ABSTRACT
After
describing the institutions for health care in China as they evolved since
1949, this paper presents statistical demand functions for health care. It
applies the demand functions to explain the rapid increase in health care demand
and the resulting rapid increase in price when supply failed to increase. The
failure in increase in supply was traced to the system of public supply of
healthcare in China. The reform experience of Suqian city in the privatization
of healthcare is reported to demonstrate the positive effect of privatization
on supply. The government’s health care program for the urban and rural
population is described and an evaluation of it is provided.
OUTLINE
1. Introduction
2. Changes in Health Care Institutions
3. Demand Functions for Health Care
4 Supply for Health Care: Public or Private?
5. Government’s Program for Health Care
6. Evaluation of the Current Health Care System
7. Conclusion
1.
Introduction
With a population of over 1.3 billion China has
received much attention, including its spectacular economic development since
1978 and the accompanied deterioration of health care for a substantial segment
of its large rural population. Section 2 of this paper recounts the success of
the PRC in improving the health conditions of its population from 1949 to 1980
and describes the changes of the public heath care system after 1980.
In section 3, statistical demand equations for health
care are estimated. Using only annual time-series data from 1995 to 2003 I have
estimated an income elasticity of somewhat above unity and a price elasticity
of about 0.7. Using cross-section data on per capita expenditure for health
care and per capita total consumption expenditure for urban and rural
population separately I have found the total expenditure elasticity of demand
for medicine and medical services to be approximately unity with small standard
errors for both populations. Taking their average value 1.042 as given I have
used time series data to estimate price elasticity, obtaining a value of 0.63
with a small standard error.
In section 4 I document the surprising fact that the
per capita supply of healthcare did not increase from 1989 to 2004 when output
of almost all other consumer goods increased rapidly in the course of China’s
rapid economic development. I trace the cause to the public supply of health
care, and use the recent reform experience in Suqian city to show that
privatization can lead to a rapid increase in supply as it did for that city. Government
programs for the health care of urban and rural population will be described in
section 5. Section 6 is an evaluation of the government’s programs. Section 7
concludes.
2. Changes
in Health Care Institutions
Since 1949 the Chinese government has had an extensive
program to improve the health conditions of the Chinese people. One indicator
of the improvement is the decline in the annual death rate from about 17 per
1000 in 1952 to 6.34 per 1000 in 1980, as shown in Table 12.1 of Chow (2002).
As another indicator, life expectancy was 40.8 years in the early 1950s, 49.5
in the early 1960s and 65.3 in the late 1970s when economic reform began (see World
Population Prospects: The 2004 Revision: http://esa.un.org/unpp/p2k0data.asp).
In the mean time many diseases were eliminated or brought under control.
Programs for hygiene and health protection were introduced. A large number of
health personals were trained and healthcare institutions were established by
1980. See Chow (2002, pp. 212-3) for details.
Before economic reform started in 1978 the Communes in
rural China provided health care through a three-tier system that was managed
and financed locally. In the first tier, the part-time barefoot doctors in
health clinics provided preventive and primary care. For more serious
illnesses, they referred patients to the second tier: commune health centers,
which might have 10 to 30 beds and an outpatient clinic serving a population of
10,000 to 25,000 and which were staffed by junior doctors. The most seriously
ill patients were referred by the commune health centers to the third tier:
county hospitals staffed with senior doctors. The “cooperative medical system”
(CMS) that organized the barefoot doctors and provided other medical services
to the rural population was part of the commune system and was financed by the
communes' welfare funds.
Thus the CMS served the dual role of a supplier and a
collector of insurance funds for the farmers to pay for the services. Healthcare
can be adequately supplied in a planned economy if the planning authority, as
represented by the Commune leaders in the present case, controls all resources
to produce healthcare including capital facilities, personnel and medical
supplies.
After economic reforms in agriculture the above
healthcare system collapsed as the system of Communes collapsed. Publicly
provided healthcare became the responsibility of the local governments which,
in poor regions, did not have the financial resources from taxation to supply
adequate healthcare. The facilities and services deteriorated. Barefoot doctors found it more profitable to work full-time in farming
or to set up private practices outside the system. As incomes of farmers increased the demand for
better-quality medical care increased. With limited supply prices went up. The low-income farmers cannot afford to pay
for healthcare of the same quality as was previously supplied under the
collectively financed CMS.
In the language of the World Bank (1997, p. 3): “The
shift away from a communal system deprived the rural cooperative medical system
of its sources of community-based financing. As communes gradually disappeared,
so did the cooperative medical system. Only about 10 percent of the rural
population is now covered by some form of community-financed health care, down
from a peak of 85 percent in 1975. (There is much variation in coverage among
provinces, however, because of differences in interpretation of national
policy.) As a result, some 700 million rural Chinese must pay out of pocket for
virtually all health services. Without insurance, medical expenses can lead to
deferral of care, untreated illness, financial catastrophe, and poverty.”
For the urban population before economic reform health
centers and hospitals associated with state-owned enterprises and other
government institutions cared for the employees and their family members. With urban
economic reform in the 1990s state-owned enterprises were made financially
independent and downsized. State enterprises and other government organizations
had difficulty in financing the health care of their employees. During this
period, along with the restructuring of the state enterprises to become
share-holding companies that are to be relieved from their burden to provide
welfare support to its employees and their families, the Chinese government was
in the process of establishing a medical insurance system to replace the
previous system. Under the new insurance system introduced in 1998 in addition
to government contribution, the employer contributes 6 percent and the employee
contributes 2 percent of his wage. The large number of non-state enterprises
can also participate in this insurance system or can afford to pay wages to their
employees that are sufficient for them to be self insured. In other words, the government has instituted
a new insurance system to pay for health care for the urban population after
the gradual reform of the state enterprises but has not provided a similar
insurance system for the rural population after the rapid privatization of
farming.
