33232 Rural Health in China: Briefing Notes Series China's Health Sector--Why Reform is Needed Goals and performance This Briefing Note is part of a broader series of Notes. It is intended to be an overview of the Health systems exist ultimately to improve challenges facing the sector, and makes the case population health through the timely provision that reform is required. It does not make specific of appropriate health care. The care must, of reform proposals, which will be the task of course, also be affordable--in part because future Notes. otherwise people will be deterred from seeking care, but also because the pursuit of health cannot be at any price. Good health is desirable, Historic and recent performance on but has to be balanced against other important health outcomes goals, such as better nutrition, shelter, education, and so on. Ideally, therefore, the cost of health care at the point of use will be low enough to Tracking health system performance in terms of enable households to restore their health and health outcomes is hampered by a shortage of achieve some or all of these other goals--the so- data that are comparable across countries and called `financial protection' goal of health over time. Child mortality is one indicator that systems. is widely available, and is widely accepted as a useful summary population health statistic. This Briefing Note* argues that while in the 1960s and 1970s China performed well on both In the 1960s and 1970s, China achieved annual health system objectives, in the 1980s it faltered, reductions in under-five mortality in excess of and in the 1990s it slipped still further. China's 6%, well above the rates achieved by Indonesia increasingly weak performance is argued to and Malaysia, and well above the rates expected reflect system-wide weaknesses in the health of a country with the per capita income China system. The cost of care has grown rapidly in had at the time (Figure 1). recent years, deterring use of health services, and putting households who do use services at Figure 1: China's recent history on child financial risk. The rise in the cost of care has mortality reduction in perspective coincided with falling health insurance coverage: Malaysia Indonesia China health insurance has all but disappeared in rural areas, and is under a good deal of strain in urban 60s 80s 70s 90s 60s 80s 0% areas. The way providers are paid encourages the provision of overly expensive care and -1% discourages cost-consciousness. And the .a.p -2% government is insufficiently engaged in areas -3% where markets are known to perform badly. ytialtro -4% m -5% *This briefing note was prepared by World Bank staff, and nieg an -6% is based loosely on an issues note prepared by Magnus ch Lindelöw and Adam Wagstaff. The findings, %-7% interpretations, and conclusions expressed herein are those -8% of the authors, and do not necessarily reflect the views of the World Bank or those of its Executive Directors or the -9% governments they represent, or the Government of China. The note forms part of the World Bank's ongoing study on actual % change predicted % change China's rural health sector. The study--referred to as the China Rural Health AAA (Analytical and Advisory Source: UNICEF mortality data at www.childinfo.org. Activities)--is being undertaken in collaboration with the Ministry of Health (MOH) and other government agencies, as well as with selected international partners. For further The `predicted' figures are based on a regression model, information, contact L. Richard Meyers estimated on data across the entire world for the years (lmeyers@worldbank.org). 1960, 1970, 1980, 1990 and 2000. The model, which Briefing Note No.3 1 April 2005 factor comes through as increasingly In the 1980s and 1990s, the picture changed important--cost. Of those in the 2003 NHS who dramatically. While Indonesia and Malaysia said they should have been hospitalized but achieved yet higher rates of reduction, China's weren't, the majority--fully three quarters in rate fell. China also switched from being an rural areas, and 85% among the poorest fifth of over-performer (its rate of reduction in the the population--said the reason was they 1960s and 1970s exceeded its expected rate), to couldn't afford it. being an under-performer. And while Indonesia and Malaysia exceeded expectations even more The cost of care in China is indeed high. In spectacularly in the 1990s than they had in the 2003, a single inpatient spell cost, on average, 1980s, China's performance--relative to just under 4000 Yuan, equivalent to 43% of expectations--deteriorated yet further. average income.