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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 the 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 edpimemiological 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.


The Effects of Decentralization at the Provincial Level

The liberalization of health care expenditure and finance has reduced the level of central government financial support and central administrative control over and oversight of health care. The responsibility for health care expenditures and oversight had been transferred to the provincial and local levels in some cases and, as has already been indicated, to firms and individuals in most cases. To illustrate this point, one can analyze the recent changes in China's public financing system. In the past, the central government collected all revenues and allocated a portion to provincial governments. Now, each government jurisdiction collects its revenue from the jurisdiction below it and from the enterprises it owns directly. This change toward decentralization has resulted in the decline of the shares of government revenues and expenditures in GDP. Central government expenditures and revenues in GDP dropped from 20.4 % and 22.7% in 1989 to 15.4% and 17.5 % in 1993.18 The second effect, however, has been that local governments now retain a higher portion of collected revenues than prior to reform. For example, in 1988, the government implemented the "provincial contracting" system allowing provinces to contract with the central government for a fixed revenue sharing quota: "a base quota of shared revenues must be transferred to the central government, but all the revenues above this quota may be kept by the province."19 Although the purpose of this reform is to give provinces greater incentive to collect revenue for local investment and growth, it has lead to the unintended effect of seriously reducing the central government's revenue raising capabilities because the contracts are fixed in nominal terms. At the same time, poorer provinces, such as those in the west are unintentionally harmed by increases in revenue quotas, for although the national GDP might be increasing rapidly, much of this might be due to the economic growth in the east's special economic areas. Hence, wealthier provinces become wealthier while the poorer provinces must endure increased strain on their already tight budgets.

Decentralization has been a central feature of economic reform since, as stated above, one direct consequence has been a decline in government revenue. During this decline in centrally allocated funds, however, was the simultaneous rise in government's extra-budgetary expenditure on health care. "Extra-budgetary" is defined as expenditures financed by earmarking charges, rather than direct allocation from the budget by the central government. From 1978 to 1990 the percentage of health care costs defrayed by direct budget allocation fell from 20.5% to 12.5%, whereas expenditures under the gongfei yiliao system rose from 4.6% to 6.9%. At the same time the amount shouldered by the enterprises and agencies also rose from 27.4% to 36.1%, while individuals costs also increased from 20.4% in 1978 to 33.0% in 1990.20 So in effect, government reform has shifted the burden of financial responsibility to the shoulders of the local governments and the enterprises themselves, while simultaneously taking a cut in revenue.

The Move from a Central-Planning Economy to a Market Economy:

In a market economy there must be mechanisms which insures that suppliers of goods and services are compensated for their opportunity costs in order to continue production. If not, suppliers will move to alternative, more profitable activity should they fail to recoup their costs. Prior to market reform in 1979, individuals could not choose the location or type of work. Everyone had to accept what was given to them by the State. As a result, efficiency and quality of work was a secondary issue. With reform came the freedom of job mobility and the ability to individually chose one's career. The government, however, continues to enforce price caps on medical services. Consequently, many in the health profession, especially physicians, feel as if their opportunity costs are not being adequately maximized. In fact, the medical profession ranked seventh among 12 major occupations in terms of wages, and their earnings were below the national average 21 Failing a substantial increase in remuneration, medical personnel will face increasing pressure to seek additional income through illegitimate channels. According to one professor at Nanjing University, it is not uncommon for a surgeon or physician to expect hong bao or other gifts from their patients prior to treatment, these gifts often valuing hundreds and sometimes thousands yuan. If wage adjustments are not made to appropriately compensate personnel, there also exists the potential risk of losing quality personnel into the health care field. An increasing number of hospital staff are taking concurrent posts and providing medical services in their spare time.

An additional and perhaps more immediate consequence of the shift from a central to market- planned economy has been the move toward fee-for-service practices in rural areas. As mentioned above, this has left 95% of the rural inhabitants without any formal system of health insurance.

