Privatization of the medical market in socialist China: A historical approach

Health

Policy 27 (1994) 157-174

Privatization of the medical market in socialist China: A historical approach Gordon Liu* a, Xingzhu Liu b, Qingyue Mengb “Harvard University School of Public Health, 1350 Massachusetts Avenue, Rm 719, Cambridge, MA 02138. USA bShandong Medical University. Jinan. Shandong, People’s Republic of China

(Accepted

3 November

1993)

Abstract A Socialist-Market Economy was defined as a target model for China’s economic reform by China’s 14th National Congress in 1992. Such an innovative change in China’s more than a decade long economic reform has brought both new challenges and opportunities for its health care system reform as it moves toward a market determination mechanism and involvement of the private sector. A better understanding of the nature and history of the Chinese private medical market and its dynamic socio-economic environment would certainly shed a great deal of light onto the accomplishments of the health care reform. Research in this area, however, is almost non-existent at either national or international levels. The present study attempts to fill this gap by providing a comprehensive assessment of both historical and prospective development of the Chinese private medical market. Three stages are defined to present the tortuous development of this market over the last four decades, coupled with our critiques of the underlying merits and problems. Predictions are also made on the future perspective of the private market, and its possible impact and role in shaping the reform of the entire Chinese health care system. The government’s role as well as its future strategy to cope with the issues surrounding Chinese health care reform are also summarized. The study concludes with five health policy recommendations aimed at facilitating China’s health care reform via more market-oriented determination of resources allocation, production. and distribution, coupled with promotion of the private sector’s involvement while minimizing its potential adverse side effects. Key words: Chinese

Privatization;

health care system; Economic CMSs; Ownership; Transformation;

* Corresponding University

author, Department of Pharmaceutical of Southern California, 1985 Zonal Avenue,

0168~8510/94/$07.00 0 1994 Elsevier Science Ireland SSDI 0 168-85 IO(93)00605-Z

reform; Market competition Medical practices Economics Los Angeles

and Policy. School CA 90033. USA.

Ltd. All rights reserved

mechanism:

of Pharmacy.

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1. Introduction While China’s market-oriented economic reform was launched more than a decade ago, the major role of a market competition mechanism in development of the socialist economy had not been officially recognized or nationally legalized until the 14th National Congress in 1992. In this Congress, China laid out its economic reform target model characterized as a so-called socialist-market economy which identifies market competition, as opposed to its formerly central planning, as a primary mechanism of determining its allocation of resources, production, and distribution. It also accepts and encourages the involvement of the private sector. Such an innovative progress, in the course of China’s economic reform, has had significant impact on its health care system, bringing about new challenges and opportunities: Rapid increases in demand for better-quality care induced by rapid rising income; changes in demand for more medically complex and costly care due to the Chinese health transition; financial decentralization, requirement of self-recovery and cost-effectiveness, and the reduction of scarce public resources allocated to public health institutions; and introduction of a market competition mechanism and involvement of the private sector.

To meet all these challenges, one of the crucial questions is how and to what extent the current Chinese health care system (with majorities of state-owned and statemanaged entities) should and could be reformed. In essence, the market-oriented reform in socialist China could bring about two broad transformations from the traditional state-owned and state-managed model to: (1) a system with primary stateowned entities but operated via a market competition mechanism; or (2) a system with a large proportion of private and semi-private (through contracting, leasing, or joint-stock holding) entities operated via a market competition mechanism. Both possibilities would confront with substantial tradeoffs. On the one hand, in contrast to the ‘Big Pot’ policy, introduction of a market competition mechanism driven by demand and supply forces is believed to have more efficient allocation of resources, production, and distribution. Such a potential gain in efficiency has been recognized as one of the most vital conditions to sustain and accelerate China’s economic growth. On the other hand, the gain in efficiency seems inevitably to be at the expense of equity. As the Chinese government often claims, during the course of this reform, some people will be encouraged to become rich before others. In addition, other social benefits also tend to be redistributed to favor the rich. Being conventionally against the nature of socialism that China had adopted firmly for more than four decades, the notions of uneven income distribution and privatization may be politically or ethically unacceptable. Thus, a substantial amount of the conflicts associated with the transformation from the formerly public-shared system with high equity to a model with substantial differentials in income and social benefits should not be underestimated. Such conflicts appear to be even more fierce in the case of health care issues. This is partly because health care has been often argued, as a social welfare or civil primary right, to be distinguished from almost all other commodities by both policy makers and researchers in China. Even at international level, debates about the nature of health care regarding access and equity are still continu-