Besides government neglect, the second reason for the
rural population to receive much less adequate health care is their low income.
As the data in Table 1 below show between 50 to 60 percent of health expenditures
are individual expenditures. Only about 16 percent are provided by the
government. In 2002, per capita consumption expenditures of the middle income
group among urban households was 5452.94 yuan, about 3.3 times the
corresponding figure 1645.04 yuan for the rural households, as shown in Table 3
below. The ratio of the mean net urban
income per capita of 7730.3 yuan to
rural income per capita of 2476 yuan in 2002 is 3.11 (see China Statistical Yearbook 2004, Table 10-1). Table 3 also shows
how much more the urban residents spent on medicine and medical services in
2002 than the urban population. As a result of government neglect and income
disparity the rural population receives much less health care than the urban
population in China. This is one of the most serious social-economic problems
in China.
3. Statistical
Demand Functions for Health Care
We will show that the theory of consumer demand is
applicable for explaining the aggregate data on the quantity of health care
provided, the relative price of health care and real income, and that the
estimated statistical demand function can be used to explain the changes in the
ratio of health care expenditure to GDP.
There has been a rapid increase in health care
expenditures in recent years, at a much higher rate than GDP. The ratio of
health expenditure to GDP (data in Table 1 and Table 2 respectively) increased
from 2257.8/58478.1 = 3.86 percent in 1995 to 6584.1/116741.2 = 5.64 percent in
2003. This fact can be explained by an income elasticity of demand close to
unity together with a price elasticity less than unity as will be explained at
the end of this section. Note in Table 1 that health care expenditure out of
government budget is only about 16 to 17 percent of the total whereas
individual expenditure accounts for 55 to 60 percent. This fact supports the
application of demand theory to explain health expenditures since the consumers
have to pay for them.
Table 1 Expenditure for Health Care
|
Year
|
Total nominal (100 million)
|
Government Budgetary
|
Social Expenditure
|
Resident
Individual
|
Percent Government
|
Percent Individual
|
|
1995
|
2257.8
|
383.1
|
739.7
|
1135.0
|
17.0
|
50.3
|
|
1996
|
2857.2
|
461.0
|
844.4
|
1551.8
|
16.1
|
54.3
|
|
1997
|
3384.9
|
522.1
|
937.7
|
1925.1
|
16.4
|
52.8
|
|
1998
|
3776.5
|
587.2
|
1006.0
|
2183.3
|
16.0
|
54.8
|
|
1999
|
4178.6
|
640.9
|
1064.6
|
2473.1
|
15.8
|
55.9
|
|
2000
|
4586.6
|
709.5
|
1171.9
|
2705.2
|
15.5
|
59.0
|
|
2001
|
5025.9
|
800.6
|
1211.4
|
3013.9
|
15.9
|
60.0
|
|
2002
|
5790.0
|
908.5
|
1539.4
|
3342.1
|
15.7
|
57.7
|
|
2003
|
6584.1
|
1116.9
|
1788.5
|
3678.7
|
17.0
|
55.8
|
Source: China
Statistical Yearbook 2002, Table 21-469; China Statistical Yearbook 2005, Table 22-37.
Demand equations for health care can be estimated by
(1) using only aggregate time series data and (2) using cross-section data to
estimate income elasticity as a check on the estimate obtained in (1) and to be
combined with the time series data to improve our estimate of price elasticity.
Note that this demand analysis deals with the quantity of health services
demanded and not the health conditions as measured for example by the death
rate or life expectancy of the population in relation to income or the
distribution of income, a subject discussed in Deaton (2003), among others.
Time series data on quantity of health services Q, GDP, a price index pr of health care, consumer price index and
population are given in Table 2.
Table 2 Time-Series Data on Aggregate Demand
for Health Care
|
Year
|
Consumer
Price Index
|
GDP
Nominal (100 million)
|
Price index of healthcare
pr
|
Quantity of health services
Q= exp/pr
|
Population(10 thousand)
|
|
1995
|
3.028
|
58478.1
|
1.000
|
2257.8
|
121121
|
|
1996
|
3.279
|
67884.6
|
1.124
|
2542.0
|
122389
|
|
1997
|
3.371
|
74462.6
|
1.381
|
2451.0
|
123626
|
|
1998
|
3.344
|
78345.2
|
1.619
|
2085.5
|
124761
|
|
1999
|
3.297
|
82067.5
|
1.808
|
2311.2
|
125786
|
|
2000
|
3.310
|
89468.1
|
2.009
|
2283.0
|
126743
|
|
2001
|
3.333
|
97314.8
|
2.220
|
2263.9
|
127627
|
|
2002
|
3.306
|
105172.3
|
2.402
|
2410.5
|
128453
|
|
2003
|
3.346
|
117390.2
|
2.616
|
2516.9
|
129227
|
Source: Consumer Price Index (1985=1.00) is from China Statistical Yearbook 2005, Table
9-2; GDP from Table 3-1; Price index pr for
health care services from the Table “Consumer Price Indices by Category” under
“medical and health care services (preceding year = 100)” in China Statistical Yearbook from 1997 to
2004. The entry in the 1997 Yearbook is
1.124 for 1996 as compared with 1 in
1995)
We define the quantity of health care Q, as exhibited in column 5 of Table 2,
as the ratio of total health care expenditure in Table 1 to the price index pr (1995 =100) of health care service in
Table 2. It is the amount of health care services measured in 1995 prices. Note
the very rapid increase in the price of healthcare in China. We further define
the relative price p of health care as
the price index of health care pr divided
by the consumer price index in Table 2 and real income Y as GDP in current prices divided by the consumer price index. Let
q and y denote respectively per capita quantity of health care and per
capita income, obtained by dividing Q and
Y respectively by population as given in the last column of Table 2. A regression
of lnq
on lny and lnp
based on the 9 annual observations from 1995 to 2003 yields the following
result:
lnq = 1.178(.395) lny – 0.707(.222) lnp – 2.564(.490) R2/s = 0.635/.0449 (1)
Income elasticity of demand for health care is
estimated to be 1.178 with a standard error of 0.395 and price elasticity is
estimated to be .707 with a standard error of 0.222. These estimates are
reasonable. It will be shown below that the income elasticity estimate is close
to the estimates for both urban and rural residents from cross-section data.
