Healthcare Reform in China

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2. CHINA’S HEALTHCARE SYSTEM

2.1. Introduction: China's Health Protection System
The health care protection system consists of two major components--rural and urban--that differ according to the needs of China's rural and urban populations and supply-side capacities serving these populations.

2.1.1 The Rural Health Protection System
China was the first large country in the world to develop community-financing schemes that covered the rural population nationwide, called the rural "Cooperative Medical System" (CMS). These schemes primarily served to fund and organize prevention, primary care, and secondary health care for the rural population. Gradually developed in the 1950s as a mutual assistance mechanism to establish access to basic drugs and primary health care, the CMS was given political priority and developed rapidly during the Cultural Revolution (1966-1976). The rural CMS organized health stations, paid village doctors to deliver primary care, provided drugs, and partially reimbursed patients for services received at township and county facilities. At the peak of expansion prior to economic reforms, CMS covered 90% of China's rural population.
China's relative success in extending health care to the rural population at a fairly low cost by mobilizing local resources played a key role in China's envious record of health status improvement during the 1960s and 1970s. However, CMS also suffered from problems of poor management and a small risk-pooling base, contributing to the downfall of these early cooperative financing schemes after the initiation of agricultural reforms in the early 1980s.

2.1.2 The Urban Health Protection System
The health protection system for China's urban workers was established in the early 1950s. The two primary components are the Government Insurance Scheme (GIS) and the Labor Insurance Scheme (LIS). Financed by government budgets, GIS covers government employees, retirees, disabled veterans, and university teachers and students. LIS covers state enterprise employees, retirees and their dependents. Only state enterprises (enterprises owned and managed by central or provincial governments) with more than 100 employees are required to participate; smaller state enterprises and industries owned by county or town governments can provide LIS on a voluntary basis. Each year, each participating state-owned enterprise (SOE) sets aside an amount equal to 11-14% of total wages as a welfare fund to finance health expenditures incurred by that workunit's LIS beneficiaries. In 1993, GIS and LIS respectively covered approximately 9% and 40 % of the urban, or 2.5% and 11.7% of the total, population (National Health Survey 1993).
Over the past four decades, GIS and LIS have played an important role in providing China's urban working population with health protection, thereby contributing to economic development and social stability. Several aspects of the original schemes, however, contributed to China's recent rapid health care cost inflation and inefficient resource allocation. GIS and LIS are third-party insurance, providing comprehensive benefits with minimal cost sharing to constrain beneficiaries on their consumption of medical services. Beneficiaries can receive largely free outpatient and inpatient services, except for dependent beneficiaries, who are reimbursed 50% for their health expenditures. Without any or limited consumer financial responsibility for the health services they utilize, these urban insured have no incentive to seek the most cost-effective health care. To the contrary, beneficiaries have every reason to seek care from the highest quality provider available regardless of expense or appropriateness for their medical conditions. The excessively rapid increase in medical expenditures under the GIS and LIS is partly a result of this lack of demand-side cost-consciousness. Moreover, except for employees in large enterprises with their own hospitals and/or clinics, both GIS and LIS beneficiaries seek medical services from public hospitals, which are usually reimbursed on a fee-for-service basis according to a government-set fee schedule. Such a fee-for-service system gives providers incentive to over-provide services and thus also exacerbates cost escalation.

2.1.3. China's Health Care Delivery System
China has developed a three-tiered organization for the delivery of health care. The tiers consist of village stations, township health centers, and county hospitals in the rural sector and street health stations, community health centers, and district hospitals in the urban areas. Village doctors are trained for three to six months after junior high school and receive an average of two to three weeks of continuing education each year staff village stations. Township health centers usually have 10 to 20 beds overseen by a physician with three years of medical school education after high school, aided by assistant physicians and village doctors. County hospitals usually have 250 to 300 beds and are staffed by physicians with four to five years of medical training after high school, as well as by nurses and technicians.
This three-tiered system was designed to promote the efficient allocation of health care resources between primary and tertiary care facilities. For several decades this system indeed provided a structure for efficient patient-referral for treatment of health problems in the most appropriate setting. Changes after reform, however, have brought new challenges to this system (as discussed further below). The development and reform of the health care delivery system is intimately interconnected with that of the health protection system (including health care financing and insurance): the two systems are complementary and mutually constraining. For example, the tardiness in development of a comprehensive health protection system has led to a whole series of difficulties in the health care delivery markets, contributing to inefficiency and excessively rapid growth in health expenditures. At the same time, implementation of health protection system reforms has been complicated and delayed by irrationalities in the health care supply system, decreasing the effectiveness of overall health sector reforms.

2.1.4. Health System Reforms in China
Beginning in the early 1980s, economic reform stimulated unprecedented economic growth and dramatically changed China's socioeconomic environment. Economic reforms greatly influenced Chinas health sector, revealing the weaknesses of the old health care protection system in adapting to the new socioeconomic environment.
In rural areas, agricultural reforms in the early 1980s led to the disintegration of the cooperative organizations that formed the basis of CMS financing. The government adopted a laissez-faire policy, and rural health care reverted to primarily private financing (self-pay). CMS coverage shrank precipitously; currently fewer than 10 percent of China's villages have CMS. In addition, many village doctors left for full-time farming or became private practitioners. Township health centers and country hospitals are also largely financed by fee-fee-service, out-of-pocket payment. Access to health care in many areas is now governed by ability to pay, and many cannot afford health care. For example, the cost of one average hospitalization would exceed.