accelerating economic growth. The per capita disposable income (income after taxes) increased 6.1% annually (after inflation) between 1980 and 1993 --more than three times the rate in the United States- reaching $1,308 in U.S. dollars in 1993, after adjustment for differences in the prices of goods and services between the two countries.2 Although this income was distributed more unequally than had been the case in the past (income inequality worsened), there was a marked reduction in overall poverty rates, as measured by income.3

China's economic growth has been phenomenal. However, the drive to channel this growth in ways that would ultimately generate more capital for the industrialization of China, as well as the success of recipients of subsumed class payments in capturing more of the surplus than had been the case in the Maoist-era, has resulted in a more rapid deterioration in the public provision of social welfare services than even the rightists might have anticipated. Among the impacts of the liberalization has been a significant effect on the health care finances and delivery systems in China. One particularly noticeable effect can be seen in the growing inequality in access to health care services.

The disparity between rural and urban health has been exacerbated due to increased privatization. During the 1980's, the rural people's communes were dismantled, as was the cooperative medical system, which was organized and highly subsidized by the production brigades under the communes. Today, in most of China's rural areas, health care has shifted to a fee-for- service system, in which the former rudimentary arrangements for health and medical insurance have not been preserved.4 Those in the rural areas lack the resources necessary to purchase the same amount of health care previously allowed by the commune system. Consequently, while the number of health offices and services available are increasing at the urban and county levels, those in the rural areas have experienced reduced access to medical care. In fact, the number of village health officials has been decreased by 18-33% while the number of hospitals and health care centers have also decreased significantly at the township and village level. The state's role in the provision of health care has been sharply reduced, producing budgetary savings for the national government. This has been a chief concern of the current pragmatic rightist leadership. Since the sharpest cuts in government spending has generally been perceived as occurring in the rural sectors, with the aforementioned reduction in health care access in the villages, health Policy researchers have focused primarily on the problems in the rural health care system. This issue is addressed further in texts such as Wang, Li, Yu5, Shi6, and Ho7. As early as 1979, however, there has also been general urban economic liberalization, similarly designed to reduce government spending on social services and to shift more of the burden for social welfare onto individuals and decentralized economic units. These reforms have had many and far-reaching implications for access to health coverage, as well as implications which some claim have brought about a number of harmful effects.

One of the present features of urban health care access is the high degree of dependency on a person's place of employment for adequate health care. Under state command and control "Stalinist" approach to urban capitalist industry, which existed prior to reforms, wage laborers were guaranteed life-time employment, migration between provinces was strictly controlled, and there existed a much more centralized system of administration. (Indeed, under this past command and control system of industry, the capitalist nature of production is not unambiguous. It might be possible to argue for the prevalence of state feudalism in Chinese industry and agriculture (under the commune structure) on the basis of the absence of labor mobility and the tight control over labor by the state --- one of the authors, Gabriel, makes such an argument elsewhere. For the purposes of this paper, we will continue to make the assumption of a de facto free labor market and the prevalence of capitalism in Chinese industry.) Under the command and control system, access to health through place of employment worked adequately and the provision of broadly available health care was one of the justifications for the system. Under liberalization, China's leadership is adopting a more flexible form of capitalism within which many formerly citizen-based social benefits, such as health care, become linked to acquiring and holding jobs in specific, decentralized, and often privately controlled work sites. Under this new arrangement, individuals are either covered by a work related health insurance system, gongfei yiliao (Government Employee Health Insurance) or laobao yiliao (Labor Health Insurance) (both which are described in detail below) or they are self-paying individuals. No adequate private insurance exists for those unemployed or without permanent job status. Economic liberalization has brought about several changes in urban areas: income differences among geographic regions, a more diversified labor force and a relatively more mobile population (including a labor market that is unambiguously capitalist in nature). Such changes combined with continued reliance on the employment system to finance health insurance creates gaps and segments of the population without a means of providing an adequate payment system for their health. In the long-term, this lack of health access for this growing segment of the population could have detrimental effects on the country's overall productivity.

In the following essay, we will first describe, with emphasis on the urban sector, the present health care environment in China, how the health care system is organized, and how it is financed. Next, we address how economic liberalization has changed the health care system and some of the effects of these so-called reforms. We then present findings from a study conducted in Nanjing, China, a study which focused primarily on urban changes in the last ten years with regard to health care methods of payment and individuals' attitudes toward these changes. Finally, we explore the implications of these results and attempt to analyze what these changes mean for the future of China's health care system and its population.


China is the most populous nation in the world with a population of approximately 1.25 billion people.8 The population is distributed over 22 provinces, 5 autonomous regions and 3 metropolitan municipalities under the central government. The provinces, which possess a high degree of fiscal independence, are themselves divided into 2182 counties (averaging 400,000 residents), 47,000 townships (averaging 18,000 residents) and 740,000 villages (averaging 1000 residents). The urban population has grown substantially since the 1960's. From 1960 to 1992 the urban population climbed from 19% to 28%, and is expected to increase further to 35% by the year 2000.9

The expansion and dynamic, productivity-driven growth of capitalist production in the most industrialized nations has been driven, in part, by the epidemiological transition from infectious to chronic and degenerative diseases as the major cause of death. This has been critically important in constructing an economic arrangement based on large-scale cooperation of workers. In China, eighty percent of the population live in areas where this epidemiological transition has already occurred.10 Nevertheless, there is still a high prevalence of infectious disease in poor rural and urban areas in China, creating an obstacle in the further expansion of large-scale capitalist development (which the pragmatist right leadership in China associates with "modernization"). The health status of this 15% of the total population is similar to that of the least developed nations.


