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Transformation of China's rural health care financing
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Soc. Sci. Med. Vol. 41, No. 8, pp. 1085-1093, 1995
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T R A N S F O R M A T I O N OF CHINA'S RURAL HEALTH CARE FINANCING Y U A N L I LIU, I W I L L I A M C. L. HSIAO, 1 Q I N G LI, 2 X I N G Z H U L I U 3 and M I N G H U I R E N 4 ~Harvard University School of Public Health, Program in Health Care Financing, 1350 Massachussets Avenue, Holyoke Center 726, Cambridge, MA 02138, U.S.A., 2Department of Health Economics, Training Center for Health Care Management, Beijing Medical University, Beijing, People's Republic of China, 3Department of Social Medicine, Shandong Medical University, Jinan, Shandong 250012, People's Republic of China and 4Department of Health Policy and Law, Ministry of Public Health, Beijing, People's Republic of China Abstract-In the late 1970s China launched its agricultural reforms which initiated a decade of continued economic growth and significant transformation of the Chinese society. The agricultural reforms altered the peasants' incentives, weakened community organization and lessened the central government's control over local communities. These changes largely caused the collapse of the widely acclaimed rural cooperative medical system in China. Consequently China experienced a decreased supply of rural health workers, increased burden of illnesses, disintegration of the three tier medical system, reduced primary health care, and an increased demand for hospital medical services. More than ten years have elapsed since China changed its agricultural economic system and China is still struggling to find an equitable, efficient and sustainable way of financing and organizing its rural health services. The Chinese experiences provided several important lessons for other nations: there is a need to understand the limits of the market forces and to redefine the role of the government in rural health care under a market economy; community participation in and control of local health financing schemes is essential in developing a sustainable rural health system; the rural health system needs to be dynamic, rather than static, to keep pace with changing demand and needs of the population. Key words--rural health care, China, transformation, financing
INTRODUCTION In China, about 800 million people live in rural areas. China's rural health care has undergone significant transformation during the past decade. The present study examines the driving forces for and consequences of major changes in China's rural health care financing, and explores important lessons that can be drawn from the Chinese experiences for other nations. In the late 1970s China inaugurated agricultural system reform which marked the beginning of a decade of continued economic growth and significant transformation of the Chinese society. Today, the economic success of the agricultural reforms cannot be seriously doubted. However, economic development is only part of the overall improvement in human welfare. Social development, including health care, is another part. In China, social sector development has not gone hand in hand with economic development, especially in rural health care. China achieved remarkable health improvement for its rural population before the reforms. The rural health care system, Cooperative Medical System (CMS), was characterized by its collective financing, prepayment and organization of health services through a three tier system. This community financ-
ing and organization model of health care was believed by many to have contributed in a significant way to ChinKs success in accomplishing its 'first health care revolution' by providing prevention and primary care to almost every Chinese and reduced infant mortality rate from about 200/1000 live births (1949) to 47/1000 live births (1973-1975), increased life expectancy from 35 to about 65 years [1-4]. Following the implementation of the agricultural reforms in the early 1980s, however, the C M S collapsed. China's rural health care financing went through profound transformation. How did the CMS, once a model for many developing countries, collapse in China? Is it a change for the better? What are the major issues facing China's rural health financing today? What major lessons can be learned from the Chinese experiences? This paper will address these questions, with the intention of drawing from the Chinese experiences some valuable lessons for other nations as well as for China. This paper is divided into three sections: the first section presents a descriptive analysis of the transformation of the Chinese rural health care financing its dramatic changes and the underlying causes; then, we will discuss about the current problems in the Chinese rural health care and the extent to which these problems are attributable to the inadequacies of
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its financing system. Finally we discuss the lessons from the Chinese experiences. CHINA'S RURAL HEALTH CARE FINANCING: CHANGES AND DRIVING FORCES