Enterprise Reform and Labor Insurance:

The central government has passed a number of reforms to promote the independence and self-sufficiency of state-run enterprises. Recommendations have been made in the following four areas:

1. Phase out unprofitable enterprises

2. Force all enterprises to sell their products in a competitive market

3. Abandon life-long employment and fixed salaries

4. Reform housing medical care, and social security system.22

The effects of these reforms have already been witnessed for the last few years with numbers of state-enterprises going bankrupt due to a discontinuation of government support while those able to compete in domestic and international market have flourished. Many state-'owned enterprises have been subject to various tax reforms. For example before 1984, any surplus generated by enterprises was transferred to the state via profit remittances. In 1984, this system was replaced by a direct taxation of enterprise profits, a statutory 55% enterprise tax rate was imposed, as well as an adjustment tax on any profits that was the result of government subsidized input costs.23 The intent of these reforms has been to make state owned enterprises more independent and ultimately assume full responsibility for their own profit and loss.

Another tax reform applied to state-owned enterprises to "wean" them from the former central planned system includes tax contracts, which are created between enterprises and different levels of government. The purpose of these contracts is to develop "enterprise performance by establishing clear criteria for the firm's profitability and accountability-, therefore, the contract specifies the amount of profits that must be remitted by the enterprise to the government."24 The World Bank reported in 1988 that over 80% of the enterprises in China had contracts with their respective governments.25 These tax contracts, however, have lead to a number of results. For one, it has introduced a variation of enterprise taxation levels because contracts are negotiated on a case by case basis depending on both the enterprise and the government body involved. Second, this system gives local governments substantial discretionary power over local enterprise tax rates, thus leading to a lenient tax relief policy, one which in the long-run could lead to inconsistent tax policies for enterprises of the same types and the lowering of overall provincial revenues to GDP. Hence, this tax contract system gives provincial and local governments significant discretion to essentially shape the fiscal system to meet their own objectives.

The net effect of both tax policies mentioned above as well as other reforms used to transform state-owned enterprises has not only furthered regional inequities --allowing wealthier provinces to retain a sizable proportion of the profits from prosperous local enterprises-- but has also generated wide disparities in profitability among enterprises.26 As mentioned above, the key to gaining health care coverage in urban China is through a person's place of employment, thus, these policy changes in state-owned enterprises are of great consequence to millions of city inhabitants. Reform affects the profitability, and in some cases the existence of certain enterprises. While the central government requires state-owned enterprise to provide health benefits to all its workers, benefit coverage differs among enterprises.27 In most cases, companies with high profit margins are often able to provide its employees with comprehensive benefits, while those under economic hardship are barely able to cover partial benefits.

Collectives, Joint Ventures, Private Companies, and the Unemployed:

The locally initiated businesses of collective, joint ventures, and private companies have accounted for a large proportion of rapid economic growth during the reform period. Their share of gross output value industry has increased from 22% in 1978 to 38% in 1992.28 About 26% of urban workers were employed by such collective and private industries. Collectives are small or medium-scale enterprises that are either initiated by local government alone (at the county, township and or smaller city levels) or in collaboration with private businesses and are often under the control of individuals.29 The private sector can be defined as anything from self-employed laborers and family-based enterprises such as street vendors, bicycle repairers, small restaurants, to larger enterprises or joint ventures. Although the number of private companies and joint ventures is still small, the creation of Special Economic Zone (SEZ's) policy continues to promote the development of this sector and has proven quite profitable, and their numbers continue to grow.

Wage rates are highest for those in state-private and joint venture employees, followed by employees in state-collective enterprises and state-run enterprises with urban collective employees making the least. Development of these new businesses has introduced yet another dimension fostering income segmentation among regions, provinces, and places of employment.

With relation to health care, one of the significant problems with these emerging new businesses is that there are no health insurance requirements for their workers. Despite the factor that those in state-private and joint venture employees earn the highest wages, on average, at this time, there is no purchasable private or public insurance plan, and thus workers must pay for their health at point of service. Moreover, although wages are higher for employees in many of the private businesses and joint ventures than state-run enterprises, they are on average, lower for workers in urban collectives. Therefore, while employees of state-run enterprises receive adequate medical health benefits, the situation for those in private companies and urban collectives is unpredictable. Some provinces have taken measures to address the problem of the uninsured. For example, some local governments in the SEZ's have discussed mandatory joint ventures and private industries allocate 3% of total wages to health benefits for catastrophic and emergency care. This 3% is incidentally lower than that state-run enterprise requirement of 7%, with the logic being that the lower requirement avoids undermining the financial viability of new collectives. The problem, however, is that one, this percentage allocation fluctuates according to the financial status of each individual company disregarding any attempt at a more equal health care distribution system and second, the country as a whole lacks a coherent health care policy which treats individuals equally from province to province. Finally, with the recent trend in urbanization, there has been an increase influx of migrant rural workers into the cities. The reasons for this are two fold, first, with the reform came the loosening of migration policies allowing rural residents to work in urban areas as "temporary migrant" to accommodate the growing labor needs of urban industry. Although migrants may register their presence in the community, this does not entitle them to benefits that permanent residents enjoy. Most substantial is the idea that only those with official residency status are allowed access to a state-provided job with health and other benefits.30