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ing (l-51. To enhance the continuation and success of the on-going health care reform, we believe that a better understanding of the nature and historical development of the Chinese private medical market in China will shed vital light on these issues. Since the Chinese medical market has been long dominated by a state-owned and state-managed model for more than four decades, research in the area of the private market was prohibited or discouraged. Also, because information about the private sector was not released, particularly to foreign bodies until very recently, such research is almost non-existent even at the international level. For instance, a popular misconception internationally is that socialist China never had a private medical market. In fact, the privatization of the medical market, as part of the entire health care system, has been tortuously developed in China. Thus, the motivation of this paper is to fill such a gap of literature by providing a comprehensive assessment of both historical and prospective development of the Chinese private medical market. We also intend to briefly address the government’s strategic plans and roles in coping with the underlying issues under the health care reform, plus our policy recommendations and concluding remarks. This paper is organized as follows. The following section portrays the history of the private medical market in three stages: first period - shrinking; second period - eradication; and third period - restoration and expansion. Section III provides our view on the future trend of the private market and its policy implications. The last section contains our brief concluding remarks and policy recommendations for Chinese health care reform. 2. The historical perspectives of the Chinese private medical market The historical development of the Chinese private medical market can be divided into three periods. The first period, characterized by gradual shrinking of the market, was from the foundation of the People’s Republic of China in 1949 to the beginning of the Cultural Revolution launched by Mao in 1966. The second period covered the period of the IO-year Cultural Revolution during which the market was almost entirely eradicated. The third period started in the late 1970s when the private market began to be restored and expanded. 2.1. Stage I -- shrinking period Before the foundation of the People’s Republic of China in 1949, the health care sector in China was primarily private-based. In 1947, for example, in the urban areas there were about 2570 hospitals and 65 800 beds, of which 60% belonged to private hospitals [6]. Although there are no official historical statistics available on the number of clinics, it is estimated that almost all of the clinics in the urban areas were individual private practices. There were no formal health care facilities in the rural areas before 1949. Individual private doctors, most of whom engaged in traditional Chinese medicine, were the only providers of health care services at township and village levels [7]. Socialism’s ideal goal, defined by its theorists, was to establish a perfectly publicowned society with need-based distribution of resources and products. Thus, as soon

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as the socialist system was established, the Chinese Communist government began to transfer the previous private ownership into public ownership. For several years after 1949, the foreign enterprises were redeemed by Chinese government; private capital was confiscated by the state; private industries were bought out by the state; land in the rural areas was confiscated from the landlord class by the local government and then redistributed to rural collectives. In general, the system of private ownership was destroyed and replaced by the newly formed public ownership. According to Bo [8], while the market share of private industry was 63% in 1949, by 1956 it was reduced to 0.04%; the total products made by private business were reduced to less than 0.1% of the gross national product during the same period. Such a radical change in the political and economic policies had a remarkable impact on the ownership of the health care sector. From 1949 to 1956, all private hospitals, including 243 private mission hospitals, were transferred into public ones [6]. Taking Shanghai as an example, the beds in private hospitals in 1950 accounted for 60% of the total number of hospital beds; by 1956, however, the proportion was reduced to 11%; and after 1956 private hospital beds were almost non-existent, according to the statistics released by the Shanghai Bureau of Public Health [9]. Doctors, engaged in individual private practices in urban areas, were also gradually recruited into the public health care facilities, and the number of private doctors decreased accordingly, though they continued to exist until 1966 when the Cultural Revolution was launched. Table 1 shows the number of health manpower between 1951 and 1965 in Shanghai. The table indicates that not only did the relative proportion of individual doctors decrease, the absolute number was reduced as well. In 1950, the number of private doctors in Shanghai was 10 855, which accounted for 56.5% of the total, while in 1965 the number declined to about 1514 which was only about 2.3% of the total. By 1966, the number of individual doctors engaged in private practices was reduced to zero. Other urban areas of the country also experienced similar changes.

Table I The Number

of Health

Manpower

in Shanghai

(1951-1965)

Year

Total

Private

Percent

1950 1951

19 197 23 828

IO 855 10904

56.5 45.8

1952 1953 1954 1955 1956 1958 1960 1962 1964 1965 1966

27 32 34 38 40 50 53 55 62 65 68

9 404 1952 6 768 7 404 2 360 2 820 I 532 I 739 I 505 1514 0

33.9 24.5 19.4 19.4 5.8 5.5 2.9 3.2 2.4 2.3 0

Source: Shanghai

Bureau

712 398 820 246 379 943 473 761 994 256 325 of Public Health

191.

