Intended for healthcare professionals

Education And Debate

Health in China: The healthcare market

BMJ 1997; 314 doi: (Published 31 May 1997) Cite this as: BMJ 1997;314:1616
  1. Therese Hesketh, research fellowa,
  2. Wei Xing Zhu, programme manager, East Asiab
  1. a Centre for International Child Health, London WC1 N1EH
  2. b Health Unlimited, London SE1 9NT
  1. Correspondence to: Dr Hesketh


    It is now about 15 years since the introduction of the market into health care in China. This produced fundamental changes in the way that health care is financed and resulted in the disappearance of universal free basic health care. Responsibility for provision of health services has been devolved to the provincial and county governments, and healthcare providers have been given considerable financial independence. A fee for service system has been introduced, and several different payment mechanisms are now in operation. The new financing and pricing structures are responsible for greater inequity of access to services and more inefficient use of resources. These problems are widely acknowledged, and a range of solutions is being developed and tested. Since the introduction of the reforms the measurable health status of the population has not declined, probably as a result of overall improved socioeconomic conditions and a continued emphasis on prevention.

    The major changes of the market

    The economic reforms of the early 1980s resulted in major changes in the way that health care is financed. (The box shows the structure of agencies that provide health care in China.)

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    1. Central government funding for health care was drastically reduced.1 It now accounts for less than 1% of total health expenditure, providing some capital grants to hospitals and subsidising preventive services in poorer areas.

    2. Provision of health services became the responsibility of provincial and county governments, who raise their own taxes. But the amount of money available only covers “basic” salaries (which are well below a living wage) and new capital investments, totalling around 20-30% of hospital expenditures.1 The shortfall has to be found from user fees.

    3. The collapse of the collective agricultural system removed the cooperative medical system, which had provided free health care. Health care is now provided on a fee for service basis.

    4. Hospitals and health centres were given considerable financial independence. They have to generate most of their own income through user fees, but they also have control over the allocation of profits.

    5. A new pricing structure was introduced. This attempts to facilitate equity by providing basic care below cost, but profits can be made from drugs and technology, and this leads to inefficiency.

    6. A variety of methods of payment has developed. These include self payment, private insurance, and work based insurance.

    The most dramatic result of the introduction of the market was the disappearance of a system of universal access to free basic health care, which at its best was a model for the developing world. The way the market has been set up has led in turn to two major problems: there is greater inequity in access to services between rich or insured people and poor people, and there is greater inefficiency in the use of the scant resources available because of the anomalous pricing structure.

    Inequity and the payment system

    For most Chinese people, user fees for health care are out of pocket expenses. In the countryside (where over 70% of the population lives) less than 10% of the population is now covered by the cooperative medical system or a modified form of it.2 In the cities, state enterprises and large collectively owned companies provide employment based health insurance covering around 45% of the population, but the benefits provided vary enormously.3 Full reimbursement of medical expenses is becoming a rarity. The high cost of health insurance to employers, by 1990 the equivalent of 8-9% of the payroll,4 has meant that insured individuals are now paying an increasing percentage of their own costs, and coverage for dependents is exceptional. Furthermore, around a third of state enterprises are running at a loss and are unable to reimburse the costs of care, so the workers are effectively uninsured.3

    Basically money follows patients, so there are better healthcare facilities in areas where more individuals are covered by insurance or in the richer agricultural areas where out of pocket costs are more easily met. This is also influenced by the amount of tax revenue raised locally (obviously more in richer areas) and the priority given to health by the local government. This is well illustrated by the ratio of health expenditure per capita between urban and rural areas, which was 3:1 in 1981 and had risen to 5:1 in 1992.2

    This polarisation has been increased by the new mobility of the peasants: now that the rural infrastructure has improved, wealthier peasants simply bypass the lower level village clinics and township hospitals and present directly at a county or city hospital. This results in underutilisation and diminished income of the lower level services while county and city hospitals are swamped. Some of the large urban hospitals see up to a million outpatients a year; meanwhile staff in township hospitals may see only a handful of patients a week. Occupancy rates of over 90% are the norm at city and provincial hospitals, while county and township hospitals have occupancy rates of 80% and 45% respectively.1 With so little generated income from user charges, many township hospitals hospital have to rely on a local government subsidy to pay even a living wage to the staff.

    But many poor people cannot afford county or city level care. Schemes to improve access for poor people have included a system of phased payment and a “green channel” (treatment first, pay later) for seriously ill patients. But both systems were abused, with some patients avoiding payment altogether, so now almost all hospitals insist on cash prepayments for inpatient care.

    Expenditure on health care is now recognised as a major cause of poverty. In one study an average hospital admission was found to cost up to 30% of the total annual household income for poor families.5 It is estimated that 30% of people who live below the official poverty line became poor because of a serious illness.6

    Inefficiency and the pricing structure

    The pricing structure is specifically designed to facilitate equity of access. The costs of basic hospital services, a consultation, inpatient stay, and simple operations are set below cost. These are laid down in principle by the state finance bureau and then adjusted at a provincial level according to local conditions. This pricing means that most people can afford basic hospital care at least at township level. But hospitals obviously cannot make a profit like this, so there are exceptions to price setting below cost: these are drugs and new technology, and it is these exceptions that lead to inefficiency and poor clinical practice.