The System Prior to the Reform Before the 1980s agricultural reform, health services for China's rural population were organized and financed through the CMS which was an integrated part of the overall collective agriculture production system and social services. CMS organized rural health care into a three tier structure. The first tier comprised 'barefoot doctors' who provided both preventive and primary-care services including drugs. The barefoot doctors, like the peasants who worked on farming, received a certain number of work points for each working day in a health post. For more serious illnesses barefoot doctors referred patients to the second tier: township health centers which were collectively owned and operated by the township government. The medical workers at the health centers (most qualified of them are assistant doctors) received a modest salary funded by the subsidies from the government and revenues generated by the services they provided. Finally, the most seriously ill patients were referred to the third tier: county hospitals. In rare cases, the patient may be referred to an urban tertiary hospital. Under the CMS, village health stations, township health centers and county hospitals were integrated within the three tier system by a vertical administrative system. County hospitals and township health centers provided regular technical assistance and supervision to the lower level organizations. Financing of the CMS generally took the form of a pre-payment health plan. Most of the villages organized Cooperative Medical Funds with funding from three sources: (1) Premium assessment. Depending on the benefit structure of the plan and the local community's economic status, 0.5-2% of a peasant family's annual income (4-8 yuan) were to be paid to the Fund; (2) Collective Welfare Fund. According the State's guidelines, each village contributed a certain portion of its income from collective agricultural production or rural enterprises into a welfare fund; (3) Subsidies from the upper level governments. In most cases, this subsidy was used to compensate health workers and purchase of medical equipment. Gradually developed in the 1950s as a mutual assistance mechanism to establish access to basic drugs and primary health care [6], Cooperative Medical System had its rapid development during the 'cultural revolution' (1960s-1970s), when CMS was given political priority. Starting from 1965, as part
of the efforts to stabilize the socialist system and strengthen 'the proletarian class dictatorship', Mao, then the Chairman of the Chinese Communist Party, personally called on communes throughout the country to adopt the model of CMS. At the peak, 90% of the rural population were covered by the CMS schemes [7]. The rapid growth of CMS helped Chinese peasants to improve their access to primary health care and improve the integration of public health and medical services. Unfortunately, CMS collapsed almost over night, when China began its agricultural system reform in early 1980s. Perhaps unintentionally, the reform had 'thrown out the baby with the bath water'. A Decade of Transformation (1980s-1990s) The agricultural reform China's agricultural reform officially began with the Communist Party Plenum of December 1978, when the household-responsibility system was instituted in agriculture sector. The two principle components of China's rural reforms were the decollectivization of Chinese agricultural production and gradual moving the pricing and production of agricultural commodities toward a free market. Markets had existed before 1978 but were tightly controlled where government set prices and production quotas. With agricultural reform, about 80% of agricultural commodities were bought and sold in competitive markets in 1990 compared to 8% in 1978 [8]. Decollectivization happened more rapidly. By the end of 1983, the collective system of people's communes and the production teams had largely disappeared, replaced by each household farming its own leased land and retaining all the earnings. Agricultural production responded immediately and dramatically to the reforms. From 1978 to 1984, the growth rate of the Chinese agriculture in valueadded terms was five times what it had been over the previous two decades. Farm income and consumption grew even more rapidly [9]. Thus, the reforms were very successful in spurring agricultural output and improving efficiency. Major changes in China's rural health care after reform (1) Collapse of CMS. Following the agricultural reforms in the early 1980s, most CMS schemes collapsed. The vast majority of the rural population obtained their health services on a fee for service (FFS) basis rather than the previous prepaid basis. Table 1 shows the significant decrease of the number of villages covered by CMS schemes after the reforms. Most villages have dissolved their CMS because its main source of financing, the welfare fund supported by the collective farming income, had disappeared. Preventive services provided under CMS, financed out of central government and local welfare funds, were essentially free to the individual.
Transformation of China's rural health care Table 1. The percentage of villages with CMS (1958-1989) Year
% of villages with CMS
1958 1960 1962 1968 1976 1979 1981 1985 1987 1989
10.0 32.0 46.0 80.0 90.0 90.0 58.2 II.0 5.4 4.8
Source: 1958-1979 figures were estimated by Anhui Medical University, 1986. 1981-1989 data are provided by the MOPH.
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already overtaxed medical facilities at the county levels. (4) The increase of private medical practices. In 1982, only 5% of village health posts were privately owned practices. But by the end of the 1990's, this proportion increased to about 48% [14]. While these private health posts do render health care that people need, they operate with minimum supervision and also are profit driven. Consequently, studies found that these private practices overprescribed drugs, gave unnecessary injections and induced demand which resulted in cost escalation, as well as crowdingout preventive care [15].