In the above text, I have delineated the present status of China's health care system along with pointing out salient features of its recent economic reform. These market reforms have indeed lead to a number of positive changes within the county's economy as illustrated by its phenomenal rates of growth. The health care system, however, has generally been more negatively affected.


The recent restructuring of the health care system and the economic market reforms have contributed to the disarray and fragmentation of China's health care delivery system. Three main features will be highlighted next, its inequality of distribution, its inefficiency, and its lack of well- organized financing.

The inequity existing between rural and urban areas is highlighted above, yet its important to point out that the disparity is not only a geographic one, it also applies to economic status and employment situation. Health resources are largely allocated by patient ability to pay because China's health care system is driven by patients' demand, operating in a laissez-faire environment. Those with greater organized systems of payment, such as insurance, or with the greater ability to pay, i.e. higher incomes, receive more and a higher quality of health care. Between geographic areas, this problem is exacerbated by the irony that fiscal decentralization not only allows wealthier local governments to benefit most from increased local government taxing powers, but also because these policies give the central government has less fiscal ability to provide transfers to poorer provinces. Hence, wealthier areas, those areas where individuals are more capable of paying medical expenses, are more likely to have better access to health care than those in poorer areas where due to low wages or economic stagnation in their sector, individuals have little means of paying their own medical expenses. One study highlighting the inequity of health care distribution pointed out that the per capita expenditure for health care in the cities averaged 100 yuan per person in 1986, while the average cost per person in the rural sector is about 20 yuan. The ratio of expenditure per capita between urban and rural areas in 1981 was 3: 1, in 1992 it was 5:1.31

Within the Chinese health care system, there also exists a significant waste and inefficiency in the production of health care. As Hsiao points out, under the present system, the hospital director need only account for the number of hospital days and outpatient visits provided. His revenues should meet expenses, although the government will make up deficits as a last resort. Staffing is fixed based on the number of hospital beds, and the director cannot fire or promote staff. As a result, there is little incentive for quality care among staff workers, and efficient use of resources is not a primary consideration.32 Another example of wasted resources is the use of hospital beds. The average length of stay in China is about three times that of the U.S. according to Diagnostic Related Grouping. There is little discharge planning and surgical patients are often admitted several days before the operation. In fact, according to China Daily, about half of the 50 million patients who needed hospital treatment in China each year could not be admitted because of a severe shortage of beds.

Nagel and Mills, however point out that since 1978, the so-called "five-fixed quotas" system has been aimed at improving efficiency of the health care system.33 It is characterized by fixed quota management, quality control, assessment by different levels, and floating wages. In essence, these quotas clearly define individual staffs' responsibilities, appoint supervisors to whom staff are accountable, and link distribution of income closely to the performance of sections or individuals. The fact that Hsiao, Nagel and Mills seem to disagree can be attributed to the fragmentation of policy execution between national and local government sectors. The move to decentralize the governmental system is likely to have contributed to this condition. This is especially true for government financing. The government altered financing of hospital and township centers, giving them a large degree of financial independence. Government financing was cut to cover only basic personnel wages and new capital investments that total approximately 25-30% of hospital expenditures. Hospitals are now required to obtain remaining revenues for operations from user fees. Moreover, bonus payments were introduced for workers to encourage greater productivity and efficiency. For health facilities, the bonus payments had to be funded from their earned profits. However, except for drugs and certain medical procedures that require high-tech equipment, the government usually set prices at less than cost. Consequently, hospitals use more drugs and tests such as MRIs and CAT scans to generate greater profits.