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By 1949, China had a total of nearly 276 000 doctors of traditional medicine and 38 000 doctors of Western medicine [lo]. Throughout the rural areas, there were approximately 30 000 doctors, most of whom were engaged in individual private practices [ 111. At the time of the movement to create rural cooperatives in 1956 and the movement of the People’s Commune in 1958, most individual doctors were centralized to medical cooperatives or health centers at township or commune levels. By the end of the 1950s there were few rural doctors engaged in individual private practices [7]. Instead, ‘barefoot doctors’, who were health workers and on average had received 1 year or less of training working at the village collective clinics, rapidly took over the delivery of medical services in rural areas. Liu and Wang [12] estimate that before the Cultural Revolution, China had more than one million such barefoot doctors working at the grass-root level of China’s rural areas. 2.2. Stage II - eradication period Mao launched the Cultural Revolution in 1966. It lasted for about a decade. The claimed objective of the Cultural Revolution was to prevent and light against revisionism, defined as an anti-Marxist ideological trend away from socialism toward capitalism. In this period, the residual private economy in China was criticized as ‘the tail of capitalism’ and accordingly had to be cut down. Under the leadership of the Chinese Communist Party, the capitalists, landlords, and the majority of intellectuals and individuals with foreign relations, were publicly denounced. All the private enterprises were closed down and self-employed production was prohibited. These policies were based on an ideology of ‘politics first’, meaning the domination of politics over every aspect of the society, including the production and economic development. Likewise, the health sector also had to follow the same policy. In order to transfer the original multi-component health sector into a purely public ownership, the remaining individual private doctors were either centralized to public institutions or prohibited from practicing. By the beginning of the Cultural Revolution in 1966, private health facilities and individually private practices were completely eradicated 1131.

Although one may think that this drastic reduction and shrinkage of the private medical market had created a shortage of health care services, just the opposite occurred. There are two distinct reasons why this was the case. First, along with the transformation of ownership from private to public entities, public facilities expanded rapidly. The total number of health workers and public beds did not decrease but rather increased markedly. According to the yearbook statistics prepared by the Chinese Ministry of Public Health [14], the total number of China’s health manpower in 1975 (2 593 517) was nearly live times that of 1949 (541 240). Meanwhile, the total number of hospital beds in 1975 (1 598 232) was 20 times that of 1949 (80 000). Furthermore, the rate of increase in total number of beds and health workers exceeded the rate of the population growth. As a consequence, the number of beds and health workers per thousand population increased from 0.15 to 1.74 and from 0.97 to 2.24, respectively [ 151. Second, the increase in demand did not exceed the increase in supply of services. This was partially because fees were charged in public hospitals to cover the costs,

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while people’s ability to pay out of pocket for health services was inordinately low due to the severe damages to the economy caused by several natural and man-made disasters, especially the Cultural Revolution. Several senior health officials who had long been working on hospital policy in the provincial department of public health recalled that serious service shortages did not occur until the end of the 1970s when the economic reform started. 2.3. Stage IZZ- restoration period At the end of the 197Os, China launched its economic reform aimed at boosting its economic growth. This reform called for a wide range of innovative changes in China’s economic system (yet such a reform has not occurred in its political field). With the objectives of improving efficiency in resources allocation, production, and distribution, China’s economic reform began with the reformulation of its formerly centralized homogeneous economy toward a decentralized market-guided model with multiple components. The most dramatic change prompted by the economic reform took place first in the rural economy as the ‘Responsibility System of Household Production’ was introduced into the commune-based agricultural production system. Under the new policies, arable land was redistributed among the peasants according to the size of the household; a given amount of tax per unit of land was paid to the government (with households keeping the remainder); and households assumed sole responsibility for their gains and losses. The introduction of the responsibility system soon resulted in the replacement of the commune-based production system by the individual-based production system. These changes in the rural economic production system brought about several significant consequences to the rural health care system. Most notably were the rapid collapse of the brigade cooperative medical stations (CMSs), serving as the base of the pyramid of the three-tier rural health care system [lo], and the progressive restoring of the private medical enterprises. Several factors may be identified to give rise to these transformations. First, the most general accepted reason for the fall of the CMSs may be the collapse of their financial base as the former collective economy of commune structure was dissolved. Before the reform, almost every village had at least one CMS clinic station. By the late 198Os, however, only 5% rural residents were covered by CMSs [16]. This was mainly because the CMSs were primarily financed through a cooperative health insurance and brigade welfare fund by the previous collective economy, with occasional subsidies from commune or county government in the case of a deficit [10,17]. Under the individual-based economy, natural villages, replacing the former brigades and production teams, were no longer able to finance the CMSs. Collection of such insurance funds from individuals was extremely difficult since brigade members were less interested in participating in CMSs on a voluntary basis as they could afford for better quality care at higher health facilities as their income increased. The second important force driving the changing of the system was the unfavorable income distribution between barefoot doctors and other more profitable businesses. Barefoot doctors, being previously paid by the work point system at a comparable level with others, was placed in a financially inferior position due to the