Driving Forces for the Transformation Now preventive services are financed through several mechanisms: user fees, prepayments, and contributions of various levels of governments.
(2) Disintegration of the three tier medical system. Many barefoot doctors left the health profession with the introduction of the household production responsibility system. The agricultural reform improved the income derived from farming. Many barefoot doctors left health sector for full-time farming, particularly when they could no longer be compensated by the CMS for their health work. Some barelbot doctors, however, converted their health posts into private practices on a fee-for-service base. According to the published statistics [10], the total number of barefoot doctors in practice decreased from 1.8 million to 1.3 million between 1978 and 1985. The inter-connection and cooperation among different rural health facilities also weakened or lost after reforms. Under the CMS, village health stations, township health centers and county hospitals were closely interrelated to each other within the three tier system. County hospitals and township health centers provided regular technical assistance and supervision to the lower level organizations. An effective referral mechanism was built into the system. After collapse of CMS, these health care organizations became independent institutions. Often, they compete for patients in order to increase revenues [l l, 121.
(3) An increased demand for higher-quality medical care. Demand for medical care is directly related to income. Agricultural reforms in China prompted rapid economic development and increased peasants' income. In the prosperous communities, despite the availability of barefoot doctors, many peasants went directly to county hospitals for medical services. The peasants were willing to pay higher out-ofpocket costs to obtain what they believe is better services from more qualified medical staff. From 1982 to 1992, the annual visits to county hospitals and above increased from 1.223 billion to 1.439 billion, while the figure for township clinics decreased from 1.467 billion to 1.015 billion [13]. The shift in demand toward services rendered by better trained health workers has put additional pressure on the
Government's laissez-faire policy Although the changes in China's rural health financing were largely caused by the agricultural reform rather initiated by explicit government policy, the government could have intervened to minimize the undesirable social consequences. However, the Chinese government adopted a laissez-faire policy toward rural health care by default. Under the agricultural reform, the Chinese government continues to fund a large part of preventionprograms, investments for hospital beds and health manpower training. However, the government reduced its financial support for the recurrent costs of hospitals and clinics, especially the ones operated by collectives and local communities. As shown in Table 2, while the size of China's government health budget remained almost constant in terms of the percentage of the total government budget spent on health, public subsidies to the rural health care decreased drastically during a ten year period between 1978-1988. The government believed that hospitals and clinics should rely on user fees to finance their recurrent costs and that would force competition among health care providers which in turn would improve quality of services and operational efficiency. This laissez-faire policy toward rural health care left the rural population to finance and organize their Table 2. China's health budget and subsidies to rural health care (1978-1988) Year
Health budget*
% of total budget on health
Subsidies to C M S t
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988
2.2 2.6 3.0 3.2 3.7 4.1 4.8 5.4 6.4 6.4 7.1
2.0 2.0 2.4 2.9 3.2 3.2 3.1 2.9 2.7 2.5 2.6
39 34 26 24 29 28 29 25 28 25 22
*Billion yuan. tMillion yuan. Source: Du L. et al. Strategic studies of the Chinese health care financing, 199Z
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own primary care services at the village level. Most health posts became fee-for-service practices operated by unsupervised 'village doctors'. Patients received their services according to their ability to pay. The government didn't make any serious attempt to replace the CMS so the equitable and efficient method of financing and provision of health care under CMS could be retained.