A 1989 survey of the nation's hospitals indicated that outpatient health care bills averaged 9.7 yuan per visit: 0.24 yuan for registration, 1.9 yuan for medical services, and 6.6 yuan for drugs and medication.34 This survey and others such as that by Zhou Haiyang35 in Shanghai point to the trend that the medication and drug prescription fees are the fastest growing component of the health care bill. As Lok points out, "The rapid rise in drug costs relative to other costs reflects both the effects of price reforms which raised prices dramatically and the effects of built-in incentives for hospitals, which were required to raise an increasing portion of its funds through the market."36 The hospitals' increasing responsibility to generate financial self-sufficiency and governmental restrictions of physician service fees has led hospitals to achieve profits through drug sales. Another method used by the government to increase hospital efficiency was to liberalize the private ownership of health facilities and private clinical practices. Private investment in new hospitals, especially from foreign joint ventures was promoted by allowing them to charge much higher fees --sometimes 10-20 times that which is allowed for public hospitals.37

Hence, government attempted to make hospitals more conscientious of their budgets and spending practices by cutting government support and having them become more self-sufficient. Internal restrictions within these policies, such as pricecaps on medical services in public hospitals, however, forced hospitals to exploit the sale of drugs in order to maintain their operations or simply forced hospitals to charge much higher prices to patients. This in turn leads to excessive expendit ures for patients.

China's largest feat in financing health care will be to create a new system to address how the 95% of its rural population will be provided with some form of health care insurance. To ignore this problem is to invite problems in the future productivity and development of the country. As for the urban population, one half of this population is not covered by any type of health insurance. This number is likely to grow given the increase in private companies and joint ventures as well as the increasing influx of short-term rural laborers. At present, there is not system to handle the health care needs of these individuals.

Thus far, I have described the present health care scenario in China, the relevant market reforms which have taken place in the last 15 years and have highlighted the problems which have directly and indirectly come about as a result of these reforms. Thus far, however, what has been presented has largely been statistics and analysis from a distance. In the fall of 1996, 1 conducted a survey in Nanjing, China, the capital of Jiangsu Province, to obtain a snapshot of the present attitudes and situations facing urban dwellers today. The study is attempt to confirm (and perhaps refute) past studies, many which are cited above, as well as to potentially come to some new insights on China's urban health care situation. Specifically, the study looks at changing in individuals' health care situations 10 years ago (1986) and now, and determines if there has been any significant change within that time period. It is hypothesized that in line with the literature cited above, market reform continues and thus does health care reform. Privatization of companies leads to more inequity in health care distribution and because of the non-uniform health care policies in China, certain groups are provided with health care insurance coverage, while others are not.


In order to determine whether there had been significant changes in the urban health care system, a convenience survey was conducted consisting of questions which addressed individuals' methods of medical payment and their feelings on the stability of their health care payment system, both in the present and ten years ago (1986) (See Appendix A). The survey was conducted in Nanjing, the capital of Jiangsu Province, during the months of November and December in 1996 using Mandarin Chinese. The highest concentration of sample data was taken from the Gulou district in Nanjing at the People's Provincial Hospital and near Nanjing University and Nanjing Normal University. The survey was directed to both males and females 30 years and over so that sufficient comparisons could be made in changes over the ten years.

Samples were chosen at random with no regard for economic status or type of occupation. The intent was to analyze how economic reform has affected urban dwellers from all classes and occupations.



Response (n=21) 1) 1986 1996

Self-pay a significant* portion of doctor's fees



Self-pay a significant portion of medication costs



Believe the health care system is stable



*significant is defined as 10% of more

Table 1. Nanjing Residents were interviewed to determine whether their health care access situation had changed significantly in the last ten years and what their attitude was to these changes (n=21).

Survey results indicate a significant change in methods of payment for medical service (i.e. physician consultation) within the last 10 years (DF= 19, t-value: 3.65, prob.<.001) as well as a significant change in methods of payment for medication and drugs within the last 10 years (DF=19, t-value 2.867, prob. <.001). 90% of the respondents stated that they had some form of health insurance in 1986 ranging from gongfei yiliao (publicly-funded medical care system) to laobao yiliao (labor insurance medical care) to cooperative medical care scheme in the rural areas. Of this 90% with health insurance in 1986, 95% of them possessed full coverage in which all basic medical expenses were covered. Respondents also indicated that medication costs were also included within their health insurance in 1986. In the present, 62% those surveyed now pay a significant portion of their health care service expenses, while 67% must now also pay a significant portion (more than 10%) of their medication costs (Table 1).