* For someone in the poorest fifth of the population, 4000 Yuan is equivalent These changing fortunes are reflected, as shown to nearly 200% of average income. The high in another Briefing Note1, in China's prospects cost of care would be less of a problem if on the Millennium Development Goals (MDGs). Chinese households were protected by health They are by no means bad, but they are not insurance. But following the de-collectivization excellent either. of agriculture, health insurance coverage plummeted (on which, more below). These high Why has China's performance been costs therefore have to be met out of pocket. It deteriorating in absolute terms and relative to is not altogether unsurprising, therefore, that expectations? The obvious hypothesis is that there are people in China who need care, but people who need health care are not getting it don't get it. when they need it. The evidence on this is mixed. There is actually some encouraging evidence of increased utilization of some key Getting sick, getting poor interventions, including prenatal checkups and attended deliveries. But there is also evidence of people in China needing care and not receiving Of course, there are also people in China who it. Of those interviewed in the 2003 National do seek treatment, but get into financial Health Survey (NHS), 50% (up from 36% in difficulty as a result. In the 2003 NHS, 30% of 1993) said they had been ill in the previous two poor households said that health care costs were weeks and yet had not sought care. In the 2003 the reason they were in poverty. Urban survey, 30% of respondents said they had not households in China now spend on average over been hospitalized despite having been told they 7% of their total budget on health care. needed to be. And among those who did go to Household payments for health care are highest hospital nearly half discharged themselves as a share of household spending among the against their doctor's advice. poor.2 Cost--a growing barrier to getting The high exposure to the risk of medical expenses gets reflected in the savings behavior health care of rural households in China. Research shows rural households hold more wealth, and hold more of it in liquid form than they would This level of non-use of health care by people otherwise.3 This helps households to protect who need it begs the question: Why? While themselves against the financial consequences many factors are undoubtedly important in of health `shocks'. But the evidence suggests shaping people's utilization decisions, one that rural households in China (especially poor ones) are not able to completely `smooth' their includes per capita income and lagged mortality as consumption when illness or some other factor covariates, confirms the importance of rising per capita causes an income `shock'.4 incomes in reducing infant and child mortality, and the fact it becomes increasingly hard to reduce mortality as mortality falls. China's low death rates in 1990 made it harder for it to reduce its IMR and U5MR yet further. But working in China's favor was the rapid economic growth it *The data on the cost of an inpatient day comes from the achieved during the 1990s. The `predicted' rates take both MOH health yearbook. The data on income are from the into account. National Bureau of Statistics (NBS). Briefing Note No.3 2 April 2005 So, as with its performance vis-à-vis the goal of Figure 3: Out-of-pocket spending--an ever improving health outcomes, China's health larger share of household expenditure system vis-à-vis the goal of financial protection faces some challenges. 8 In fact, China may well face bigger challenges 7 urban in this regard than other countries in the region, e rural 6 where household health spending--as a share of total spending--tends to be higher among richer nditur 5 income groups.5 Further, the fraction of the xpee 4 population experiencing `catastrophic' health 3 expenses (defined as expenses that are more living than 25% or 40% of nonfood consumption) is % 2 higher in China than it is elsewhere in the region 1 (Figure 2). And, in contrast to the situation 0 elsewhere, those households in China that 1980 1985 1990 1995 2000 2005 experience catastrophic payments are typically poor ones.6 Source: China National Health Economics Institute "China National Health Accounts Digest", 2002. Figure 2: Chinese households are more likely to experience catastrophic health expenses Expanding and deepening health than households in neighboring countries insurance Viet Nam The high and rising cost of health care in China Thailand 40% nonfood thus poses a major challenge to the health cons. system--from the point of view of improving Taiwan (China) 25% nonfood health, but also from the perspective of Philippines cons. providing financial protection against health `shocks'. Expanding health insurance is Korea understandably seen as one of the obvious responses to this challenge. Indonesia Hong Kong SAR In urban areas, coverage in the government schemes--LIS and GIS, and more recently the China new consolidated BMI scheme--steadily declined during the period 1993-2003, falling 0% 5% 10% 15% 20% below 40% in 2003 (Figure 4) and 12% among % households exceeding threshold the poorest fifth of the urban population.