Blog by Yanzhong Huang, Editor of Global Health Governance and Senior Fellow for Global Health

photo credit: Chinese flag in Shanghai via pixabay

Despite higher government spending, public hospitals remain a hindrance to genuine healthcare reform in China, says U.S. expert.

Six years have passed since China kicked off its “new” round of healthcare reform, which translated mainly into more spending in the sector. Government spending on healthcare has grown 20 percent annually since 2009, increasing healthcare’s share of fiscal spending from 4.4 percent in 2008 to 5.9 percent in 2013. Between 2009 and 2014, the government spent nearly RMB4 trillion or US$640 billion on healthcare, which has led to significant progress in expanding health insurance coverage, equalizing public health services, and strengthening financial conditions of grassroots healthcare institutions. In addition, the number of people with some type of health insurance increased from 30 percent in 2003 to 96 percent today.

As the low-hanging fruit is picked, the consensus is that the government’s recent healthcare reforms failed to fix problems of access and affordability. On the one hand, healthcare resources remain concentrated in a few urban health centers, which continue to expand at the expense of grassroots healthcare institutions and rural patients.

For example, Zhengzhou, the capital of Henan Province, is now home to the “largest hospital in the world” with 7,000 beds. Xijin Hospital, a major urban health center in Shaanxi Province, has an annual capacity of 30,000 people. However, every day, nearly 1,800 to 2,000 patients are forced to wait days or even a week for a bed. At the same time, although “out of pocket” spending has shrunk, the financial burden for patients remains a problem. Between 2008 and 2012, for example, while the share of out of pocket spending dropped from 40 percent to 34 percent, actual out of pocket spending increased by 64 percent, from RMB587.6 billion to RMB965.5 billion.

Not surprisingly, a Horizon Group survey in 2013 found that 57 percent of respondents said it was more difficult than four years ago to meet with a doctor, while 87 percent said that the cost of healthcare was higher compared to four years ago. This may in part account for the rise in violence between patients and healthcare providers. The percentage of hospitals reporting violent conflicts increased from 48 percent in 2008 to 64 percent in 2012, while the average number of violent attacks directed at healthcare workers in each hospital increased by nearly 30 percent over the same period. In some ways, the reform has left both patients and healthcare providers displeased.

Revenue challenges

Why has the seemingly well-intended and well-funded reform failed to create a Pareto improvement in the healthcare sector? The primary reason is China’s inability to effectively address the core issue: public hospitals. Despite the growth in the number of private hospitals, public hospitals in China still account for 88 percent of hospital beds and provide 90 percent of the healthcare services. Their commanding reach in the healthcare sector not only reinforces the maldistribution of healthcare resources but also hinders growth within the non-public sector, which could otherwise relieve access problems.

In the absence of competitive pressures from the private sector, it is a lot more important to address the revenue-seeking model, one which drives up healthcare costs in China. Unfortunately, no significant progress has occurred. A large portion of hospital revenue comes from overprescribing drugs and services. Consider that drug sales alone account for 40 percent of hospital revenues, with only 8 percent coming from government subsidies.

Patients with chronic diseases such as diabetes and cancer are usually slapped with staggeringly high medical bills. A study in 2012, for example, found that adjusted expenditures for medical care were 3.4 times higher among people with diabetes than among people with normal glucose tolerance. It is estimated that diabetes may consume more than half of China’s annual health budget if routine, state-funded care is extended to all the diabetes sufferers.

To be fair, government decision makers are fully aware of the need to reform public hospitals. But many of the proposed measures they undertook failed to account for the systematic and holistic nature of the needed reform.  In order to reduce the overreliance on drug sales, for example, the government introduced “zero markups” for drugs sold at hospitals and sought to increase fiscal subsidies to compensate for the hospitals’ loss incurred by this new policy. Since hospitals get a sizeable share of revenue from drug sales, it’s nearly impossible for the government to fill the gap.

Compared to their public counterparts, non-public hospitals do not receive equal treatment in terms of taxation, market access, eligibility for social insurance, and evaluation of professional titles. For example, the rules restrict the opening of a second hospital within an 800 meter service radius of an existing hospital. This protects the monopoly status of public hospitals. Also, doctors at private hospitals face discrimination when it comes to promotion and retirement benefits. Therefore,  it is difficult for the best doctors (most of them are employed by public hospitals) to leave public hospitals and practice in private ones. But in the absence of a competitive non-public sector, it is difficult to incentivize the public hospitals to kick off meaningful reform measures.

Delay tactics

The National Development and Reform Commission (NDRC) relies on an administrative fiat to set prices for services and drugs, while the National Health and Family Planning Commission (NHFPC) is the owner, general manager and regulator of the public hospitals, a situation that  reinforces the delay of introducing competition into the sector. In addition, social security departments which could play a critical role in reforming the provider payment system are service units of the Ministry of Human Resources and Social Security and do not have the motivation and authority to launch required reform measures.

These bureaucratic agencies distort the healthcare market and it is unrealistic to expect they would surrender power. It is safe to say that public hospitals and health bureaucrats have hijacked a reform process that is critical to the interests of more than one billion people. Premier Li Keqiang seemed to be keenly aware of the challenge when he said “stirring vested interests may be more difficult than stirring the soul.”

The awkward status of the healthcare reform also highlights the importance of top-level design. Rather than view the NDRC or NHFPC as lead agencies for healthcare reform, the central government should create a higher-level agency or policy group to handle the reform process. Ideally, this would be the State Council or the Central Leading Group for Comprehensively Deepening Reforms, which may charge a stand-alone and authoritative committee to redesign and guide China’s healthcare reform.

The idea is by no means radical: In 2002, in order to apply for and implement grants from the Global Fund to Fight AIDS, Tuberculosis and Malaria, China built its “Country Coordinating Mechanism” that draws representatives outside of government such as international organizations, nongovernmental organizations, the private sector, and individual representatives. A similar arrangement would not only allow members of the committee to undertake a more systematic or synergistic approach toward the reform, but would also minimize the undue influence of vested interests. Of course, defining and designing the reform package is no small task. But setting up such a committee would be a crucial step in the right direction.

This article was first published by Insight: The Voice of the American Chamber of Commerce in Shanghai on July 1st, 2015