With regard to individuals' opinion on the changes in the stability of the health care payment system within the last 10 years, a significant percentage of those interviewed believed the system to be less stable now than in the past (DF=19, t-value: 2.66, prob.<.001). Many expressed the idea that stability depended greatly upon the financial disposition of their danwei (employer). For those working in companies generating positive revenue, employees often received some form of insurance (usually a partial coverage requiring co-payments by employees). For those working at companies generating losses in revenue or barely breaking even, employees often received no health insurance and therefore had to pay for themselves Individuals working for the government, in universities, or full-time students, all received 100% or 95% coverage for health care services.

There was no significant change in respondents attitudes toward seeking health care during the 10 years (DF= 15, t-value: 0.642, prob.>.05). Most would consult their doctors immediately upon recognizing their health disposition (83% in 1986, 77% in 1996). Those who did not usually wait until the illness became more serious before consulting a physician. Those who would wait were all self-paying patients.

Fifty-two of the applicants surveyed possessed no form of medical insurance at the time compared to 90% in 1986.


As mentioned above one of the main tenets of market reform has been to decentralize financial and administrative bodies. Findings suggest that these reforms have had a significant influence on urban individuals' health care. For one, the number of individuals required to pay a significant- share of their health coverage rose from 14% to 62%. This is most likely do to the introduction of co-payments or coinsurance policies. The Qingdao Daily reported on January 27, 1994 that as of that time, 90% of gongfei yiliao required some form of coinsurance, in the sense that patients were required to share the cost of services. Similarly with laobao yiliao about 80% of such plans require patients to take up some of the costs. Thus, these results confirm the trend that decentralization has lead to the creation of policies that are shift* cost burdens from the central government to the individual payers themselves (in this case, the enterprises and patients). At the same time, these new policies are forcing patients to become more economically conscious of their choices in purchasing health care, thereby eliminating potential waste of health resources which might have otherwise occurred were their health costs shielded by full coverage insurance plans of the past.

For the most part, individuals subject to this new co-payment system were able to sustain costs. Many believed it to be a necessary measure for the positive economic transformation taking place in their country. A small number of individuals (10 %), however, were drastically affected by this reform. Ms. Wang, a 48 year-old married woman, is employed at a collective-run sewing machine manufacturing factory. Ten years ago she received 100% health coverage. Since the market reforms, however, business revenue has been drastically declining. As a result, her company has rescinded all health coverage because it no longer has the means of supporting its employees' medical benefits. Due to her asthma condition, she must see the doctor monthly. With the increase in medical costs rising, she said that she must borrow money now to pay for her monthly 200 yuan medical fee.

Insurance plans have changed drastically concerning payment plans on medication and drugs. In 1986, 33% of the respondents' insurance plans fully covered their medication costs. Ten years later, only 18% were fully covered. This change again reflects government attempts to shift the cost burden of medical care to the local levels and to individual patients. By having patients bear a significant level of the medication costs, the hope is to decrease excessive expenditures and the waste of resources. China Youth News reported a case of patients not picking up the hundreds of packages of herbal drugs at a pharmacy and another case of sanitation workers finding unused drugs in garbage bins in some residential areas worth hundreds or even thousands of yuan. Similar to the purchasing of health services, the past policies of full coverage of medication purchases is likely to have shielded true costs from patients and as a result frequent abuse of the system occurred. The present scenario seems to be reversing itself .Due to the recent moves to privatize hospitals or simply the reducing in government support, many hospitals are attempting to generate their own revenue through increased pricing of medication. Where patients once took very little consideration of cost, suddenly they are finding themselves paying extravagant fees for doctors' prescriptions. In an attempt to make health care accessible to all, the government uses price caps to keep physicians' fees down. Hospitals instead generate revenue through the sale of drugs (described above). Since there exists an asymmetry of information between doctor and patient, purchasers of health care have no way to discriminate between doctors who prescribe necessary curative measures as opposed to those who are simply trying to generate profit. Therefore, patients without a system to keep physicians in check are vulnerable to exploitation. Simultaneously, I the freedom of doctors to open fee-for-service clinics and charge higher prices could potentially divert more talented practitioners to the private sector creating a larger disparity in quality of health care.