Systems of finance:

China's health care finance system consists of three formal systems and an informal component. Gongfei yiliao or Government Employee Health Insurance, provides coverage for government workers at all political divisional levels (central, provincial, county, township, and village), including officials of labor unions, youth's and women's leagues, the staff of cultural, educational, health and research institutes and students at approved colleges and universities. The government is solely responsible for the financing of this system. In 1992, 30 million people were covered by the gongfei yiliao system. Health services are mainly provided by public hospitals, but larger organizations with more than 200 employees usually set up their own clinics. The beneficiaries of gongfei yiliao are required to seek health services at appointed hospitals of the organization, and the charge for the services is reimbursed by the gongfei yiliao based on the government fee schedule.

The laobao yiliao, or Labor Health Insurance, is a system under which employees in state and collective enterprises and their immediate family members are entitled to full (for the employees themselves) or partial (for immediate family members) benefits. Government mandates that the state enterprises with more than 100 employees must provide laobao yiliao.11 Payment is made mainly out of "welfare funds" of enterprises, a portion of which are designated for medical services. Most large enterprises with more than 1000 employees organize their own hospitals (inside hospitals) and most medium size enterprises (200-1000 employees) have their own clinics for providing free outpatient services to their employees.

The third formal system of medical care finance is the rural cooperative medical system (RCMS). This system was first conceived during the 1950's through initiatives of communes and brigades in rural areas and is funded by yearly contributions paid by participants and subsidies from collective welfare funds. The accomplishments of this system were internationally regarded as an unprecedented feat in the creation of a nationwide medical system which effectively met the basic health care needs of the general population, including the widespread use of what is now called preventative medicine, while simultaneously taking major steps toward the eradication of major infectious diseases. By the mid 1970's it was estimated that over 95% of the rural population had a collective medical system administered by their brigade with their own village health clinic.12 However, a significant number of these RCMS's were dismantled as part of the economic liberalization that began in 1979. Thus, oOne of the largest and first groups to lose public health coverage under economic liberalization has been agricultural direct producers. The dismantling of the commune system and the concomitant expansion first of self-exploitation in farming and more recently of capitalist agriculture dramatically reduced the number of individuals employed within state-controlled enterprises in rural China. This structural change in the balance between "public" and "private" sectors allowed the Chinese authorities to sharply reduce public sector spending on rural health care provision, shifting the burden to the direct producers themselves.

The Chinese government has recognized the potential disastrous effects this new condition could inflict upon rural inhabitants and is presently attempting to create policy to alleviate this without having to dramatically increase the allocation of public funds for such a purpose. In fact, as late as December 24, 1996, the China Daily reported that at the First National Conference on Health, 5 government bodies --the State Planning Commission, the Ministry of Civil Affairs, the Ministry of Finance, the Ministry of Health, and the Ministry of Agriculture-- jointly urged local governments to support the creation of cooperative medical systems in rural areas, much like those that existed prior to the 80's, but funded in ways that do not require significant financial contributions from the national government.

The informal component of health care financing is that component for which there is no institutional payer, whether government agency, non-governmental organization or private enterprise. In the informal health care sector, it is up to the individual to finance her/his own health treatment (or to locate someone, family member, friend or other non-formally obligated party, who will provide the financing). This informal health care sector includes a considerable number of farmers and their family members, well as some urban workers not covered by any medical scheme.

We have not discussed the possibility of a fourth formal component, one in which private health insurance companies enter into contracts with individuals who exchange premium payments for clearly delineated health coverage, because at present this remains relatively rare. There is a negligible segment of the population that is covered by private medical insurance. However, such private insurance systems are a relatively new concept in China and there is some indication that the current pragmatic rightist leadership would favor seeing this sector expand.

According to a 1989 study, more than half of the 336 million people who live in large and medium-sized cities are covered by one of two types of formal sector health plans (or types of health insurance) described above: the laobao yiliao and the gongfei yiliao.13 The laobao yiliao ,or labor health insurance program, accounts for approximately 200 million workers and retirees (and their dependents) of medium and large state-owned enterprises, the gongfei yiliao , or government employee health insurance program, accounts for roughly 30 million public employees, retirees, and their dependents.14 It should be made clear that the word insurance as used to describe these two health coverage schemes does not mean a third party insurer. Instead, it refers to an employer self-insured system. The cost of these insurance plans is accounted for within enterprises and government agencies as a line item under operating expenses. State-owned enterprises also include an item related to health insurance within their asset accounting because health insurance for wage laborers is primarily financed by a government mandated enterprise contribution to an insurance fund that must be segregated from other asset classes. The contribution is equivalent to 7.0% of basic wages (payroll not including bonuses) paid by the enterprise.15 The enterprise then pays claims submitted by its own employees, retirees and dependents out of this fund.

Managers at many state-owned enterprises have found the 7.0% of the basic wages insufficient to cover the health costs of their employees.16 Between 1985 and 1990, health care cost per employee rose nominally by 22.4%. This was 9.5% higher that the increase in nominal wages. Hence, by 1990, health insurance costs actually equaled 8-9% of payroll.17 The only way to cover the shortfall of the health insurance fund was for the enterprise management to subtract the amount from enterprise profits. However, the typical procedure of wage laborers paying for their health care and then seeking compensation can backfire for the laborers. In accord with the new hard budget constraints under which Chinese state-owned enterprises are operating, those enterprises generating insufficient revenues to cover health care obligations failed to compensate their employees for health care costs.

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EC 100: Survey of the Chinese Economy EC 321: Comparative Economic Systems
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Copyright © 1998, Satya Gabriel, Economics Department, Mount Holyoke College.