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financial crises of CMSs. Barefoot doctors at CMSs, being previously a very respectable career, then tended to give up their medical practices at CMSs for more profitable businesses. Consequently, two outcomes were inevitable: the total rural health manpower declined drastically, and a large number of CMSs had to be contracted or leased out for village doctors to run at a fee-for-service basis. Studies by Young [lo] show that the number of barefoot doctors fell from a peak of 1.6 million in 1975 to 1.28 million in 1986. For the first 4 years of the rural reform, the total number of such health manpower decreased by 308 010, or about 20% [ 11,151. In some areas where peasants’ demand for village health care services was relatively strong, most of these stations then were contracted or leased out to rural doctors who could profitably maintain practices on a basis of fee-for-service. These village stations, incidently, were run with a variety of management and reimbursement approaches. The end result was that these rural medical stations, based on either contract or lease arrangement with villages. were virtually functioning as private enterprises with an incentive tie between revenues and performances. As Table 2 shows, as early as in 1984, more than 30% of the former CMSs were rearranged to privately owned health stations, and by the end of the 1980s the majority of the rural medical stations had switched over to private practices [3]. A third extraordinary effect of the economic reform was the rapid increase in peasants’ disposable income. According to the statistics provided by the Shandong Economic Center [19], the income of the rural villagers doubled in the first 3 years of the reform. The increased income for peasants made it feasible for them to seek higher quality health care, usually at tertiary health facilities such as county and city hospitals located in urban areas. A number of surveys showed that almost 20% of villagers tended to forsake the rural health units and preferred to receive treatment in county hospitals or township health centers over their village health stations [20,21]. The increases in demand for tertiary care induced by farmers’ rising income, in turn, created a growing pressure on urban hospitals. Following the income elasticity estimated by Liu and Wang [12], the increase in income resulted in an increase of nearly 50- 100% for the demand for urban hospital visits. Subsequently, a severe shortage of health care services appeared in the higher level of health facilities. A study by Zhou et al. [22] showed that in 1984 the average waiting time for an outpatient visit to a provincial hospital would take a day, and the waiting time for inpatient hospitalization was around 80 days, double that before the 1980s. In

Table 2 The ownership distribution

of rural brigade health stations in China (1984)

Type of ownership

Number

Percent

Total number of brigade health stations

707 I68

100.0

Number

of stations run by the collective economy

360 079

50.9

Number

of stations run/owned

222 771

31.5

Number

of stations jointly

by private doctor

run by the collective and village

71 305

IO.0

23 967

3.4

doctors Number

of stations run by the township hospitals

Source: Adapted

from Henderson

[18].

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164

response to the increase in demand for health care, local government was forced to further allocate more scarce resources to the public health facilities. Unfortunately, but not surprisingly, the government’s financial support for expanding public health care supply could not meet the rapidly increasing demand. This government failure was partly due to the increasing demand for more resources by other sectors such as education, energy, and transportation sectors. The result, as was the case when supply fell far short of demand, was that the market forces calling for greater supply of health care began pushing very hard for the re-emergence of the private sector. Finally, and perhaps most importantly, government policies regarding decentralization and permitting privatization at small-scale enterprise level played a last critical role for the private sector to re-emerge. Soon after the success of rural economic reform, a strong movement calling for urban economic reform in the mid 1980s was undertaken. The primary purpose of the urban reform was to break down the ‘Big Pot’ policy, which was often blamed as one of the key barriers in gaining production efficiency. Under this policy, the state monopoly on the production, purchase, and sale of goods was abolished; public factories and commercial units were permitted to contract out for management; and permission was given for the establishment of private enterprises (individually and collectively) and the practices of self-employed work. Under these favorable political and economic conditions, the private medical market began to be restored in the early 1980s. In 1980, the State Council approved the ‘Report on the Permission of Private Medical Practices’ submitted by the Ministry of Public Health. Since then private practices at a small-scale level were again made legal. In the rural areas, more and more village health workers transferred to individual private practices along with the collapse of CMSs and the timely government policy permitting the private practices of health care. By the end of 1982, only 5% of the existing village CMSs were arranged for individual private practices; one year later, 25% of them were practicing on a private basis [ 11,151. By the end of the 1990s this proportion increased to 47.5% [23]. In Hunan province, according to a statistical report [24], the number of individual private practitioners was 8386 in 1987, 9678 in 1988, 10 508 in 1989, and 12 104 in 1990. Individual private practices were also restored in urban areas in the 198Os,but the pace was not as rapid as in the rural areas. Taking Shanghai City as an example,

Table 3 The number of health workers engaged in individual private practices in a village in China (1983-1990)

1983 1984 1986 1987 1988 1989 1990

Total health workers

Private practices

Percent

4 090 030 4213646 4495919 4 564 122 4 677 512 4 786 959 4906201

49 080 80 223 132 424 I38 334 157 985 165 966 162 031

1.2 1.9 3.0 3.0 3.4 3.5 3.3

Sources: Ministry of Public Health [ 1I, 14,15,23,25,26].