Although a majority of those interviewed were not drastically affected by the introduction of this co-payment policy, a significant number of them felt that in the last 10 years, the health care system had grown less stable. Most attributed this to the change in people's employment status. Many reiterated what was in recent literature, that the largest problem was for those who were unemployed or whose danwei were financially disadvantaged. A number of street vendors interviewed had come from the nearby rural areas and were selling fruit or other food items in the city. Most of them said that ten years ago they were covered by a collective medical plan in their farming village, but at the present had no formal coverage. Instead, they relied on family members for assistance when necessary or simply themselves. A forty-eight year old woman named Ling who runs her own restaurant outside the gates of Nanjing University said 10 years ago when she worked as a street vendor, her danwei provided her with full medical coverage including coverage for medication. Now she runs her own restaurant. Officially retired, she has retirement coverage provided by her former danwei. Her employees, however, have no health coverage, because she claims she cannot afford to cover them. Her staff consists mostly of younger individuals who are less likely to be in need of medical treatment. If need arise, however, they must cover their expenses. In contrast to the majority attitude that economic reforms have made health care access more difficult, there are cases that prove the opposite. At the onset of market reforms ten years ago, Zhang, a 38 year-old businessman was struggling to make ends meet with his self-run business. Since then, however, he claims revenues have gone up and business is extremely profitable. Consequently, he said that his present health care status is much more stable than before, because he can purchase more treatment and health care than he could 10 years ago. This may be the exception to the rule; however, it does show that economic reform can have a positive effect even on those without formal health insurance.

As for the 50% of the urban population that is uninsured, what can be done to alleviate this problem? This population includes the unemployed, those who work for private companies, collective- run enterprises, and even some state-run enterprise employees who have less than 100 individuals. As stated earlier, in the former central-planned economy, medical insurance was closely linked to one's place of employment. Now, with market reforms in swing, individuals are more mobile and not all enterprises can afford to provide for their employees. To propose concrete solutions to solve China's present health care situation would require an in-depth look at health policy considerations. However, general themes can be addressed.

For one, a more mobile health care insurance system is necessary, one which will insure that all individuals are covered even while in transition between jobs or without an employer. The introduction of private insurance is a consideration. Already in Shenzhen, a Medical Insurance Management Bureau, the first of its kind in China was established in 1992. A Provisional Regulation for Medical Insurance was announced and took effect in August. However, because medical insurance schemes are offered on a voluntary basis, by the end of 1993 only about 1500 enterprises and government agencies had established medical insurance plans for their 120,000 employees. If private medical insurance is to be expanded in China, one must consider however that the severance of the health care delivery function (physicians) from the funding function (insurers) may precipitate a take-off in health care expenditures, just as has been the case in Western nations.

Second, consideration should be made to offer a more egalitarian distribution of health care to the population. Decentralization and market reform has increased prosperity but has also increased disparity in wealth and health care access. The government needs to formulate a solution to close not only the rural-urban health care gap, but also the gap between those with and without health care in urban areas.

Finally, as China continues to develop economically, the central government may need to do more to insure that central policy is executed more thoroughly through the country. This is in some ways a reversal of its present decentralization trend. However, as the country becomes wealthier, it will be the central government's role to redistribute wealth from more wealthy eastern provinces to the inland areas in order to insure that the people's basic social needs are met. When the government issues policy, such as the "five-fixed quota" system, it is important that provincial governments follow these policies. If not, China's health system may be me dangerously fragmented and unmanageable.

The results of this survey could have been influenced by a number of factors. First, sample bias is possible due to the geographic location in which the survey was conducted. The Gulou district is home to three universities and therefore the population of workers affiliated with public educational institutions is very high. As a result, it is possible that the number of respondents with gongfei yiliao was over represented while those with laobao yiliao or no insurance at all were under represented. In addition, it is often the case that university institutions and enterprises have designated hospitals to which their employees can go for health treatment. Therefore, due to the proximity of the People's Provincial to both Nanjing University and Nanjing Normal University, it is possible that the sample of population interviewed was skewed by the fact that most were from educational institutions.