* In Source: Van Doorslaer, O'Donnell, et al.6 rural areas, coverage is far lower--below 20% in 2003. Coverage increased somewhat between China's performance on the financial protection 1998 and 2003, due to increased coverage in goal may indeed have deteriorated over time. CMS and private (commercial) insurance Household (i.e. private) health spending rose as schemes. a share of the household budget dramatically during the 1980s and 1990s, especially among It is not just the number of people covered by urban households (Figure 3). In real terms, health insurance that has been falling. The depth private spending grew at a staggering average of coverage has also been declining (Figure 5). annual rate of 20% during the 1990s. Public By 1997, insured patients were paying more spending, by contrast, grew at a much more than one third of their inpatient costs out of their modest 8% per annum. own pockets. For outpatient costs, they were * Figures taken from presentation made on `Equity in health care among different income groups' by Tang Shenglan and Gao Jun at Dec. 2004 MOH seminar on 2003 NHS survey. Briefing Note No.3 3 April 2005 pril paying nearly two thirds, up from just 30% in measures aimed at curbing insurance costs. One 1987.7 popular demand-side measure has been the Medical Savings Account (MSA), the idea being to give the patient an incentive to limit his Figure 4: Health insurance coverage in China demand for services. However, it is not clear has been falling how successful this approach can be in a system 80 like China's where providers have strong financial incentives to generate demand for their 70 Other services (see below).8 There is also a downside, Collective % 60 namely that MSAs reduce financial protection-- gea not only through higher co-payments, but also 50 Private insur. through the cap on payments from the social cover 40 CMS pooling account that has been introduced in ncearu 30 many cities. GIS, LIS, BMI ins 20 While important, the challenge of extending and 10 deepening health insurance coverage in cities is 0 small compared to China's huge challenge of 1993 1998 2003 1993 1998 2003 providing coverage to the uninsured 80% of Urban Rural China's rural population, which accounts currently for 70% of the total population. Source: National Health Survey2,* The current low coverage in rural areas stems Figure 5: Reimbursement rates for inpatient from the collapse of the old commune-based care have also been falling cooperative medical scheme (CMS) following 90 the decollectivization of agriculture. Attempts to 80 resuscitate the CMS during the 1990s met with %etra 70 limited success. Schemes have tended to be less 60 generous than the "old" CMS, and tend to suffer nt 50 me from poor administration and small risk pools. serubmire40 Further, their voluntary nature tends to result in 30 adverse selection (the better risks opting out, 20 leaving behind a risk pool that comprises ever 10 0 worse risks). 1987 1991 1993 1997 With these experiences in mind, the government GIS/LIS Dependent recently decided to develop a `new-style' CMS Collective Special / other (NCMS). The program is being piloted in more Overall than 300 of China's more than 2000 counties, and will be rolled out to the rest of the country Source: China Health and Nutrition Survey7 by 2010. Contributions from households-- starting at 10 RMB per person, and paid on a The recent history of the urban schemes voluntary basis--will be supplemented by a 10 contains important lessons--not just for the RMB subsidy from local governments, and by a future development of urban insurance but also 10 RMB matching subsidy from central for health insurance in rural areas too. One of government in the case of households living the these is the experience with cost-sharing poorer central and western provinces. NCMS will operate at the county level rather than at the * Figures for urban 2003 are from `Health Services village or township level as was the case in the Utilization and Urban Health Insurance Reform in China', old CMS. presentation made by Ling Xu of MOH at Dec. 2004 MOH seminar on 2003 NHS survey. Figures for rural 2003 are NCMS is a major policy shift by the from Main Findings from the 3rd NHS Survey, government, and will doubtless make health www.moh.gov.cn, accessed on April 21st, 2005. The CHNS sample is not statistically representative of the care affordable to millions of rural households Chinese population but does cover a broad spectrum of who currently do not get the care they need or China's provinces, and draws from the urban and rural do but end up impoverishing themselves in the populations. Briefing Note No.3 4 April 2005 process. As with all major policy initiatives, have the scope to exploit this informational challenges are likely to be encountered as the advantage, and may generate services that are policy is rolled out nationwide. Will NCMS be not medically necessary. Whether they do so sustainable if kept on a voluntary basis, or will depends on the incentives they face. it increasingly suffer from adverse selection? Will a combined contribution of 30 RMB be Under the old planned economy of health care sufficient? It looks rather small compared to the that existed in China up to 1980, providers had 104 RMB spent per capita on medical care in little financial incentive to generate demand for rural China in 2002. If 30 RMB is too small, their services. They received a budget from the and is not subsequently adjusted upwards, there State or commune and that was the only legal are risks. NCMS administrators may promise payment they could receive. too much to their members in terms of benefits, and end up making a loss. Or they may limit the However, when the planned economy model scheme's benefits, so that NCMS members have was discarded and replaced in the 1980s by the to pay a substantial share of the cost of health `Management Responsibility System', provider care out of pocket.