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Focus: Healthcare

A Healthier China?

Cooperation between the public and private sectors can nurse China's ailing healthcare sector back to good health

by Yuanli Liu

Is China becoming a wealthier and healthier nation? The answer to the first part of the question is unequivocally yes, while the answer to the second part requires more nuance. The PRC economy has grown at an average annual rate of 9.7 percent for nearly three decades, lifting more than 210 million people out of poverty. Chinese citizens now enjoy safer drinking water and better nutrition, housing, and healthcare, which, unsurprisingly, have led to overall health improvements. For instance, life expectancy at birth rose from 67.9 years in 1981 to 71.4 years in 2000; and from 1991 to 2005, the infant mortality rate dropped sharply from 50.2 per 1,000 live births to 19.0, while the maternal mortality rate fell from 80.0 per 100,000 to 47.7 over the same period, according to the PRC Ministry of Health (MOH). Yet amid the good news, self-reported health status such as morbidity rate and bed-ridden days increased remarkably from 1993 to 2003, according to China's three National Health Services Surveys (NHSS), conducted in 1993, 1998, and 2003.

The mismatch between the demand for, and supply of, safe and effective healthcare, escalating medical costs, misallocation of public resources, and the lack of adequate insurance coverage have led the general public to identify rising healthcare costs as a major social problem in several recent opinion polls. In the last NHSS, interviewers from MOH found that 52.6 percent of outpatient services users and 61.2 percent of inpatient services users were dissatisfied with the services they received, largely because medical costs were perceived to be too high.

Quick Glance

China is growing wealthier but still faces serious public health risks and the growing prevalence of chronic diseases.
Spending on healthcare has failed to keep pace with economic growth.
To overcome major obstacles in China's healthcare sector, a robust public-private partnership is needed.

Although China now faces major challenges in reforming the healthcare sector, particularly in cutting costs and expanding coverage, significant opportunities exist for a fruitful public-private partnership in the reform and development process.

Double burden: Communicable and non-communicable diseases

China's rapid industrialization and profound social transformation have brought about significant changes in people's natural and social environments and lifestyles, many of which—pollution, migration, and the spread of HIV/AIDS—have increased risks to people's health. These factors, along with a rapidly aging society, have led to the evolution of disease patterns in urban areas, where the bulk of illnesses now take the form of non-communicable, chronic diseases. The World Health Organization (WHO) estimated that in 2002, 133,056 disability adjusted life years (DALYs; defined by the WHO as a measure of "time lived with disability and time lost due to premature mortality") out of 200,273 DALYs in China were attributable to non-communicable diseases. Of these, neuropsychiatric conditions accounted for 34,952 DALYs, more than cardiovascular diseases, which accounted for 25,233 DALYs. The prevalence rate of diabetes soared more than 300 percent between 1993 and 2003 (see Table 1).

The transition from the prevalence of contagious diseases to the prevalence of chronic illnesses has taken place in China at a much slower rate in rural areas than in urban areas. By 1990, the leading causes of death for urbanites were malignant tumors, cerebrovascular conditions, heart and respiratory diseases, and injury and poisoning. In rural populations, however, respiratory diseases remained the leading cause of death from 1990 to 1995. Only in 2006 did respiratory diseases drop to third place—behind tumors and cerebrovascular diseases—as a cause of death for rural residents. Moreover, 5 million Chinese have tuberculosis, accounting for one-quarter of total cases worldwide. Tuberculosis is also responsible for 150,000 deaths per year in China. The prevalence rate of hepatitis B in China is 10 percent of the total population (20 percent in some regions), or about 130 million people—accounting for one-third of total global cases. Finally, emerging infectious diseases, such as severe acute respiratory syndrome (SARS), avian flu, and HIV/AIDS, still present imminent public health threats.