Health Care Survey

1. Surname:

2. Occupation

3. Age

A. 1. In 1986 when you became sick, where would you go to seek assistance?

2. When seeing a doctor, did you pay the service fee? If so, what percentage?

3. When buying medication did you pay the costs? If so, what percentage?

4. At the time, did you think the health care system was stable?

5. When you became sick, how long did you go before seeing a doctor?

6. Did you pay for preventative health care measures (including preventative vaccinations) yourself? When?

7. In 1986, what kind of work were you doing?

B. 1. Now in 1996, when you become sick, where do you go to seek assistance?

2. When seeing a doctor, do you pay the service fee? If so, what percentage?

3. When buying medication do you pay the costs? If so, what percentage?

4. Do you think the health care system is stable?

5. When you become sick, how long do you go before seeing a doctor? 6. Do you pay for preventative health care measures (including preventative vaccinations) yourself?



'Jiankang Bao, December 29, 1996, pg. 1.

2 Li, J. (1995), The Chinese economy toward the 21st Century Beijing, China: Enterprise Management Press.

3 UNDP defines the absolute poverty line as that income or expenditure below which a minimum nutritionally adequate diet plus essential non-food requirements are not affordable

4Shi, Leiyu (1993), "Health care in China: a rural-urban comparison after the socioeconomic reforms", Bulletin of the World Health Organization, vol. 71 (6).

5Wang, Shucheng, Li Xuesheng, et al. (1996), "The reform of the rural cooperative medical system in the People's Republic of China: initial design and interim experience", Macroeconomics- Health and Development Series, nobody, WHO, Geneva, Switzerland.

6Shi, Leiyu (1993).

7Lok Sang Ho (1995), "Market Reforms and China's Health Care System", Social Science and Medicine, 41:8:106

8United Nations (1995), World Economic and Social Survey 1995, New York: UN, pg. 299.

9Wang, Shucheng, Li Xuesheng, et al. (1996), pg. 2.

10Hisao, William C.L. (1995), "The Chinese Health Care System: Lessons for Other Nations", Social Science and Medicine, Vol. 4, No. 8, pg. 1048.

11Xiuzhu Liu and William C.L. Hsiao (1995), "The Cost Escalation of Social Health Insurance Plans in China: Its Implication for Public Policy", Social Science and Medicine, Vol. 4, no. 8, pg. 1058.

12Wang, Shucheng, Li Xuesheng, et al. (1996), pg. 10.

13Hsiao, William C. L., (1995), pg., 1049.

14Song lianzhong. "Approach to the reform of the medical care system in China" Paper presented at the ED I Senior Policy Seminar Issues and Options on Health Financing in China. May 27- June 1, 1991 in Hsiao, William C. (1995), and pg. 1050.

15Hsiao, William C.L. (1995), pg. 1049.

16Hsiao, William C.L., (1995), pg. 1050.

17National Statistic Bureau. The Yearbook of Chinese Population Statistics. Chinese Statistics Press, Beijing, 1991.

18Lok Sang Ho (1995), pg. 1068.

19Grogan, Colleen, M., "Urban Economic Reform and Access to Health Care Coverage in the People's Republic of China", Social Science and Medicine, Vol. 4, no. 8, pg. 1076.

20Zhou Hai-yang (1992), pg. 8.

21China Daily, August 18, 1989.

22Grogan, Colleen M., (1995), pg. 1077.

23Grogan, Colleen M., pg. 1077.

24 Ibid.

25 The World Bank (1990), China: Revenue Mobilization and Tax Policy. The World
Bank, Washington, D.C.

26 Grogan, Colleen M., (1995), pg. 1078.

27 Grogan, Colleen M., pg. 1079.

28 Ibid.

29 Lin Nan and Bian Yanjie (1991). "Getting ahead in urban China". American Journal of Sociology, 97:657.

30Yang Xiushi and S. Goldstein, (1990). "Population movement in Zhejiang Province, China: the impact of government policies", International Migration Review, 24.509.

31Hsiao, William C.L., (1995), pg. 1053.

32Ibid, pg. 1053.

33Nagel, Stuart S. And Miriam K. Mills (ed.), (1993). Public Policy in China, Greenwood Press: Westport, Connecticut, pg. 57.

34 Cai Renhua (1992). "A few observations on the development and reform of the health care sector", Health Economics Research (Weishengjingii yanjiu 44:5

35Zhou Hai-yang (ed.) A Study of Employee's Medical Care System Reform I Shanghai Medical University Press, Shanghai, 1992.

36Lok Sang Ho (1995), pg. 1067.

37Hsiao, William C. L. (1995), pg. 1047-1048.


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