Table 3 Cross-section data on per capita health
expenditure and total expenditure 2002
|
|
Low income households
|
Lower Middle income households
|
Middle income households
|
Upper middle income households
|
High income households
|
|
Urban: Total expenditures
|
3259.59
|
4205.97
|
5452.94
|
6939.95
|
8919.94
|
|
Medicine and medical services
|
225.67
|
286.56
|
382.83
|
510.15
|
657.33
|
|
Rural: Total expenditures
|
1006.35
|
1310.33
|
1645.04
|
2086.61
|
3500.08
|
|
Medicine and medical services
|
57.57
|
74.88
|
90.73
|
116.49
|
201.72
|
Source: China
Statistical Yearbook 2003, Table 10-7, for urban data in 2002; Table 10-23,
for rural data in 2002 (rural data for previous years are not available in Yearbook).
Next, cross-section data are used to estimate income
elasticity of demand for health care. Table 3 shows cross-section data on per
capita expenditures for medicine and medical services for five different income
groups among the urban and rural families in 2002. As reported in Table 4, regressing
the log of medical expenditure per capita on the log of total expenditure per
capita yields a total expenditure elasticity for the urban population equal to
1.080 (with a standard error of 0.023) and for the rural population equal to 1.003
(with a standard error of 0.023). The adjusted
R2 of these two regressions with 5 observations are equal to 0.9981
and 0.9980 respectively. Table 4 also shows that the corresponding estimates
based on 2004 data are similar. Since 2004 is outside our sample period we will
use the 2002 estimates to combine with time series data to improve our estimate
of price elasticity. Given that over 60 percent of China’s population is rural
but their total expenditure for health services is smaller than that of the
urban population I simply take an average of 1.080 and 1.003 or 1.042 as our
estimate of income elasticity of demand (which is the same as total expenditure
elasticity if total expenditure is proportional to income). This estimate is
quite close to and highly consistent with the estimate based on time series
data alone as reported in equation (1) above.
Table 4 Cross-section
Estimates of Income Elasticity
|
Observation Units
|
Year
|
Sources of Data
|
Estimate
(Standard error)
|
R2
|
|
Households
|
2002
|
Table 3
|
Urban 1.080 (0.023) Rural 1.003 (0.023)
|
0.9981
0.9980
|
|
|
2004
|
CSYearbook
2005
Tables 10-7, 10-24
|
Urban 1.136 (0.046)
Rural 1.056
(0.018)
|
|
|
Provinces
|
2002
|
CSYearbook
2003 Tables 10-15, 10-25
|
Urban 0.869 (0.189) Rural 1.161 (0.145)
|
0.4230
0.6876
|
|
|
2004
|
CSYearbook
2005
Tables 10-16, 10-26
|
Urban 0.919 (0.154)
Rural 1.162
(0.163)
|
|
Taking the income elasticity of 1.042 as given I use
time series data to estimate the price elasticity by regressing (log quantity –
1.042 log real income) on log price to yield
[lnq -1.042 lny] = -0.633 (.047) lnp
- 2.733 (.034) R2/s = 0.9633/.04198 (2)
Given the small standard errors of the cross-section
estimates of income elasticity and the small standard error of the estimate of
price elasticity in equation (2) which is conditional on the given value of the
income elasticity, we can be fairly confident in using these estimates to
discuss the trends of health care demand below.
To deal with the problem of simultaneous-equation
bias, I regress lnp on [lnq – 1.042 lny] and obtain a regression coefficient
of -1.522 with a standard error of 0.112. The inverse of this coefficient
provides an estimate of price elasticity equal to 0.657. Since it is very close
to 0.633 the problem of simultaneous-equation bias is not serious and we can
use equation (2) to explain and forecast demand with confidence.
We provide further empirical support for our estimate
of income elasticity by using provincial data. If lnp is added to both sides of our demand equation (1) we have,
algebraically,
ln(pq) =
c + a ln y
+ (1- b) ln p + e
(3)
Provincial data on health care expenditure per capita pq
and income per capita y can be used
to estimate income elasticity a
if lnp on the right-hand side of (3) is uncorrelated with ln y and can be combined with e as the
residual of the regression. We recognize that residents in provinces with
higher per capita income may pay higher prices for health care but p in equation (3) refers to the price
paid for health care of the same quality and the higher prices, if observed in
richer provinces, are assumed to pay for products or services of higher quality.