* Would households not be incentives changed markedly. Under the new impoverished with such high copayments? If a MRS system, rural health centers and hospitals total contribution of 30 RMB is indeed too little were allocated a fixed subsidy and became free to make NCMS a fully fledged insurance to generate additional revenues by charging scheme, how could additional revenues be patients. Furthermore, providers treating insured generated, and done so in such a way that keeps patients were reimbursed on a fee-for-service NCMS affordable for the poor? How should (FFS) basis. The prices paid by fee-paying central and local government subsidies be patients and insurers were not set by providers targeted if at all? themselves (one key element of a market system was therefore missing from the new model), but rather by a Price Commission. This tried to keep Improving provider performance basic care affordable by setting the price of such care well below cost, and allowing providers to cross-subsidize such care by allowing them to Expanding health insurance will undoubtedly earn profits on high-tech care. In addition, help make care affordable--it will help ensure allowable drug prices were set above cost, and that people who need care get it, and are able to the allowable fees for insured patients were set do so without impoverishing their families in above those for uninsured patients. the process. These policy changes, coupled with the But focusing on lack of health insurance as the information asymmetry between patient and obstacle to better health system performance provider, have resulted in many providers over- begs the question of why health care costs are so prescribing drugs because they make a profit on high--and increasing so rapidly--in the first their sale, over-delivering sophisticated care on place. Things would be different if the high (and which they make a profit and under-delivering rising) cost of health care were justifiable. But it basic care on which they make a loss (see Box doesn't seem to be. Rather, it appears to reflect 1).9 The institution-level incentives have been an increasing tendency of China's providers to sharpened by the use of individual-level induce demand for their services, especially incentives--the bonuses doctors receive from high-tech care. their hospital often depend on the revenues they generate through the provision of services and The health sector is one of the few sectors of the prescription of drugs. Overcharging has become economy where users know far less about what increasingly prevalent: in a small scale study of services are appropriate for them than the hospitals in Shandong province, it was found person delivering the service. Health providers that hospitals routinely overcharged by a margin of around 90% of the regulated fees, typically by "unbundling" services.10 *For example, even if benefits are limited to hospital costs, that would still leave 40% of expected medical costs uncovered. In fact, 30 RMB is sufficient to cover only around half of expected hospital costs, which would leave patients picking up the remaining 50% of their hospital bill. Briefing Note No.3 5 April 2005 Box 1: The legacies of China's provider payment system and pricing policies Strengthening the role of government in China's health sector In a recent study of village clinics, it was found that only 0.06% of drug prescriptions were considered reasonable.11 Another study found that 20% of What is the appropriate role for government in expenditures associated with the treatment of the health sector? Should government reduce its appendicitis and pneumonia were clinically unnecessary.12 involvement in this sector and leave it to the free market? In the case of TB, providers have delivered additional care to that in the free DOTS* package, Theory and evidence from around the world because doing so generates additional revenues for suggests that leaving the health care sector them. In one setting, a local TB control manager entirely to the market would not be wise. No explained that the DOTS strategy "has been locally country--not even the United States--does so. adapted... to improve effectiveness and generate In some respects, in fact, the government in revenue".13 This involved treating patients for longer China should probably be doing more in the than the recommended six months, and providing health sector. For example, it should probably non-standard tests and medicines on top of those in the DOTS package. be spending more, by, for example halting the decline in the share of government spending Many MCH centers now sell drugs and focus on going to health (Figure 6). By international maternity services for which they can charge, while standards, a country with China's per capita EPS stations have begun offering outpatient care and