G. Liu et al. /Health Policy 27 (1994) Table 4 The number

of village clinics in China

157-174

165

(1982-1990)

Total clinics

Private

1983 1984

707 933 707 168

I986 1987 1988 1989 1990

795 807 806 820 803

221 222 349 363 369 396 381

Sources:

Ministry

963 844 497 798 956

of Public Health

016 771 792 285 209 43 1 844

clinics

Percent

(‘X)

31.2 31.5 43.9 44.9 45.8 48.3 47.5

[ 1 I. 14.15.23,25.26]

only 0.37”/u of health workers were in private practices in 198 1, by 1990, the number had not exceeded 0.7% [24]. According to the Chinese Yearbook of Health from 1984 to 1991, 1.2% of health workers above the village level were practicing private care in 1983; by 1990 this number was about 3.3%. In addition, differing from those at the village level, private health workers in urban areas are largely drawn from the present health manpower (60%) working at public health institutions and from the retired doctors (40%) (Ministry of Public Health 1987). Table 3 summarizes the number of private health workers above the village level and Table 4 shows the number of private village clinics from 1983 to 1991. Based on Tables 3 and 4, if there were 1.7 health workers in each village clinic as estimated by Xia [24], there would be 649 135 health workers at the private village clinics in 1990. Since there were 162 031 private health workers above village level (Table 3), these two together would add up to 811 166, accounting for nearly 14% of the total health care manpower in China. By and large, the productivity of the private sector tends to be higher than that of the public sector in terms of unit quantity of care provided. Based upon several studies by the Ministry of Public Health [26], Zheng [27]. and Gu [28], on average each private doctor provides 6-8 outpatient visits per day. In contrast, a clinical doctor in public hospitals only provides half of that amount. However, the difference in quality of care between private and public clinics cannot be rigorously assessed here due to the lack of sufficient data in this study, although a subjective judgement is often given in favour of public providers for their comparative advantage of medical training, technology, and equipment facilities. Private hospitals also emerged in the 1980s. Almost all of them are located in urban areas. For instance, in Shanghai 4 private hospitals appeared in 1984. By 1989. there were 15 private hospitals with about 500 beds. Beijing, the capital of China, had 74 private hospitals in 1985 [26]. For the entire nation, in 1990 there were about 110 private hospitals with 4127 beds’. ‘Please 2. Since in their couldn’t to lack

note that the number of health manpower in private hospitals is included in the statistics of Table government policy allows public doctors to have private practices in private hospitals and clinics spare time, many full-time public doctors are in fact also part-time private doctors. However. we make an adjustment to convert the part-time private doctors into the full-time equivalent due of the relevant data source.

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3. Fhspective trend of the Chinese private medical market If we consider the market oriented economic reform launched at the end of the 1970s as an initial driving force prompting the expansion of the private market, the legal recognition and acceptance of market competition as a primary mechanism to govern the functioning of China’s economic system at its 14th National Congress in 1992 should be considered a far stronger impetus to boost both the expansion scale and pace of the private medical markets. A document of the Central Committee of the Communist Party announced that a socialist-market economy, as opposed to the former pure socialist economy, is the goal of China’s economic reform. This declaration removes a great deal of potential theoretical barriers which could otherwise have critically blocked or disturbed the reform. In particular, several policy messages have been carried out: Except those large-scale public enterprises engaged in producing the state’s vital products (e.g., steel, transportation, communication, and energy industries), state-owned entities’ decision-making in resources mobilization, production, and management have been decentralized down to the firm level through market competition; Small-scale state-owned firms are allowed to acquire capitals through private joint-stock holdings or partnership. In fact, during the first year of this policy adoption, most small and medium state enterprises were contracted or leased out for management; Private investments are highly encouraged with favorable policies such as tax deductibles. Under this policy, private industries increased by 28% and their capita1 increased by 79.8% [30]; The pricing of many primary commodities including grain, cooking oil, and household energy were released from government control to the determination of market forces. Likewise, the private medical market has also been well developed since its restoration in the early 1980s and its development has been rapidly accelerating over the last two years. This expansion can be expected to continue at an increasing rate in the future as long as the current political and economic conditions are maintained. Although no official statistics of 1992 are available, we expect a continued acceleration of privatization of the health care market conditional on the reforms of medical education and development of the new multi-ownership market. China’s medical education system has long been owned by the state. Before 1991, the enrollment and job placement of medical students were completely planned by governments and authorities at various levels. Also, educational costs were fully covered by the government. With the implementation of socialist-market economy policy in 1992, medical schools are allowed to enroll additional students on a basis of privately paid tuition and fees without any subsidies from the government. Moreover, these students have to search for jobs on their own after graduation. Such a market-oriented change in medical education creates a very strong incentive for those self-paying graduates to seek practices on a private basis. According to un-