The estimates by using provincial data are given in
the last two rows of Table 4. These estimates are close to those obtained
previously from household data but the estimates for the rural population are
somewhat higher than for the urban population, contrary to the previous
estimates. Any difference between the provincial estimate and the previous household
estimate is explainable by its standard error. For example, for 2002 the larger
difference is 0.257 between the estimate 0.869 (0.189) from provincial data and
the previous estimate 1.136 (0.046) for the urban population. Its standard
error is the square root of 0.1892 plus 0.0462 or 0.195,
almost as large as the difference itself.
The regressions based on provincial data can be used
to study the relation between income inequality and inequality in medical
expenditure across provinces for urban and rural residents. Define income
inequality by the standard deviation s(ln y)
of log per capita income across provinces and health expenditure inequality by
the standard deviation s(ln(pq)) of
log per capita medical expenditure. Since the correlation coefficient R in the
regression of ln(pq) on ln y equals the ratio of income
elasticity a times the ratio s(ln y)/s(ln(pq)), we have
s(ln(pq)) = (a/R)s(ln y)
Thus our measure of inequality in medical expenditure
s(ln(pq) is a factor (a/R) times the measure of income
inequality s(ln y). If the factor is greater
than one, the former is greater than the latter. The smaller the correlation
coefficient R, given the regression coefficient a, the larger is this factor because other factors contribute more
to the variation of medical spending. Using data for 2004, the factor a/R
equals 0.919/0.742 or 1.239 for urban residents. For rural residents it is
1.162/0.799 or 1.454. Hence inequality in medical expenditure is larger than
inequality in income across provinces for both urban and rural residents. The
ratio of medical spending inequality to income inequality is higher than for rural
residents than for urban residents partly because the former have a higher
income elasticity of demand for medical expenditure. This may be the result of the
better insurance provided for urban residents.
Our demand equation (3) can explain the
rapid increase in per capita expenditure for health care. Taking the derivative of equation (3) with respect to
time we have
dln(pq)/dt
= 1.042 dlny/dt + (1 - 0.633) dlnp/dt
(4)
Using data on y
and p based on Table 2, we find dlny/dt
= (ln 2714.89 - ln 1594.47)/8 = 0.0665
and dlnp/dt = (ln1 - ln 2.36738)/8
= 0.1077. The right-hand side of (4) is the sum of the
income effect 1.042(0.0665) = 0.06932 and the price effect (1 – 0.633)(0.1077) = 0.0395, yielding a total
of 0.1088 for the exponential rate of increase in medical expenditure per
capita per year.
As a fraction of GDP health care expenditure increased
from 3.86 percent in 1995 to 5.61 percent in 2003. The increase in the ratio of
health expenditure to GDP in the course of economic development can also be
explained by our demand equation (2). Let us add lnp to and subtract lny from
both sides of the equation (2) to yield
ln(pq/y) = 0.042 lny
+ 0.367 lnp - 2.733
(5)
The first term on the right side of equation (5)
indicates that the health expenditure income ratio will increase as per capita
increases if income elasticity is larger than unity. The second term implies
that the ratio will increase if price elasticity is smaller than unity. In the
case of China the income effect on the ratio is small because income elasticity
is not much above unity but the price effect is large enough to explain the
increase in the ratio from 3.86 percent to 5.61 percent. A similar point about
the increase in the ratio of education spending to GDP was made in Chow and
Shen (2006) on the demand for education in China, where the demand is also
found to be price inelastic.
4. Supply of
Health Care: Public or Private?
After almost three decade of economic reform towards a
market economy in China, the most striking fact is that the supply of
healthcare remains almost entirely public. People in China, whether in government
or outside, still believe that healthcare is a part of the social welfare
system and that therefore the supply of it is the sole responsibility of the
government. Statistics presented in
column 5 of Table 2 and later in Table 4 show that the per capita supply of
healthcare in China did not increase from 1989 to 2003 while the per capita
output of almost all other products and services in China was increasing at a
very rapid rate. The only reasonable explanation of this remarkable phenomenon
is that healthcare was publicly supplied. Hospitals, health centers and health clinics
are almost entirely publicly owned and publicly operated. Healthcare is the
responsibility of local governments or state-owned units. These units have
limited budget and have no incentive to increase supply. For years they simply
maintained the existing level and considered that sufficient in fulfilling
their responsibility. Since supply was not market determined, market forces did
not operate to increase supply in the face of rapid increase in demand. The
result of increasing demand is an increase only in price with no increase in
the quantity supplied as the data in Table 2 have shown. The healthcare
industry is the outstanding example of failure of China’s economic reform
towards a market economy.
Evidence for the limited increase
in supply of medical services was presented in column 5 of Table 2 which shows that
per capita health care expenditures in constant 1995 prices (q = Q/population) did not increase from 1996 to 2003. The
almost constant supply of health care per capita is also confirmed by the data
given in Table 5.
