Reforming China’s Healthcare System necessary for growth rebalancing

July 5, 2010

China’s healthcare system has been underfunded in the past years. 2009, the government announced a “big bang” reform. The changes are not only meant to cover 90% of the Chinese population with healthcare insurance schemes by 2011 but also to boost domestic demand and thereby rebalance China’s growth path. Even though reforms are a step into the right direction, many challenges remain.

The collapse in 1987 of the “iron rice bowl” system, which had provided social security for a large share of the population since 1949, is thought to be one of the reasons behind China’s high savings rate. In recent years, the Chinese government has sought to address the underfunded healthcare system and has set itself the target of providing universal, safe, affordable and effective basic healthcare by 2020 to reduce dependence on personal savings. This will have far-reaching consequences for China’s outlook and the rebalancing of the Chinese and the global economy as the extremely high savings rate in China (over 50% of GDP in 2005) might decline if people become less dependent on their savings for their medical care.

In healthcare spending, China ranks significantly below OECD countries and the other BRIC countries. While most countries spend 8-11% of GDP on healthcare, China’s spending is below 5%. Increasing healthcare expenditure is necessary in light of China’s ageing population and the one-child policy. The dependency ratio will worsen over time and drain personal disposable income if there is no additional help from the state. Moreover, as per capita income rises, people are increasingly confronted with “modern” diseases such as hypertension and diabetes and cancer which are exacerbated by the modern way of life. The prevalence of hypertension, for example, increased by over 400% between 1993 and 2008. Since 2002, obesity has increased by 14% and more than 6% of the population suffers from diabetes. 

Despite rapidly increasing incomes and strong economic growth, government spending on healthcare stayed constant over the past decade. This development is worrisome given constantly increasing life expectancy (and thus increased expected healthcare expenditures) and the rapid rise in medical costs since the early 2000s. The shortcomings of the healthcare system became patently obvious in 2003 with the outbreak of SARS. Recognising the untenable situation and the need to stimulate domestic demand, a healthcare “big bang” was announced in April 2009. The Chinese government announced plans to provide another RMB 850 bn between 2009 and 2011 to build 29,000 new municipal and 2,000 county-level hospitals, upgrade existing healthcare centres, invest in infrastructure and a new drug programme listing all refundable drugs. By 2011, over 90% of the population is to be covered by health insurance schemes and each citizen participating is to receive RMB 120 of insurance subsidy per year. These measures are in line with the objective to spread development to previously neglected rural inland provinces.

Reducing dependence on savings will likely raise household consumption expenditure and thereby boost domestic demand. That is a necessary precondition to the desired change in the Chinese growth strategy away from dependence on exports towards domestic demand. Studies show that a 1% of GDP increase in government expenditure equally distributed between pension, healthcare and education would result in a permanent 1.25% of GDP increase in the household consumption ratio (IMF WP/10/69). The increase in consumption could possibly be more evident in rural than in urban households as the former receive a smaller share of government spending while the latter account for 75% of household consumption (IMF WP/10/16).

Early outcomes of recent reforms have already revealed an improved quality of life, a significant increase in insurance coverage and a drastic decline in infant mortality from 37 children per 1000 births in 1990 to 18 in 2008. The government plans to increase the number of medical graduates, since low qualification of medical staff is among the main challenges facing healthcare facilities. Having more licensed doctors than nurses (see chart) hampers adequate provision of basic healthcare services and leaves hospitals in larger cities overcrowded. The additional training of nursing staff should ease this problem. 

Even though recent reforms have already improved conditions for many citizens; major challenges remain, especially in hospital financing. Soft budget constraints that grant the highest subsidies to the hospitals with the highest deficits led to over-prescription instead of prevention and insured patients paying higher drug prices than uninsured. In the future, all drugs on the drug list are to be reimbursed and prices are to be capped. However, as hospitals currently receive 90% of their funds from drug prescription, they will henceforth be unable to obtain sufficient financing. Either large allowances from the government or an increase in costs for treatment will be necessary. Local governments might also be reluctant to direct resources to a sector not immediately producing GDP growth or boosting employment.

Even though reforms address the lack of medical staff, there are not yet enough incentives to work in rural areas, as better pay, lifestyle and career prospects in urban areas attract young doctors. The new regulations will allow doctors to work in more than one facility such that they can cover rural as well as urban facilities. Taken together, recent reforms are a step in the right direction and have a good chance of further improving living conditions among a broad share of the Chinese population, while at the same time contributing to the desired macroeconomic goal of boosting domestic demand.