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published statistics from the Shangdong province, in 1992 there were about 3000 self-paying medical students enrolled, 40% of the total medical students enrolled in that year. It is highly expected that the proportion of self-paying students will be increasing rapidly. Recently, the government also urged the higher educational institutions, including medical colleges, to reform their previous state-planning job placement model toward a self-searching approach. We believe these dynamic changes in college education will produce a large ‘reserve army’ of private health manpower several years from now. Another form of privatization is the transformation of currently public-owned hospitals into joint-stock or partnership models. As indicated in the last section, one of the major forces driving this transformation is the inability of the government to adequately finance public providers to meet the increasing demand for high-quality health services. Moreover, the growing pressure on public providers is reinforced by the government’s financial decentralization policies which require most health institutions to earn sufftcient revenues to cover operational costs and some capital costs aimed at increasing resource mobilization and efficiency [4]. Thus, private financing tends to be an increasingly important alternative source for most public hospitals to expand and improve their financial position. Joint-stock among the hospital’s own staff becomes a fairly popular type of private financing. Currently, the prominent hospital stock holders are still the hospital’s own staff members. A ceiling is often given for each individual stock holder, and dividends (if any) are distributed to the stock holders at the end of the fiscal year. Of course, like any other stock holder, hospital stock holders would also bear the risk for any economic loss with the hospital’s operation. Some hospitals also try to acquire a certain amount of external funds from their adjacent enterprises via stock holdings. However, the most Chinese hospital joint stocks are still circulated internally and are as yet not publicly marketable [31-331. Partnership-type hospitals have also been developing in recent years. Some are joint ventures among native people (most of whom are medical doctors). Others, called ‘native-foreign hospitals’, refer to those joint-venture hospitals between native people and foreigners. The report by Zhang [32] shows that in Shanghai City, 16 native-foreign hospitals have been built over the last two years with a total investment of about $30 million. While joint-stock and partnership hospitals are scattered all over the country, no statistics for the whole nation are available at this time. Nevertheless, evidence reveals that not only are new private hospitals developing, but the ownership of public hospitals is also changing toward market competition and privatization. Historical experience tells us that privatization of medical markets in China is highly determined by political, social, and economic policies, in addition to the demand-pull forces. At present the Chinese economy is officially defined as a socialist market economy with two distinguished features: dominating public ownership (for the sake of socialism) and market competition promotion (for the sake of efticiency). To a large extent, whether the dual goals are or can be made compatible is still under question (at least for now) and certainly deserve a great deal of future research efforts. For the time being, however, given the current political and economic conditions

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that we can foresee, our general expectation is that the Chinese health care sector will be likely to evolve from its formerly homogeneous public ownership model to a more diversified model with multi-components in both ownership and operation. This expectation is based upon four major observations: (1) Increased demand induced by rising income - given China’s steady GDP real growth rate of 8.7% and nominal rate of more than 10% over the past decade, the rising income will continue to induce higher demand for better quality and more individualized services [4]; (2) Increased demand induced by the health transition - demographic effect (i.e., population growth and aging), epidemiological effect (i.e., changes in agespecific rates of different diseases and in consumption pattern of diet), and relative effect (relative declines in the rates of mortality and morbidity from infectious diseases but relative increase in the rates of mortality and morbidity from chronic disease). These three major components of the Chinese health transition have been making the demand for more medically complex and costly care services stronger than ever before [3,4]; (3) Relative declines in government budgetary support and public subsidies for public health providers - due partly to the effects of financial decentralization and self-recovery policies. According to the World Bank statistics [4], the public subsidies, as a share of the total health spending, sharply declined from 30% in 1980 to about 19% in 1988, while during the same period private payment increased rapidly from a 14% share of the total spending in 1980 to 36% in 1988; (4) A number of important legislative measures have been implemented at different levels of authority to permit and, in some areas, even encourage private medical practices [34]. Government controls over pricing, production, distribution and marketing have been gradually released to allow a proliferation of private enterprises and the re-emergence of free-market competition [3]. As indicated earlier, the privatization of the medical market evolves in two basic forms: one is the emergence of new private entrants, and the other is the progressive transformation from formerly public-owned entities to either private-owned or semi private-owned enterprises via a variety of means such as joint-stock, partnership, leasing, or contracting. Again, while the privatization trend of the Chinese medical market seems to be irreversible, its pace and scale are still critically conditional upon the dynamics of health policy, macroeconomic policy, and government regulatory legislation regarding ownership and market competition. Lastly, it must be pointed out that while China’s economic reform has led to much positive change in the existing health care system, a number of potential threats to the health care system could arise during the course of privatization, financial decentralization, the promotion of market competition, increased efficiency, and costeffectiveness. Several of these potential problems could be briefly summarized as follows: (1)