Table 5 Trends in the
Amount of Health Care Supplied
|
Beds and Medical Technical Personnel in
Health
Institutions by City and County
Areas
|
|||||||||
|
|
Beds in Health Institutions
|
Medical Technical Personnel
|
Doctors
|
Senior and Junior
|
|||||
|
Year
|
(10 000 units)
|
(10 000
persons)
|
|
|
Nurses
|
||||
|
|
City
|
County
|
City
|
County
|
City
|
County
|
City
|
County
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1957
|
22.1
|
7.4
|
38.2
|
65.7
|
13.8
|
40.8
|
10.0
|
2.8
|
|
|
1980
|
76.8
|
121.4
|
131.3
|
148.5
|
52.7
|
62.6
|
30.0
|
16.6
|
|
|
1981
|
80.3
|
121.4
|
143.5
|
157.6
|
58.6
|
65.8
|
33.4
|
19.1
|
|
|
1985
|
96.2
|
126.7
|
167.7
|
173.4
|
70.9
|
70.4
|
39.2
|
24.5
|
|
|
1989
|
133.5
|
123.3
|
212.1
|
168.8
|
95.0
|
76.8
|
59.9
|
32.2
|
|
|
1990
|
138.7
|
123.7
|
218.5
|
171.3
|
97.8
|
78.5
|
63.4
|
34.1
|
|
|
1995
|
174.0
|
109.7
|
265.9
|
159.8
|
118.4
|
73.4
|
79.0
|
33.5
|
|
|
2001
|
195.9
|
101.7
|
287.2
|
163.6
|
129.5
|
80.5
|
91.8
|
36.9
|
|
|
2004
|
225.3
|
101.6
|
293.4
|
145.5
|
126.1
|
64.4
|
96.8
|
34.0
|
|
|
a) Number of beds in health institutions by city and
county before 2001 refers to hospital beds.
|
|||||||||
Source: China
Statistical Yearbook 2005, Table 22-27.
From 1989 to the early 2000s both the number of beds
per capita and the number of technical medical personnel per capita did not
increase based on the data in Table 5 and a population of 1127.04 million in
1989 and other population data in Table 2 .
In 1989, the number of beds was 2.2785 per 1,000 persons; the number of
medical technical personnel was 3.3796 per 1,000 persons and the number of
doctors was 1.5243 per 1,000 persons. In 2001 (year selected because of the change
in the definition of beds in 2002 by inclusion of beds not in hospitals) the
number of beds was 2.3318 per 1,000 persons. In 2004 the number of medical
personnel was 3.3765 per 1000, and the number of doctors was 1.4655 per 1,000
persons. Thus the number of beds per thousand persons increased very slightly
from 2.28 to 2.33 while the number of medical personnel per thousand persons
remained constant at 3.38 and the number of doctors per thousand persons
decreased slightly from 1.52 to 1.47. In other words the supply of medical
services per thousand persons as measured by the above statistics remained
approximately constant from 1989 to 2004. These data confirm the statistic on per capita expenditure for health care in constant prices exhibited
in column 5 of Table 2.
If public ownership and operation of healthcare
facilities is the reason for the lack of increase in supply of healthcare we
need to present evidence to demonstrate that non-government operation will
increase supply. Such evidence can be found in the privatization of the public
healthcare system in Suqian City of Jiangsu province in the period 2000-2006,
as reported in Jingji Guancha Bao (Economic Observer News), July 8, 2006, Xianhua Daily News, April 17, 2006, and Zhongguo Qingnian Bao (China Youth News), March 23, June 22 and
June 23, 2006. These news reports are summarized below.
In 1999 Suqian was the poorest city of Jiangsu
province with a population of 5.2 million and the lowest healthcare asset per
capita in the province, lower than the national average. The reports confirm
the fact that healthcare supply was generally recognized to be the
responsibility of the government. In 2000 the supply of health care had four
major problems: (1) The government faced a debt burden and the hospitals had
insufficient funding. Sometimes the wages of about two third of the workers in
health institutions could not be paid on time. (2) Capital stock was antiquated
and new investment was not forthcoming. (3) There were not enough adequately
trained doctors and the bare-foot doctors had a poor attitude for service and
provided low-quality service. (4) Village health clinics confronted the vicious
circle of lacking funds, poor service, less income and more difficulty in
raising funds. Under these circumstances the new mayor decided to attract
non-government capital by privatization of healthcare while leaving as
government responsibility the maintenance of public health as a public good, such
as disease prevention, disease control and setting public health standards. The
main objective was to eliminate the monopoly of public supply of healthcare as
a consumption good.
Such a major institutional change as in the present
case always faces resistance and obstacles. When the first public hospital was
privatized by auction its workers and staff objected. This problem was solved
partly by giving shares to them. After receiving numerous criticisms from the Department
of Public Health of the Jiangsu Provincial Government and experimenting with and
eventually allowing various forms of privatization, including individual
ownership, partnership and share-holding companies with shares held locally or
nationally, some held by well-known national corporations that retain control,
the privatization process became successful after five years.
The following statistics show evidence of success.
Between 1999 and 2004, the average expenditure per visit was reduced from 75.49
to 70.19 yuan, or by 7 percent in hospitals at the city-county level, and from
37.62 to 27.84 yuan, or by 26 percent in hospitals at the village level. The
average charge per bed per day was reduced from 182.18 to 175.38 yuan, or by
3.7 percent in city-county level hospitals, and from 62.24 to 51.71 yuan, or by
16.9 percent, in village level hospitals. The average expenditure for a patient
leaving a hospital was reduced from 2150.8 to 2124.12 yuan, or by 1.2 percent
in city-county level hospitals, and from 554.36 to 484.80 yuan, or by 12.5
percent in village level hospitals. The price of healthcare (term not defined
in the news article) at village level hospitals was one-third lower than the
national average. If we refer to column 4 of Table 2 the national price index
of healthcare increased from 1.808 in 1999 to 2.616 in 2003. This shows that by
reducing or just maintaining the price of health care as reported above the
privatization experiment of Suqian was a great success.
