A Theoretical Analysis, Performance Evaluation, And Reform Solution on Health Care System in China|Sheng Hong



  • The market for healthcare features uncertainty, lack of price elasticity, and information asymmetric, besides other market characteristics.
  • The purpose of medical insurance is to eradicate uncertainty and bring about the utility of certainty by transforming the uncertainty of personal medical affairs into predictable risks through integration and professionalization.
  • People tend to “buy more” and “buy the expensive” as insurances lower the part of the medical expenses borne by the individuals, which in effect pushes up the prices of health care, and the demand for medical services and goods. The overall effect is an increase of health care expenditure.
  • Insurances pushes up 73% of the prices of China’s medical services and goods, leading to an over-expenditure of 21% of all the medical services and goods by consumers, which further increases the healthcare expenditure per capita to 115% of that without these insurances .
  • Even though insurances bring about an increase of welfare by 2.25% of the GDP, compared to the loss caused by it, a net loss of some44% of the GDP, that is some RMB361 billion, is caused by insurances.
  • By 2013, a total of some RMB45.7 billion has been wasted by the public healthcare system.
  • The managerial cost of healthcare institutions, i.e., expenditure by healthcare administrations and cost of managing the healthcare insurances, skyrocketed year on year, and reached RMB 35.9 billion in 2017.
  • Per capita medical expenses are rising, from 4.03% in 2008 to 5.2% in 2017. In 2017, the national total health expenditure accounted for 6.4% of GDP.
  • Therefore, it is not enough to criticize only the use of healthcare insurances. See below:

 Weighing the Gains and Losses of Insurance.   Unit: Percentage of GDP per capita (%)


  • Quality medical resources concentrate disproportionately in big cities and big hospitals, which causes insensible spatial allocation causing an overly high time cost and other indirect medical cost. In 2013, if we put together the overspent cost and time for local and cross-region healthcare services and goods, it equaled to a total waste of resources that priced some RMB445.2 billion a year.
  • The growth of labor costs for doctors is lower than that of the per capita GDP. The proportion of labor costs for doctors in per capita GDP fell from 11.7% in 2002 to 3.2% in 2017.
  • In an aggregate sense, the demand for healthcare increased 45 times from 1980 to 2017, while the number of health technical personnel only increased 64times. Demand surpassed supply by a large margin.
  • Average healthcare resources are distributed in a balanced manner across regions. It coincides with the resource allocation planning approach based on population taken by the Chinese government.
  • Quality healthcare resources are distributed in a very imbalanced term with more resources concentrated in administrative centre. And this situation is exacerbating.
  • Beijing is the “utmost unfair benefactor” of this distributional system of healthcare finance, while the “unfair victims” include provinces such as Henan, Anhui, Hebei, Hunan, Jiangxi, Guizhou, Guangxi and Shandong.
  • The unfairness index of the financial distribution system in the healthcare system is 0.335. According to our evaluation standard, this score is interpreted as intermediate.
  • Civil servants are the “utmost unfair benefactor” in the current healthcare financial distribution system, while the “unfair victims” include farmers, urban residents, and urban workers.
  • This research proposes the basic principles for institutional healthcare reform is taking the market institution as the basis, and government regulations as complement.
  1. To increase the self-pay ratio and its scope, to enlarge the function of the market;
  2. To facilitate the market competition for healthcare;
  3. To let the market make the price for healthcare services under the market mechanism;
  4. To let the price of medicines fluctuate when the market makes prices for healthcare services;
  5. To abandon compulsory social insurance and rely more on commercial insurance institutions;
  6. The government should subsidize the medicine fees for the poorest people.
  • The main measures proposed by this research include:
  1. Canceling the insurance covering out-patient medical services: the fee inflicted by out-patient medical treatment can be paid either by the patients or by the individual account;
  2. Canceling the threshold for insurance coverage and raise the self-pay ratio for in-patients to 70%;
  3. Setting up a national severe disease charity fund to subsidize those whose self-pay portion exceeds their yearly income’s 40%.
  • Estimated according to the model in this research, setting 2017 as the baseline, the proposal of this research should be able to hold back a 62% increase of the price, which would save RMB 1404.9 billion, 1.7% of the GDP.
  • It would hold back some 5% of healthcare overuse, which would save up to RMB 397 billion, about 0.48% of the GDP.
  • Some RMB1537 per person would be saved for healthcare, about 2.6% of GDP per capita, which rounds up to some RMB2036.4 billion nationwide.
  • Those whose self-pay proportion exceeds their yearly income’s 40% constitute about 2.45% of the total population. If a severe disease fund is set up with a scale of about RMB 250 billion, it will be only about 0.3% of the GDP.
  • If the monopoly is eliminated and competition is promoted, that is the slope of the supply function, e, changes from 0.47 to 2, then everyone would be able to save about RMB 127 for healthcare, a total RMB152.3 billion nationwide.
  • Healthcare resources will be better allocated in space. If the distance and waiting time for medical treatment is shortened by half, that is the 4 hours needed for local treatment is shortened to 2 hours, then a total value of time amounting to about RMB 266.2billion will be saved; if the distance and waiting time for cross region treatment is shortened from 12.5 days to 6days and 6 hours, according to data of 2013, when a total value of time amounting to about RMB 29 billion will be saved. Putting them together, a total waste of time estimated for the value of RMB 295.2 billion will be avoided.
  • Canceling out-patient (small illness) insurance would reduce 2/3 of the current insurance-related managerial operations, saving a total of RMB23.9 billion according to the current administrative fees of insurance agencies that is RMB 35.9 billion.
  • When the increase of healthcare expenditures is contained, a huge amount of resources are saved, which will bring back the advantages of insurances. See blow.

Situation after the Reform            Unit: Percentage of GDP per capita (%)


  • In summary, this reform proposal will reduceper capita medical expenses from 5.2% to 2.6% of the per capita GDP, a decrease of 49.9%.
  • This reform proposal will also reduce the per capita medical expenses originally covered by insurance from 3.1% to 0.4% of the per capita GDP, a decrease of 87%.
  • If it is shown by the deduction of healthcare insurance fees for urban workers, the deduction from their monthly wage will be decreased from 9.5% to 1.2% of their monthly wage, which would also lower the burden for enterprises.
  • Even though the self-pay fees account for a higher ratio than before, as the healthcare expenditure decreased in general, patients pay 112% of that they paid for their medical treatments before the reform.

Author: flourishflood

Economist, Confucianist

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