Factors affecting the fall of CMS External forces: (a) Economic forces. The essential financial base of the CMS was the collective welfare fund. The communes and work brigades supervised the collection of welfare funds and CMS's operation. Under the new householdproduction responsibility system, the collective welfare fund largely disappeared and the power of the brigades to coordinate production and manage social services also ceased to exist. So in many places the once very effective rural administrative organizational structures have been weakened. Hence, the CMS also lost a key pillar of its administrative foundation. (b) Sociological changes. Along with changes in peasants' living standards, peasants' social cohesion and attitudes also changed. Once peasants were all members of the same commune where fortunes and risks were equally shared. Now they are independent producers and consumers who are supposed to look after their own interests. Therefore, the willingness to pay into a CMF, a mechanism for riskpooling and redistributing benefits between the rich and poor, between the healthy and sick, decreased. (c) PoliticalJbrces. Many policy decisions in China were driven by ideologies. Having just experienced the disastrous cultural revolution, all the 'glorious achievements' of the past political movements were questioned. In the post-Mao era many 'products of the cultural revolution', namely institutions established at the time, were abolished. CMS was labeled as such a product of the cultural revolution. Political pressures were created to disband CMS. In some areas where CMS had strong popular support, villages were forced to abandon the system, much to the dismay of the local people [ll]. Internal problems of the CMS. Economic, social and political factors were necessary, but may not be sufficient, conditions for the downfall of the CMS. Without its internal problems, perhaps CMS would not have dissolved so rapidly. Two major internal problems had plagued CMS" (a) Poor management. Since CMS was established in many communities as a political under-
taking, financial solvency and economic efficiency of the schemes were often ignored. The decision to collect funds was quite arbitrary and there was no technical base for premium assessment. Local cadres, serving as managers of the funds, often did not know how to manage the scheme effectively and efficiently. No explicit quality and cost control mechanism was built into the system. Most of the CMS schemes were organized at the village level, a very small risk-pooling base. In case of adverse selection and moral hazard problems, the small CMS fund were easily exhausted. As a result, many communities experienced financial instabilities with their CMS. (b) Corruption. Under CMS, many local cadres enjoyed preferential treatment by receiving expensive drugs and more favorable reimbursement of large medical bills. They received these greater benefits because they had the power to appoint and dismiss any health care workers or managers of the CMS funds. Past studies of CMS often cited corruption as the number one problem with the system [12]. The rise and fall of China's CMS has revealed its advantages as well as weaknesses. The government needs to take an important but appropriate role with regard to initiation, organization and management of the system. On one hand, the rapid development of CMS schemes could not have been possible without government's initiatives and support. On the other hand, many internal problems of the CMS schemes, such as corruption, are in part a result of the excessive government control. In addition, people at the local level were powerless in the decision making processes. One lesson of the Chinese CMS experience was the need to balance the role of the government's control and community participation in the CMS. A decade has passed since the inception of the economic reform and the collapse of the CMS. Are China's rural population better off without CMS? The next section will address the consequences of the collapse of CMS.
CHINA'S RURAL HEALTH FINANCING: PROBLEMS AND CHALLENGES
The major issue of health care financing in rural China is how to generate and allocate adequate resources to provide effective, equitable and affordable health services for a population of about 800 million. Therefore, any evaluative study on the Chinese rural health care financing would need to examine its impact on the rural health care system as a whole. It would be misleading to say that after reform the rural health care is a complete failure. The standard of living has risen rapidly in a majority of the rural communities. People now have improved housing,
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Table 3. The health expenditure in 1980 prices Items
1980
Total health expenditure (100 million yuan) % of health expenditure financed by out-of-pocket payments made by rural population % of health budget for the urban sector Source: Wei Y. China's health care financing, utilization and future strategies, 1991.
better food and cleaner water. The rural health care system is by no means a total disaster. All this can be used to explain the continued health improvement as measured by the increase of life expectancy and decline of infant mortality. However, the issue is: how much of the potential positive effects of the economic reform on health and health care could have been offset by the negative effects generated by the changes? In the following section we will identify some major problems faced by China's rural health care today. These problems and challenges with regard to access, equity, and efficiency may be direct or indirect results of the changes that have taken place in China's rural health care financing.
Access Affordability of health services (1) Rising medical costs and financial burden of illnesses. It was estimated that the average health spending in China has increased almost six times from 1978 to 1988 [17]. Table 3 shows that the financial burden of illnesses for the rural population had risen after the collapse of CMS. The relative higher medical costs restrained the medical service utilization and affected the living conditions of the rural people, especially the poor. (2) Poor health leads to poverty. After the collapse of CMS, many uninsured were exposed to the risk of catastrophic medical expenses. When an uninsured person becomes severely ill, this person must pay a large medical bill. According to a survey on 1013 poor households, 48.9% of the surveyed families cited illness of their family members as the reason for the poverty situation [19]. Controlling for the average income, it is found that the uninsured rural population has a significant higher risk of suffering from the illness-induced-poverty than their counterparts who are still covered by C M S [20].