Not only was price lower and supply greater, but the
quality of healthcare has improved. Patients interviewed reported better
service, better attitude of doctors and shorter waiting time. Furthermore, the
inflow of investment has led to the increase in the number of hospitals from
130 in 1999 to over 400 (some very small) in 2004 and the increase in the
city’s total healthcare asset value to 1.539 billion yuan, which amounts to
over three times the amount in 1999.
In April 2006, Professor Li Ling of the Center for Chinese
Economic Research led a group of 10 scholars to study the reform in Suqian,
making two visits from April 6 to April 10 and from April 28 to 30, some acting
as potential patients. They have written a report, as summarized in China Youth News of June 22 and 23, that
includes the following four negative comments on the reform experience.
Basically they believe that the demand for and supply of healthcare cannot be
treated in the same way as an ordinary consumer good and therefore the market
mechanism does not work. The following are their negative comments (in quotes) and
my responses. I include this discussion in the present paper because there
other economists in China and elsewhere who may have similar views as Professor
Li and her colleagues.
1. “Average expenditure per visit and per hospital
stay were said to have decreased but at the same time the number of hospitals
and their incomes also increased rapidly. If these data are correct, the demand
for healthcare must have increased rapidly. Under the economic condition of Suqian
there was no possibility for demand to have increased so rapidly. One wonders, did
health expenditure actually decrease?”
My response is that all the facts cited above are
consistent with the basic economic theory of demand and supply. Before
healthcare reform the supply curve was vertical, showing no increase in
quantity supplied in response to a price increase. After reform the supply
curve is positively sloping with a large segment on the right of the previous
vertical supply curve, showing the increase in supply. Given the same
negatively sloping demand curve as assumed by Professor Li that there was
little or no increase in demand (no increase in demand means the same demand curve and not the same amount demanded which did increase because
price decreased), the new equilibrium will have a lower price and larger
quantity than before just as the data indicate. As the product of price and
quantity expenditure will also decline when price declines if demand is
price-inelastic (price elasticity being -0.633 as we have estimated in section
3 of this paper). Hospital income which equals revenue minus cost can increase
if competition has led to significant reduction in cost. All the cited facts
about price, quantity demanded and supplied, expenditure of consumers and
income of hospitals can be explained by elementary economic theory.
2. “The economics of healthcare has its special laws.
The first is the existence of asymmetric information between suppliers and
demanders. There is a natural monopoly for the supplier… If the suppliers are motivated by profits, the
hospitals will find ways to obtain more profits by misleading the consumers
such as inducing a higher demand. As a result the patients will be harmed.”
While I agree that asymmetric information, monopoly
power and profit seeking at the expense of the consumers exist, evidence in Suqian
and elsewhere has demonstrated that these are not sufficient to undermine the
advantage of private supply of healthcare as compared with public supply. A
public hospital in lack of funds provided by the government and doctors working
in such a hospital can also use monopoly power to raise more funds or to
increase income at the expense of the consumers. Evidence of this will be
provided in section 6 where asymmetric information will be further discussed. A
private system allows for competition among many hospitals and reduces the
monopoly power of government hospitals. Given the available hospitals and
doctors, most consumers in Suqian and elsewhere are able to choose the better
ones even some may be misled. Doctors and hospitals misleading patients for
short-term profits will be discovered by the intelligent ones and words will
spread. They will lose out in the long-run and most of them understand this.
3. “Reduction in price and in expenditure are
different concepts. In China prices of healthcare and some medicine are
controlled by the government. When citizens complain about expensive healthcare
they refer to large expenditure, which the product of price and quantity.
Quantity is subject to the prescription of the doctors.”
Except for the first sentence the remaining three are
subject to error. First, our study of demand for healthcare has demonstrated
that price has been determined by the increase in demand in the face of limited
supply. It is market determined. Even if officially the government has power to
set some prices it has to follow market forces in setting the prices. For
example if the government had failed to increase price in the face of
increasing demand there would have been serious shortages which we have not
observed in China. Official statistics in column 4 of Table 2 show the rapid
increase in the price of healthcare, which the government would have prevented
if it could. Second, there is no
evidence to support the assertion that the complain about expensive medical
cost is a complain about total expenditure and not a complain about price.
Citizens know the difference between price and expenditure. Third, doctors can
manipulate the quantity demanded only to a limited extent, for reason given at
the end of the last paragraph.
4. “We have observed ‘competition in healthcare
equipment’ to attract patients. Since the patients are not well informed they
tend to seek the best known hospitals and doctors and the most up-to-date
equipment. Hence there exists competition in providing skilled doctors and best
equipment and not in price. Some of the new equipment is superfluous and the cost
is ultimately charged to the patients.”
My response is that such “quality competition” is a
good thing in offering a better product to the consumers. Again the consumers
cannot be assumed to be entirely ignorant of the quality of doctors and
equipment being offered. The reputable and best known ones are in general of
good quality because many consumers have testified to their quality from
experience. It may be easy to fool a few consumers but not a large number of
consumers who decide collectively what is well-known and reputable. The
accusation of over supply of high-quality doctors and equipment is unjustified
because excess supply cuts into the profit of the hospital when other more
efficient hospitals having just the right amount of new equipment can offer a
lower price and attract customers away from the inefficient one with excess
equipment.
Just because there are some special features in the
economics of healthcare such as asymmetric information one cannot conclude that
the basic law of demand and supply fails to operate. The evidence from the
reform in Suqian and my responses above should suffice to demonstrate that
privatization can lead to increase in supply, a lower price, and better
quality.