Table 1: China's Disease Prevalence Rate, 1993 and 2003 (per 10,000)
	1993	2003	% change
Diabetes	247	1,000	304.9
Hypertension	1,492	4,122	176.3
Cerebrovascular	496	1,020	105.6
Injury and poison	153	270	76.5
Cancer	115	184	60.0
Cardiovascular	1,639	2,285	39.4

Needs unmet for safe and effective interventions

While perceived need for and the availability of medical products and services have increased significantly, healthcare utilization rates in China seem to have dropped between 1993 and 2003, according to NHSS. For example, the utilization rate of outpatient services fell for all income levels (see Figure 1).

In part because they do not trust the safety and quality of the services provided by small clinics, people tend to choose either to buy drugs from the nearby pharmacy (self treatment) or to go directly to tertiary hospitals (typically large and general hospitals), which has led to overcrowding in tertiary hospitals. Because government spending on healthcare covers less than 10 percent of a hospital's operational costs, government hospitals and doctors depend on revenue from services and drug sales under the current fee-for-services system. Such a system encourages excessive provision of healthcare services and products, especially drugs, which, on average, accounted for 45.6 percent and 44.3 percent of outpatient and impatient costs, respectively, in 2006.

Unnecessary prescription of expensive drugs is one of the major reasons for escalating drug costs. As a result, the Chinese public widely believes that healthcare providers are profit maximizers rather than vanguards of the patient's best interests. Mistrust is also a major reason for the worsening relationship between patient and doctor. For instance, China Daily reported on January 27, 2007 "... the policemen will train the hospital guards to quell violence, according to the agreement, which Shanghai Minhang District Central Hospital is to sign with Xinzhuang police station today. The move has been necessitated because of the rising number of violent incidents between hospital staff and patients, relatives and friends."

Escalating medical costs and lack of insurance coverage

Between 1990 and 2003, the average per capita urban disposable income rose 5.6 times, while the average per capita net rural household income nearly quadrupled, according to the PRC National Bureau of Statistics. Average medical spending per capita, on the other hand, soared nearly 19 times for urban residents and six times for rural residents over that period, far outpacing the rate of income growth. The ratio of average hospital expenses to average annual per capita income rose for all rural income quintiles (see Figure 2).

Despite steep rises in medical costs, insurance coverage is inadequate. Though insurance coverage for rural residents only rose slightly from 1993 to 2003, the percentage of insured urban residents fell for all income quintiles (see Figure 3). In 2003, only about 55 percent and 21 percent of urban and rural residents, respectively, had any health insurance, according to the 2003 NHSS. Although China spent about ¥986 billion (about $141 billion) on healthcare in 2006, and total spending on healthcare as a share of GDP increased from 4.0 percent in 1990 to 4.7 percent in 2006, individual out-of-pocket spending as a share of total health expenditures rose from 35.7 percent to 49.3 percent, indicating that the financial burden of medical care falls largely on individual patients, according to MOH's 2007 estimates.

Unaffordable healthcare prevents many people from accessing essential medical care and causes financial hardship for those who use the services. In 2003, among those who were ill but did not see a doctor, roughly two-fifths reported that they did not seek medical services because they could not pay. Among the hospitalized patients, 43 percent discharged themselves against doctors' advice. Nearly two-thirds did so because they ran out of money. In addition, 13.7 percent of urban households and 15.8 percent of rural households—about 184 million people—experienced financial catastrophe as a result of spending on medical services (defined by the WHO as spending more than 30 percent of household non-subsistence income on healthcare), according to the 2003 NHSS.

Major opportunities ahead

China's health sector is in a state of crisis. Resolving the complex healthcare emergency in the world's largest country will take contributions from both the private and public sectors. China's healthcare industry has been one of the fastest growing in the world, with healthcare spending tripling between 1997 and 2006. Despite this, healthcare spending in China accounts for less than 5 percent of its GDP, a level far below that of developed countries. (For example, healthcare spending among Organization for Economic Cooperation and Development countries is about 9 percent of GDP.) MOH estimated overall healthcare spending in 2007 at ¥1.1 trillion ($157 billion), but per capita healthcare spending stood at only ¥828 ($118.3), indicating enormous consumption potential in the coming decade.