income would be expected to spend around have expanded revenue-generating activities such as 2.4% of its GDP on government health sanitary inspections. These revenue-generating spending. In the event, it spends just 1.9%. activities have displaced less profitable but more cost-effective activities, such as basic preventive and Figure 6: Government health spending has curative care, public health programs, outreach, and risen in real terms, but has fallen as share of support and supervision. total government spending Expanding health insurance--often seen as the obvious policy response to unaffordable care-- 300 Hospital could in fact exacerbate these problems. If providers continue to be paid by insurers on a Control & prev. 250 FFS basis, the likelihood is that expansion of MCH insurance coverage will simply result in Govt. hlth exp. providers inducing still more demand for their 200 Hlth shre of govt. exp. services, with patients perhaps paying similar 100 amounts out-of-pocket as before, and providers 1990= pocketing the extra taxes injected into the 150 system through insurance subsidies. Insurance reform without provider-payment reform would 100 lead to disappointing results at best. But how should providers be paid by insurers if 50 not by FFS? Should insurers be free to decide? 1990 1992 1994 1996 1998 2000 2002 How should prices be set for fee-paying Source: China National Health Economics Institute China patients? By whom? And should providers be National Health Accounts Digest, 2002. regulated differently if supplier-induced demand is to be cut? These are all key questions to be Beyond spending more, what should China's addressed in future Notes. government do differently in the health sector? Ultimately, government involvement in the health sector is to be rationalized in terms of the government trying to overcome `market failures'--instances where a free market fails to deliver efficient and equitable outcomes. The current risk of adverse selection emerging as a *DOTS stands for `directly observed treatment strategy'. Briefing Note No.3 6 April 2005 problem in voluntary insurance has already been government rely for the delivery of public mentioned, as have other challenges facing the health services on providers who are allowed to government in the area of health insurance. generate incomes on top of any subsidies received? Or should public health activities be In the market for health care itself, there are also delivered by institutions that rely 100% on areas where the role of government merits government subsidies? These are all important examination. questions that need answers. All governments have an important role in On the promotion of equity the government also setting and enforcing regulations to ensure that faces challenges. Government spending providers do not exploit their informational currently disproportionately benefits the rich advantage over patients. The Chinese (Figure 7). This is likely to reflect a variety of government has recently expressed concerns factors. One is that because local governments about this issue, and there is certainly scope to are highly dependent on their own revenues, strengthen the regulation of providers in China. government spending per capita varies It is true of public providers, where quality considerably across provinces--and even more control and the enforcement of price regulation so across counties. These inequalities have are weak, but is especially true of private grown in recent years.14 Another factor is the providers. Currently the weak framework for large fraction of government health spending regulation (and enforcement) of private sector that goes to supporting the BMI. activity exposes patients to considerable risks of malpractice and unscrupulous providers. The Figure 7: Government spending on health in price schedule is another area where, as already China disproportionately benefits the rich noted, reform may be merited. Viet Nam Government engagement on public health is another area worth reviewing. All governments Thailand have an important role to play in financing--or at least subsidizing--services and activities that Indonesia have either `externality' characteristics such as immunization, or `public goods' characteristics Hong Kong SAR such as communicable disease surveillance and (China) control. In China, public health activities are Heilongjiang only partially financed by the government: for (China) example, in a departure from international Gansu (China) practice, Chinese families are charged for immunization. -0.4 -0.2 0.0 0.2 0.4 Concentration Index China has, in fact, been increasing its spending (negative indicates pro-poor) on public health in real terms (Figure 6), contrary to what is often claimed. However, Source: Van Doorslaer, O'Donnell, et al.15 there is a concern that providers responded over-enthusiastically when they were given the There are signs that things are changing for the freedom to raise their own revenues. And it is better, the government's commitment to transfer true that the government has increased its 10 RMB for every CMS enrollee in the poorer spending on health in general faster than on central and western provinces being a good prevention and control activities, and that public example. Its commitment to improving equity is health and family planning programs account also evident in the Ministry of Civil Affairs' for only 10-20% of non-insurance government new medical assistance program. spending.