Availability of health facilities The three tiered health care delivery system disintegrated with the collapse of CMS. Many barefoot doctors have left the health profession for fulltime farming; the number of village health posts decreased; and, the staff and beds of middle-level facilities were reduced. During the period from 1980-1988 the number of township clinic beds decreased from 775,413 to 726,124 and the number of health personnel working in these facilities also decreased from 1,037,543 to 870,355 [14]. It should be
132.00 23.90 41.36
1985
1989
233.40 307.00 33.40 46.00 50.00 48.07
noted that these changes were only partly related to the collapse of C M S and in certain areas, the decline of township clinics represents efforts to consolidate the system of service provision as a way to solve the quality and efficiency problems in the old system. However, for a majority of the rural communities where shortage of health facilities are commonplace, the decline of both village and township health facilities may exacerbate the existing access problems. More studies are needed to ascertain the actual impact of these changes.
Equity Inequality in health input (1) Urban-rural differentials. Studies carried out in the early 1980s documented that the urban per capita expenditure on health was about three times the rural level [22]. More recent studies found the gap has widened to a ratio of 5:1. As for government's health budget, between 1980 and 1989 the proportion of government health budgets in urban areas increased by about 18% at the expense of the surrounding rural areas [17]. (2) Differentials by economic level among rural communities. With decentralization, local governments took primary responsibility for most public health expenditures. Therefore, a more affluent county might finance expensive health facilities while a poor county would have to settle for much less. A survey on 20 counties of different economic development stages indicated that the per capita government health budget in high income counties were more than two times that in poor counties and this gap seemed to be widened instead of being reduced during a period of 1986-1988 (see Table 4). According to a recent study of 114 poverty counties, even among those poor counties health expenditures per capita vary with income, although the difference Table 4. Per capita GNP, per capita government health budget (yuan) of 20 counties in China (1985-1987) Income and health budget by type of county 1985 1986 1987
GNP High income counties Middle income counties Low income counties
Health budget
1018 557 351
I 173 681 368
1403 788 391
High income counties 5.14 6.35 6.15 Middle income counties 4.77 4.23 4.37 Low income counties 2.46 2.66 2.61 Source: Luo W. Studies on health care financing and resource utilization in rural China, 1993.
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Table 5. Per capita GNP, per capita expenditures of the state and collective health facilities and per capita government health budget (yuan) in China's 114 poor counties State/collective Government GNP facility exp. health budget < 200 7.04 4.14 200 7.95 4.68 5008.85 4.77 800 9.51 4.89 100~ 9.90 6.85 Source: China Network. Research report on financing and organization of health care for the poor rural population in China, 1993.
Table 6. Utilization rate of health services in the three socio-economic regions Socio-economicregion I
II
1II
Outpatient visits/capita/year 3.0 2.7 4.3 Hospital admissions/1000 52.0 28.0 25.0 Inpatient days/1000/year 542.0 247.0 195.0 Rural income/capita 1987 999.0 524.0 319.0 % of income on medical fees 1.8 2.3 4.7 Source: Gu X. Financing health care in rural China, 1993.
Efficiency Incentive structure
is much smaller than the gap between high and low income counties (see Table 5). The later study also found that 17.5% and 25.4% of the 114 poverty counties were running at a deficit in their county hospitals and their township clinics respectively [23].
Inequality in service utilization A 1988 nationwide study found that not only was the utilization rate significantly different for different populations (depending on whether the population has any insurance coverage), it was also different across regions with different levels of economic status [18]. Table 6 indicates that while the utilization of outpatient services is similar, utilization of more expensive hospital services consistently declines from one region with a high economic level to a region with lower economic level.
Inequality in health status Some studies compared health status of the population still covered under C M S to those without C M S and concluded that C M S has had a positive effect on people's health status [11, 20, 24]. Table 7 shows the increase of the incidence rate of certain communicable diseases, which were once brought under control during the tenure of the CMS, as an indication of relaxed public health in the postC M S era. Although a causal relationship can hardly be established between the collapse of C M S and some indications of declining health status for some populations, it may be concluded that the equality in health status has not improved since the reform. Urban-rural and inter-rural community differentials still exist. The survey of 114 poor counties reported that the infant mortality rate in 36 of those counties was higher than 75/1000 live birth in 1992, compared to the national average of 23.0/1000 live birth of all the Chinese rural counties [23].