Growing demand for medical technology innovations

The demand for technological innovation, particularly new and appropriate technologies to address disease outbreaks and medical information, is growing. For example, after SARS, China quickly developed a national online reporting system to help rapidly detect emerging epidemics and pandemics, and the market for similar medical information technologies has much room for growth. Many hospitals and clinics must integrate their management and clinical information systems to become preferred providers for patients covered under social insurance schemes. The development of standards comparable to international standards for, and the wider use of, patients' electronic health records are another goal of healthcare reform policies, according to PRC policymakers. China can and should draw upon international expertise and experiences in medical information technologies in its efforts to upgrade the medical information system.

Private hospitals and other services

Market opportunities for modern medicines and medical services are also expanding for both foreign and domestic companies. For example, despite a rapidly aging population and significant rises in the incidence of chronic diseases, China still lacks decent nursing homes and effective disease-management programs. According to MOH, China had 18,703 hospitals in 2005, only 2,027 of which were private, relatively small hospitals. To expand the role of the private sector, China's Health Minister Chen Zhu said at the 2008 China Development Forum in Beijing that the government would allow more private investment in the country's health system, including in for-profit and non-profit organizations, to meet citizens' demands at different levels and may even purchase health services from private providers. The Beijing municipal government announced in March 2008 that some government-run hospitals will be privatized, according to the Beijing Daily. These efforts underscore the central government's determination to create a more level playing field for the public and private sectors to compete on quality, services, and price.

Expanding the insurance market

Behind China's escalating medical costs and inadequate insurance coverage lie opportunities for foreign and domestic players in the insurance industry, including the managed care industry. Private insurance is beginning to complement social insurance schemes with a range of healthcare plans from which people with sufficient purchasing power may choose. In fact, the PRC government has already made it clear that public insurance schemes will provide universal access only to basic medical benefits, with restrictions on essential drugs, high co-payments, and low ceilings. Consumers will thus be encouraged to buy private insurance for supplementary coverage.

Healthcare reform

China now has a historic political opportunity to significantly reform and improve its healthcare system. Perhaps as an indication of the seriousness of the reform effort, China's top leaders recently decided to include such reforms as part of the effort to build "a harmonious society." In September 2006, China formed the State Council Healthcare System Reform Coordinating Group, which involved 16 ministries, to establish a more effective and equitable healthcare system.

The major objective of the new reform policies is to improve access to healthcare services by strengthening community health services and expanding insurance coverage through the Basic Medical Insurance (BMI) schemes for urban workers. The BMI scheme, funded by employer and employee contributions, does not cover children and elderly parents, however. Policies such as the New Rural Medical Cooperative Medical System and medical assistance programs are aimed at rural residents and seek to establish full coverage in 2008. In September 2007, the central government announced that it will roll out voluntary insurance schemes, subsidized by the government, for children, the elderly, and informal sector workers who live in urban areas and lack health insurance. To be effective and sustainable, these policies must be rigorously evaluated after their implementation, adjusted based on the evaluation results, and complemented by the private sector.

Although China's long-awaited and much-debated reform plan will likely be revealed soon, it is unlikely that China will implement the plan nationwide without first conducting pilot projects in selected provinces and cities. The overall theme of the reform seems to emphasize a stronger government role. For example, the government will divert more money from the central budget into the provision of public health services and universal basic medical services at a reasonable cost. At the March 2008 National People's Congress session, Premier Wen Jiabao pledged that his government would allocate ¥83.2 billion ($11.9 billion), up 25 percent from 2007, to support the healthcare sector.

Nevertheless, China is too big a country, and the healthcare demands of 1.3 billion people too diverse, for the public sector to act alone. After much debate, China's top policymakers now recognize the need for a public-private partnership to improve access to modern medicines and encourage the private sector to play a more active role. Now it is up to the leaders in both the public and private sectors to create a booming healthcare industry that can improve the health of all Chinese citizens.

Yuanli Liu (yuanliu@hsph.harvard.edu) is senior lecturer on International Health and director of the China Initiative, Harvard University School of Public Health. The author would like to thank Rachel Berlin, Frank Fan, Linlin Hu, and Jing Wu For their assistance

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