* Towards concrete reform proposals Should greater priority be given to core public health functions in China? Are the recent reforms and extra spending enough? Should the On the two overarching goals of any health system--better population health and financial *Source: China National Health Economics Institute China National Health Accounts Digest, 2002. Briefing Note No.3 7 April 2005 protection--China's health care system faces 2. Gao J, Qian J, Tang S, Eriksson B, Blas E. Health equity major challenges. in transition from planned to market economy in China. Health Policy and Planning 2002;17(Suppl.1):20-29. On health outcomes China has gone from being an over-achiever to being an under-achiever. 3. Jalan J, Ravallion M. Behavioral Responses to Risk in Many neighbors are doing better than China on Rural China. Journal of Development Economics progress towards the health MDGs. High health 2001;66(1):23-49. care costs are a major factor in people not getting the health care they need, and in causing 4. Jalan J, Ravallion M. Are the Poor Less Well Insured? Evidence on Vulnerability to Income Risk in Rural poverty among those who do get care. China. Journal of Development Economics Inadequate health insurance--low coverage and 1999;58(1):61-81. high copayments--is one clear area where work is required, and where reform efforts are already 5. O'Donnell O, Van Doorslaer E, Rannan-Eliya R, et al. underway. But reform on the supply side is also Who pays for health care in Asia? EQUITAP Working Paper # 1, Erasmus University, Rotterdam urgently needed--the current emphasis on out- and IPS, Colombo, 2005. of-pocket payments and fee-for-service, coupled with the distorted price schedule, results in the 6. Van Doorslaer E, O'Donnell O, Rannan-Eliya RP, et al. provision of unnecessary care and rapidly rising Paying out-of-pocket for health care in Asia: costs. Expanding health insurance without Catastrophic and poverty impact. EQUITAP Working Paper #2, Erasmus University, Rotterdam addressing these supply-side issues makes little and IPS, Colombo, 2005. sense. Further, there is a case for the government increasing the quantity and quality 7. Akin JS, William H. Dow and Peter M. Lance. Did the of its engagement in the health sector. distribution of health insurance in China continue to Government spending in China is less than one grow less equitable in the nineties? Results from a longitudinal survey. Social Science & Medicine would expect by international standards of a 2003( in press). country with China's GDP per capita, and as in many countries it disproportionately benefits the 8. Liu Y. Reforming China's urban health insurance better off. Government spending on public system. Health Policy 2002;60(2):133-150. health programs has increased in real terms, but more slowly than government health spending 9. Barnum H, Kutzin J. Public hospitals in developing countries: Resource use, cost, financing: Baltimore in general. The government could also and London: Johns Hopkins University Press for the undoubtedly achieve more with existing World Bank, 1993. spending: for example, improving its regulatory framework vis-à-vis health care providers. 10. Liu X, Liu Y, Chen. N. The Chinese experience of hospital price regulation. Health Policy and Planning It is one thing to point out the need for reform. 2000;15(2):157-163. It is another to set out concrete options for 11. Zhang X, Feng Z, Zhang L. Analysis on Quality of reform. Several subsequent Briefing Notes in Prescription of Township Hospitals in Poor Areas. this series will make a start on this process by Journal of Rural Health Service Management providing critical reviews of what is already 2003;23(12):33-35. known in the academic and policy literature. 12. Liu X, Mills A. Evaluating payment mechanisms: how The next Note, for example, looks at the can we measure unnecessary care? Health Policy and evidence available on how to improve provider Planning 1999;14(4):409-13. performance. These Notes will in turn inform the deliberations of a joint Government of 13. Zhan S, Wang L, Yin A, Blas E. Revenue-driven in TB China-World Bank working group, whose task control--three cases in China. Int J Health Plann is to come up with concrete ideas for policy Manage 2004;19 Suppl 1:S63-78. reform in each of the areas discussed in this 14. World Bank. China: National Development and Sub- Note. National Finance: A Review of Provincial Expenditures. Washington, DC, 2002, 22951-CHA. References 15. O'Donnell O, van Doorslaer E, Rannan-Eliya RP, et al. 1. World Bank. China's progress towards the health MDGs. Who benefits from public spending on health care in Washington DC: World Bank, 2005, Rural Health in Asia? EQUITAP Working Paper #3, Erasmus China Briefing Note Series, Briefing Note #2. University, Rotterdam and IPS, Colombo, 2005. Briefing Note No.3 8 April 2005