(1) Pricing and payment for health services. China's medical pricing policy is inadequate and provides incentives for inefficiency and waste. Under CMS, costs for services were largely funded by the Cooperative Medical Fund. The prices for services set by the government were successively reduced in the late 1950s and 1960s for political and social reasons and then due to the rapid growth of C M S schemes. By the time of decollectivization in the early 1980s, most of the established services were priced substantially below cost. Conversely, services that use newer technologies introduced during the 1980s were often priced well above cost. Prices for drugs were also set higher than cost when county hospitals, township health centers and village health stations as well as private practitioners are allowed to mark up their prescribed drugs by 15-20%. Therefore, health care providers can make profits by selling more drugs and increasing the use of new technology [16]. (2) 'Responsibility system" in health sector. Rural health organizations faced increasing pressure to improve their financial performance. The health sector was one of the last to undergo 'responsibility system' reform that accompanied decentralization. In the reform process, health institutions were gradually pressed by national policies to recover operational costs from user fees. But those fees were set by the government. Price distortions remaining from earlier periods created a natural incentive for overor under-provision of some services by health institutions seeking to maximize net revenues. Recovery of operational costs from service fees and drug charges has increased since the early 1980s from about two-thirds of total revenues to about 80% today. In 1978, the percentage of the total retail values of drugs in the country sold by health institutions was 37.33%. By the end of 1988 this share rose to 57.19% [18]. It appeared that health institutions overprescribed drugs to generate net revenues.
Table 7. Incidencerate (I/100,000) of selected communicablediseases in China (1974-1988) 1974 1977 1979 1981 1984 1986 1988 Typhoid and paratyphoid 8.8 12.84 10.61 12.72 9.75 9.76 14 Hepatitis (A and B) 74.2 104.0 103.8 106.0 67.8 97.2 132 Source: MOPH, health statistics information in China 1948-1988, 1991.
Transformation of China's rural health care
System disintegration of rural health organizations Close ties between different level of health care organizations started disappearing after reforms. Under the old CMS village health stations, townships clinics and county hospitals were integrated within the three tier system. An effective and efficient referral mechanism was built into the system so that patient flow was evenly spread between the three levels of health care facilities. With the dissolution of CMS the internal administrative relationship between the three types of health care providers have been either weakened or lost. Without a formal referral system people tend to see private doctors and to use county hospitals much more frequently, bypassing the township clinics [11]. On efficiency ground, however, some patients admitted to the county hospitals could have been well treated by the township clinics [18]. Better coordination and integration of different level facilities can certainly control the duplication and overuse of health services, which is now one of the major problems in China's rural health care system [I1, 15,26]. Facing decreased demand and simultaneous reduction of government support many township clinics are being forced to downsize or close. From 1980 to 1988, the number of personnel working in township clinics declined from 1,037,543 to 870,355 and the number of beds decreased from 775,413 to 726,124 [14]. These developments exacerbated the shortage of bed and personnel in rural areas and produced more crowding at county hospitals. In addition, there may be problems in reduced access to and effectiveness of the rural health care system associated with the much weakened middle-level health facilities in rural China. Efficiency issue aside, the shift of demand toward county hospitals, which largely caused the weakening of lower level facilities, is also indicative of the need for the rural health care system to be dynamic, rather than static. People's demand for medical services is driven, among other things, by the actual and perceived quality of the services rendered. Therefore, rural health care facilities, in order to survive at a time where people have the freedom of choice, need to constantly upgrade their technical as well as marketing skills to attract patients.