In January 2006 the mayor of Suqian who spearheaded
the healthcare reform was promoted to Deputy Governor of Jiangsu Province. He
can be expected to push such reform in that Province forward. It is difficult
to predict the extent and the speed of his success and of the acceptance of similar
reforms by the central government for other parts of China. Without being able
to predict the speed of privatization one cannot predict the increase in supply
of healthcare in China.
5.
Government’s Program for Health Care
Important policies on health care were announced on
January 15, 1997 in the
"Decision on Health Reform and Development by the Central Party
Committee and State Council." The basic (long-run) objective of the
Decision is to insure that every Chinese will have access to basic health
protection. For the rural population the strategy is to develop and improve CMS
through education, by mobilizing more farmers to participate and gradually expanding
its coverage. For urban employees a basic medical insurance system was
established in 1998, financed by 6 percent of the wage bill of employing units
and 2 percent of the personal wages. By the end of 2001, 76.29 million
employees had participated in basic insurance programs. In addition, free
medical services and other forms of health care systems covered over 100
million urban population. The establishment of a health insurance system is
concerned with the demand side of health services. It is important to note, as
pointed out in the last section, on the supply side the government still
maintains the notion that public supply is the main stay although in 2004,
possibly influenced by the reform experience of Suqian, it is in the process of
allowing some hospitals in urban and rural areas to be run privately to reduce
the financial burden to the government.
Further efforts have been made to improve the health
care of the rural population, as indicated in the Work Report of the Premier, March 14, 2006 which reads in part:
“In health care, we put great effort into improving
the public health system and rural health care work. Over the past three years,
the central and local governments spent 10.5 billion yuan to basically complete
establishment of a disease prevention and control system that operates at the
provincial, city and county levels. A total of 16.4 billion yuan was spent on
setting up a medical treatment system for public health emergencies, and work
is proceeding smoothly. The central government spent 3 billion yuan from the
sale of treasury bonds to support the establishment of health clinics in towns
and townships in the central and western regions, thus improving public health
and medical treatment conditions there. Trials of a new type of rural
cooperative medical care [insurance] system were extended to 671 counties with
a total of 177 million rural residents. We intensified efforts to prevent and
treat major diseases such as AIDS and gave high priority to the prevention and
control of highly pathogenic avian influenza, keeping it from spreading and
infecting people. Progress was made in population work and family planning.”
Thus the government programs include disease
prevention and control, treatment for public health emergencies, the establishment
of health clinics and the health insurance under a new CMS. The new CMS is the
center piece of rural health care and is still in the process of being
improved. It currently covers only 177 million of the almost 800 million rural
residents or only 22.5 percent. The No. 1 Policy Document on the three-farm
problem issued by the State Council in February 2006 stipulates more financial
support for the system from both central and local government revenues in 2006.
The system will cover 40 percent of the rural areas in 2006 and almost all
rural areas in 2008. Under the plan the government will allocate 40 yuan for
every account of farmers who pay ten yuan each, and set up a clinic in every
village in the near future. All this is to remedy the current situation that rural
residents, who account for some 60 percent of the nation's total population,
only have access to 20 percent of the country's medical resources.
6. Evaluation
of the Current Health Care System
From my discussion of section 4, it becomes obvious
that the main weakness of China’s healthcare system is its failure to allow and
encourage private supply. Since the government program deals mainly with demand
by providing insurance and with public supply these are the topics to be
discussed in this section. I will first evaluate the effect of the government’s
program to improve the healthcare of the rural residents as stated in the last
paragraph of section 5. I will then consider the special characteristics of the
economics of healthcare and examine how they affect the healthcare in China.
Before economic reform the cooperative medical care
system had adequate funding under the Commune system since the Communes
controlled all the farmers’ incomes. In
1985, only 5 percent of rural villages had such a cooperative health care
system, with private financing becoming the main source of payment for medical
care. From 1990 to 2000, the share of total government health care spending that
went to rural areas was reduced from 12.5 percent to 6.6 percent (Zeng (2004,
p. 309)), partly accounted for by the reduction in the proportion of population
in rural areas. Government funding has since increased together with an attempt
to expand the CMS as described at the end of the last section. How effective will
this plan be in improving healthcare for the rural population?
More farmers are expected to be insured. The 40 yuan
subsidy to pay for government health insurance is small as compared with the
per capita annual income of almost all farmers. Hence total spending on
healthcare will not increase substantially through the income effect. However
healthcare spending (including both private out-of-pocket spending and spending
by government insurance) and the quantity of healthcare demanded will increase through
the price effect since the price of healthcare to the insured rural residents
will be substantially reduced. Under the government insurance system many rural
residents can pay for treatment for illnesses which they otherwise cannot
afford. They will take preventive treatment or treatment for an illness in its
early stage which they would not otherwise. A government program of social
insurance can have an important effect in improving healthcare for the rural
population because many rural residents may not voluntarily buy such an
insurance. In fact many have not voluntarily done so as they are now paying for
medical expenses only when they are seriously ill. How much success this insurance program and the
program to build a clinic for every village will have depends on how well the
government can organize the rural residents to join the insurance program and
how well it can increase the quantity of services available through the
establishment of additional clinics in rural areas. The provision of healthcare
will increase even faster if the government allows and encourages the
establishment of private clinics and hospitals.