Inequality: the disparity of income levels and distribution of wealth, as the inevitable outcomes of a market economy, may lead to a substantial gap of reaching

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(2)

(3)

(4)

(5)

169

health care services, and thus the health status between rich and poor, between urban and rural areas, and across different geographic regions; Crowding-out effect on preventive care: the market-guided incentives of maximizing profits from medical practicing naturally tend to lead providers to supply curative care (more profitable) over preventive care (less profitable). Yet. preventive care has constantly shown to be both cost-effective and efficient in caring for a large population such as China. A world-wide recognized evidence is the remarkable achievement in population health status (e.g., the IMR decreased from more than 200/1000 before 1949 to 34.7/1000 in 1982) during China’s ‘first health care revolution’ beginning in 1949 [4,35]; Induced demand and cost escalation: the incentives of maximizing profits may lead to commodilication of medical care and thus induced demand for unnecessary or costly care. This issue is particularly significant in the areas where people are very unknowledgeable about health care. Furthermore, market-driven pricing tends to lead to a higher cost escalation than that under previous state control; Mis-alloction of health facilities: too many private health facilities may attempt to locate first in urban areas rather than in those remote rural areas where their services are most needed. In the short run, the problem of mis-allocation might be rather severe and may require more government intervention. In the long run, however, economic principles maintain that the market ‘invisible hand’ should be able to guide a rather rational allocation of resources under competitive market conditions [36]; Quality: the incentives of seeking profit through medical practice may lead to a deterioration in the quality of health care. Under poor management and less government regulation of the medical market, there might be a greater risk of deteriorating quality of care. The over-prescription of drugs, the practicing of unqualified doctors, and other medical abuses are all potential hazards threatening the quality of health care. Like in most other developing countries. many Chinese private medical practitioners are not well trained or formally educated. While some private providers are knowledgeable in certain specialized fields via self-learning or family inheritance, a considerable proportion of individual private practitioners, many of whom are not even licensed, are found to provide medically inferior services than that of public providers [2-5.10, 21,35,37,38].

4. Policy recommendations and concluding remarks In response to the new challenges and opportunities created by the newly modified economic reform scheme, a wide range of innovative changes in the health care sector are taking place. Rapidly increasing demand and inadequate public supply are the two major problems facing the Chinese health care market. On the one hand. people’s demand for higher quality health care continues to increase due primarily to rising incomes. In addition, the demand for more costly and medically complex care is also increasing due to health transition, as well as other secondary effects such as changes in consumer preference and relative changes in prices. On the other hand. public health care suppliers are suffering from external and internal problems. The

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external problems are due to the relative reduction of government subsidies and public scarce resources, self-recovery requirement for almost all recurrent costs and some capital costs, increasing inflation pressure on medical inputs, and increasing market competition for patients [39]. The internal problems refer to the increasing difficulties of retaining existing hospital medical staff and recruiting new medical graduates. One obvious reason for this is the relative low salaries paid by public hospitals as compared to private practices or other more profitable professions. In rural areas, the CMSs are almost nonexistent due to the collapse of the former collective economy as well as the decreasing demand for the lower quality care supplied [20,21]. As a consequence, the Chinese health care market has been increasingly running short of medical care services. Thus, it is a historical challenge for China to seek feasible alternative ways of providing and financing additional health care to meet the increasing demand for higher quality, more complex, and more diversified medical services. The present study suggests that growing private medical practices and the ownership transformation of existing public health institutions via joint-stock holdings or joint-ventures can play a major role in filling the gap between the increasing demand and the inadequate public supply for health care. In contrast to public providers, the private sector offers several unique merits: (1) It helps increase the access to primary care in the areas where government linancing of public health facilities is unable to supply adequate care for local residents. This contribution is particularly significant in poor rural areas since very few formal-trained physicians (with college medical education) would like to stay in the poor and remote rural areas; (2) Private practitioners tend to compete with public suppliers for Chinese traditional medicine in dealing with some very specialized, especially chronic, and rare cases such as bone-setting and maternal care to which public health institutions have relatively less comparative advantages; (3) Since private providers are guided by their own interests and their performances are directly tied to revenues, their motivation and resources utilization generally tend to be better and more efficient than their public counterparts. More importantly, one of their very competitive features is the long and flexible working schedules, especially for those practicing care at home. Such a flexible schedule of long working hours is quite important in those areas where few public providers are available; (4) Private practitioners are commonly considered to be better than their public counterparts concerning courtesy, respect, and attitude components of treatment, especially to rural patients [24,35]. According to a survey conducted in Guangzhou by Yuen [34], 79% of the people interviewed gave a ‘very good’ rating to private doctors’ attitude, 1lo/oabove average, 3”%average, and only 2”/u below average; (5) Since the entire medical education system is also in the transition period toward self-financing (privatization), the potential supply of health manpower seeking careers in private medical practices should be substantial. This is true partly because private practices are usually considered to be more profitable, efficient, and self-interest guided than working at public health institutions [35,40,41].