    Western drugs can be charged at a markup of 15%, Chinese drugs at a markup of 25%1; the profits can go directly to the doctor or the institution. Thus massive overuse of drugs is endemic, with everyone from village doctors to provincial hospitals dependent on this income to make profits. The drug bill is estimated to account for 50% of all healthcare costs.6 Although the desire for drugs is a reflection of the health and illness behaviour of the Chinese, the pricing structure gives practitioners no incentive to change their practice, even when they know they are overprescribing. A few examples of the clinical problems created are shown in the box.

    The problem of excess drug use

    • An infusion of 5% dextrose with some added antibiotics is a common treatment for a cold or a fever. Hospital outpatient departments have infusion rooms where mild complaints are treated with intravenous fluids

    • Though many health workers know about the use of oral rehydration solution for diarrhoea, intravenous infusions and antibiotics are still widely used

    • A study of appendicectomy patients showed that drug costs for insured patients were twice those of uninsured patients, with no difference in the outcome7

    The use of new technology highlights similar problems. Ability to make profits from high technology investigations and treatment provides a natural incentive to acquire equipment for profit. Fees for computed tomography, magnetic resonance imaging, laboratory services (by automated equipment), ultrasonography, intensive care, and renal dialysis can be highly lucrative.8 Full neonatal intensive care costs a staggering 1000 yuan (£75; $US120) per day at Hangzhou Children's Hospital. This compares with an average monthly income in the area of around 600 yuan per month. Since most work based insurance schemes do not cover children, this kind of care is accessible only to a small minority. Removal of babies by parents who can no longer afford the care is not uncommon.

    A study at county level in Jiangxi province showed that the major priority of the health officials was to increase hospital equipment.9 The more equipment is used, the greater the profit, so investigations such as computed tomography are sometimes carried out for relatively trivial conditions for insured and rich patients. More worrying than the overuse of proved technology is the existence of much technology which is unproved or obsolete. There is a “myopia correction machine” in a number of hospitals, which even the clinicians doubt is effective. Patients are charged around 100 yuan per treatment.


    Treatments and their cost are prominently displayed at hospital entrance. An obstetric examination costs 0.4 yuan, a caesarean section 80 yuan, a blood test (haemoglobin and white cell count) 4 yuan

    Development of a plan for the acquisition of new technology based on risks, costs, and benefits has been recommended by the World Bank,6 but current funding mechanisms and lack of any central planning for acquisition of equipment provide no motivation to do this.

    The positive side

    It is important not to lose sight of the positive aspects of the economic reforms. They have been responsible for improvements in socioeconomic conditions, better education, and improvements in nutrition, housing, sanitation, and clean water. These have benefited hundreds of millions of people across the country. There is much else which is good: access to basic services is still better than in many countries. Village level health care, for example, is within the reach of almost everyone. There is a safety net for those living below the poverty line, which entitles them to reimbursement of some healthcare costs. A major programme to increase township hospital utilisation rates through staff upgrading programmes has been introduced nationwide. State subsidies for health facilities and prevention are targeted to the poorest areas. There have been concerns that preventive activities have reduced in some areas because they are less lucrative for health workers than curative care. However, prevention is still high on the political agenda, and spending on this has remained constant in real terms.1 In fact, the health status indicators of the Chinese population in both rural and urban areas have not worsened since 1981, although there are still marked disparities in health status between the cities and the poor rural areas. Life expectancy has actually improved from 68 years in 1982 to 70 years in 1995.10


    Full neonatal intensive care costs 1000 yuan (£75) a day–almost twice the average monthly income


    Central China, showing places mentioned in this series

    Health officials acknowledge the problems of inequity and inefficiency and are aware of the paradox: the fact that they seem to be condoning inefficient and inappropriate practice simply to fund the system. The ministry of public health has limited powers to act, because of the way that financing has been devolved to the lower levels. Various efforts are being made at a local level to overcome some of the problems through insurance schemes (box). The plethora of such schemes does show that there is the will to overcome the problems which have been created by the new market. How successful they will be remains to be seen.

    New ways of paying for health care

    • Parents can pay a fixed amount for a full course of immunisation. If the child acquires any of the vaccine related diseases the parents receive compensation5

    • In nine cities and over 700 counties there is a government sponsored insurance scheme specifically for women of childbearing age. In Guandong province by 1998 all employers will have to protect their female workers through such insurance11

    • Women may make a fixed payment for antenatal, intrapartum, and postnatal care (usually until 6 weeks). This also covers any complications that may arise

    • In poor counties in Yunnan province a scheme has been introduced whereby the whole population pays 20 fen (about 2p) per month to subsidise delivery in hospital of mothers at high risk


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