We next turn to the special microeconomic characteristics
in the market for healthcare. First, there exists asymmetric information between
consumers and suppliers as discussed in section 4. Although the consumer can
choose the physicians and the hospital to a large extent, the treatment for any
particular illness is chosen mainly by the physician. One consequence of this
is that expensive and perhaps unnecessary tests and treatment may be
recommended by the physician who tries to minimize his risk of having to take
responsibility for neglect and to maximize the payment to himself. Second, if
the consumer is insured, and if he does not pay for most of the cost of
medicine or treatment under some form of co-payment system, he has no incentive
to economize the use of the resources. In the mean time hospitals and
physicians could also take advantage of the insurance system to extract as much
as possible for their services. Asymmetric information and medical insurance
are two important sources of wastes in the provision of healthcare. In spite of
the above possible sources of waste, we have found that the demand for health
care is responsive to price in our estimation of the demand equations and that private
supply of health care will be responsive to price and will provide more,
cheaper and better healthcare to consumers than public supply.
Wastes in the public health system in China are described
in Huang (2004). Some consumers and the physicians have colluded to bill the
government insurance system for unnecessary expenses and even for falsified
medical expenses. Hospitals and physicians have also billed public insurance
for unnecessary or non-existing expenses. Hospitals and medicine producers have
cooperated to over charge the insurance system. Pharmaceutical companies
collude with doctors to increase the use of their drugs by paying a percentage
of sales receipts. The consumers suffer because parts of medical expenses are
not covered by insurance under a co-payment system with a fixed annual
deductible. The control of costs by the Chinese medical insurance system in the
face of such attempts to over charge is a difficult task. Allowing private
insurance to compete might help improve the performance of the government
insurance monopoly. While some economists have pointed to the bureaucratic
behavior and inefficiency in a monopolistic government insurance system Paul
Krugman (2006) points out two advantages of public health insurance that covers
all citizens: saving of the administrative costs which private insurance
companies incur “to identify and screen out high-cost customers” and “the
ability to bargain with suppliers, especially drug companies, for lower
prices.” Yet there is no harm to allow private insurance companies to enter
because they would not survive unless they can render better services at a
profit. They may also have a better incentive to control costs.
Under the system of public supply in China, the urban residents
receive much better health care, at least measured by expenditures per capita,
than the rural population. The government has assisted the urban working
population in the transformation of the former medical service system provided
by the employing units to the current system of insurance financed three ways
by the government, the employees themselves and the employers. Given its
limited budget the local governments have not provided as much health care to a
large segment of the rural population as under the former Commune system. The
attempt to organize CMS as a collective medical care insurance system is
incomplete. Until recently this system has received only limited government
financing and is now covering only about 180 million of the 800 million rural
population. For the urban population the current medical care is essentially
publicly supplied and publicly insured although much of medical expense is paid
for privately. For the rural population public supply is limited and demand is
limited by the lack of insurance and low income. Inequality between the rural
and urban population in the Chinese system of public supply and public
insurance of healthcare is a major weakness of that system.
Returning to the need to privatize the supply of
healthcare services, given the positive experience of private supply in Suqian
city as described in section 4 and in all other countries in the world in which
private hospitals flourish, China does not need to privatize all public hospitals
but only need to allow non-government hospitals to exist and to compete with
one another and with public hospitals. Let the better hospitals flourish. In
the case of education, the government has encouraged private provision through
the leasing of public schools for “operation by the people” and the
establishment of private schools at all three levels of primary, secondary and
higher education, and of financially independent branches of public
universities. See Chow and Shen (2006) for a discussion. However the government
still retains the old notion of the planning period that hospitals should be
public and has not encouraged the establishment of private hospitals or the
leasing of public hospitals for “operation by the people.” The unfortunate result
is the lack of increase in the output and the rapid increase in price of
healthcare in a period when China experienced a very rapid growth in national
output and a stable price level.
7.
Conclusion
After surveying the institutional changes in China’s
healthcare system, this paper presents statistical demand functions for health
care with income elasticity near unity for both the urban and rural population
and a price elasticity of about 0.6. It applies demand analysis to explain the
increase in healthcare expenditure and in the relative price of medical
services as income increases and as supply is limited. When income increased
the demand curve shifted upward. Given an inelastic supply both relative price
and total expenditure increased. Our demand equation can also explain the
increase in the ratio of healthcare expenditure to GDP in the course of rapid
economic development. While Chinese data are consistent with a demand equation
based on the theory of consumer demand for health care, the data on the
quantity supplied suggest that aggregate supply during the sample period was
determined by a government system of public supply of healthcare which did not
respond to price increase. A rapid increase in demand led only to a rapid
increase in price but not quantity supplied as the data show.
China’s economic reform has been regarded as a great
success and the accompanied economic growth has been phenomenal. One important
failure of the reform was the failure to allow market forces to operate in the supply
of healthcare. As the reform experience in Suqian demonstrates, relying solely
on public supply by local governments and state-owned units could lead to no
increase in supply. The Chinese public healthcare
system also resulted in serious inequality in the supply of and insurance for
healthcare between the urban and rural population. Many poor and uninsured
farmers received less health care than under the Commune system because the
increase in their incomes was not sufficient to pay for the same amount of
health care now at much higher prices.
Most recently the Chinese government has
attempted to improve the health care of the rural population through the
expansion of the cooperative medical insurance system CMS in the next few years
with its own subsidy but the success of this policy remains to be seen. This is
one important aspect of the more general problem of rural poverty, called the san-nong
problem (or three-farm problem for farming, rural areas and farmers) to which
the government is devoting much attention as discussed in Chow (2006) but much
of that general problem is yet unresolved.
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