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Inevitably, privatization of the medical market could also produce a number of potential adverse side effects if it is under poor management and regulation. These potential problems include: (1) Disparity of incomes may widen the differentials in access to health care, and consequently in health status between poor and rich, and across regions; (2) Crowding-out effect on preventive care may jeopardize the remarkable achievements in population health by China’s ‘first health care revolution’ beginning in 1949 [4]; (3) Induced demand and cost escalation: with widespread loosening of state control over pricing, market competition guided by self-interest and profit maximization may possibly drive Chinese health care costs unacceptably high over the next decades; (4) Mis-allocation of health resources may be severe in the short run, since private practitioners, guided by self-interest, may attempt to first locate in urban areas rather than rural, poor, and remote areas in most need; (5) The quality of medical care could deteriorate as such abuses as the overprescription of drugs and the practicing of unqualified doctors become more widespread. (6) The current pricing mechanism in the private market is operating poorly. The price is not functioning as a device to allocate resources and adjust quantities demanded and supplied in medical market. In general, prices of private services tend to be far higher than those of public ones which are still closely regulated by the government. The present problem of over-utilization of public care services can be, in large part, attributed to this dual-pricing system. In regard to the above merits and problems with the private medical market in China, in general we tend to view favorably the reform of the Chinese health care system toward a market-oriented approach. Several specific health policy recommendations are made as follows:

(1) The government should maintain and further improve its current policies con-

(2)

(3)

cerning the development of private medical practices. In doing so, the most important step is to have relevant legislation enacted, and more importantly, is to ensure full implementation of the policies legislated at all levels (central, provincial, and local). Among others, implementation of the laws of patent, contract, and property right may be considered as top priorities. Such legislation policies should be aimed at improving efficiency of the entire health care system through market competition and involvement of the private sector; The overall direction of allocating scarce public health resources may be better made toward development of community, ambulatory and extended primary care facilities at relatively lower levels (county, township, and village), as opposed to relying on tertiary health facilities or a large hospital-based approach. In addition, more efforts should be directed to the prevention and treatment of chronic and noncommunicable diseases in accordance with the Chinese health transition [4]; To mitigate the crowding-out effects on preventive care under market competi-

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tion, the government should formulate policies to encourage greater private involvement in preventive care. It might also be practically feasible to have the government play a key role in providing preventive services while leaving curative services, to the most part, to market competition. Of course, like in most developed countries, the market for curative services should not be left to run under a perfectly competitive condition; rather, it should be well managed by public agencies; Policy instruments, such as taxation and subsidization plus a certain degree of government intervention should be designed to encourage health care providers, particularly private practitioners, to re-allocate their practices from urban to rural and remote areas. As a large country with 80% of its population residing in rural areas, rural health care is of great importance for the success of Chinese health care reform. This point is clearly highlighted as a top priority of China’s three strategic transitions for its future health care agenda, with emphases on preventive care as the second and on Chinese traditional medicine as the third, as declared by the Chinese Ministry of Public Health in 1992; Effective market regulations and management measures, as opposed to a strong government intervention, should be established regarding pricing and quality control to keep development of the Chinese private medical market on the right track. For instance, the government may help to collect price and quality information to provide to the public; have licensure rules or relevant laws for private practicing implemented, carefully monitored and examined on a regular basis for licensure renewal, coupled with a certain degree of reward or punishment. The establishment of some medical peer review agencies might also be worthy of consideration to enhance the technical quality control of the medical care market.

Finally, we propose some suggestions concerning financing of the Chinese health care system. Given the fact of Chinese population with almost 800 million rural residents, the health insurance (private and public) approach seems to be the most feasible and viable option for increasing resources availability (via risk pooling) to alleviate the substantial financial burden of ‘Reaching Health for All’ in China by the year 2000. A few health insurance experiments, e.g., the China-Rand health insurance study in Sichuan, have been deliberately carried out in China over the last decade and a great deal of positive evidence has also been obtained for the feasibility of having health insurance in rural areas of China [42,43]. It is also observed that a variety of small-scale private health insurance schemes have been emerged recently for curative, preventive, and MCH services in the relatively prosperous regions, particularly along the east coast areas. This observation sheds vital light onto the economic basis for increasing the possibilities of implementing various health insurance schemes as people’s income rapidly increases during the Chinese economic reform. Of course, one cannot overlook the problems and difficulties with implementing health insurance in China, particularly in rural areas, such as difficulties in fund collection, overspending, and poor management and lack of an effective monitoring system [43]. Thus, we urge researchers and policy makers to devote more effort to

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