THE CHINESE LESSONS
In many western countries, the trend between 1950-1980s has been towards an increasing role for government because of known market failures in the health sector. In China, by contrast, market forces are being introduced to remedy the systemic failures of excessive rather than insufficient government involvement. The agricultural reforms in China-decollectivization and freeing up of markets for agricultural-altered the peasants' incentives, weakened community organization, and lessened the central government's control over local communities. ConSSM 41/8--E
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sistent with its economic policy, the Chinese government adopted a laissez-faire policy toward rural health care which has caused major changes in the country's highly acclaimed rural CMS. The consequences of these changes on rural health care are multifold: a decreased supply of barefoot doctors, disintegration of organized primary care, reduced primary health care, and an increased demand for higher-quality medical services. More than ten years have elapsed since China changed its economic system and China is still struggling to find an equitable, efficient and sustainable way for financing and organizing health services for its rural population. The Chinese experiences provided several major lessons. First, the Chinese experiences demonstrated the need to understand the limits of market forces and define the role of government in rural health care under a market economy. Before the agricultural reform, China achieved remarkable health improvement for its rural population, largely because the government played a strong role in organizing, financing, supervising rural health services. After the reform, the role of the government in agricultural production was significantly reduced. As China moves its agricultural sector toward a market economy, the government adopted a laissez-faire policy in its rural health care and left the market to finance and provide health services. However, under a market economy, the government still has major roles such as provide public goods and set the rules of the game for market operations and enforce them. As for public goods, the government has a responsibility to provide sanitation, clean water, prevention, health education and primary care. In China the government reduced its financial support for basic public health in rural areas and the controllable communicable diseases increased. The emergence of the rural private medical market with minimum public supervision also caused many problems. Equally importantly, the government, as initiator and enabler, should and can provide technical assistance, especially the leadership and management training and public supervision of community financing. Despite availability of financial resources and people's willingness to support community financing schemes, many rural communities were not able to sustain effective operation of the schemes due to lack of managerial know-how. The government has both the responsibility and resources to fill this important gap. In the process of filling the gap it is especially important to reexamine and redefine the role of central government vs local governments. Coupled with China's policy of decentralizing the fiscal responsibilities, health care becomes increasingly a local matter for the rural population, thus the gap between the rich and poor is getting worse, before it's getting better. Although an uniform benefit package for all the people in China is perhaps neither feasible
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nor desirable, an increasing role for the central government in health policy research and development, in leading the efforts to relieve the illnessinduced poverty, and in establishing more equitable access to health care in rural areas, as well as an increasing cooperation between the central and local level of government in guiding the health care reforms may be warranted. Second, China's experiences also illustrate the necessity and feasibility of establishing community financing schemes which are for the people and by the people. Equity considerations require the government to play a major role in health care financing, include pooling risks. At China's level of development, the government does not have adequate public resources to finance all the health services. The majority of the health care costs may have to be borne by communities or individuals. However, that doesn't mean that the government should abandon its role in assisting the communities to" develop an organized system. Various studies found a popular demand for collective financing of rural health care services in China. Even in the poorest areas, both peasants and government officials expressed a strong preference for collective financing over the currently dominant FFS system [11, 23]. According to a survey on 114 poor counties in China, 96.2% of the officials interviewed thought that it is necessary to develop a CMS type of financing scheme in the area to replace the current self pay system, 92.3% of them said that establishing such a community financing system requiring certain contributions from the peasants will not impose an additional financial burden upon the local residents [23]. Moreover, Rising medical costs in China have caused an increasing number of households to become newly poverty stricken because of illnessinduced-poverty. Risk pooling mechanisms seem to be needed to prevent poverty and to improve the access to health services. To be sure, there might be problems with operation of any risk pooling schemes such as adverse selection, 'moral hazard' (overutilization), the need to have a large enough pool of participants to assure sustainability etc. All these potential problems need to be considered in program development, so that adequate preventive measures (e.g. compulsory enrollment to avoid adverse selection and copayment provisions to control unnecessary resource use from the consumer side) can be taken. Establishing community financing schemes, on the other hand, need to avoid the problems of the old CMS which was strictly controlled by the government bureaucracies. The instability with old CMS are caused by three problems: small risk pooling base; lack of managerial skills on the part of the managers of the schemes; and lack of public participation and control by the local residents. China's experiences with its CMS provided ample evidence that when a system is heavily controlled by the government, there is a tendency for the government officials to abuse
their power and corrupt the system. Therefore, emphasizing government's role in rural health care does not imply governmental control. Quite the contrary, any new community financing scheme should be controlled by the people, serving the interests of the members of a community, rather than serving the interest of a privileged few. It is an important element of community development and, as such, associated with social and political participation by the people. Third, community financing cannot be cost recovery alone. China, like many other developing countries, has a twin problem: limited health resources and misallocation of available resources. Even in the poorest areas in China, it was found that people were spending and were willing to spend a significant amount of their income for health services [14, 23]. At issue, however, are appropriate mechanisms for resource allocation: should the market play the dominant role in allocating resources and organize health services? China's experiences show that the market does not work well in health care. Before the reforms, despite having less financial resources, a well organized rural health delivery system, the three tier medical system, produced more integrated public health and primary care services and the services were accessible to all. After reforms, the government's laissez-faire policy resulted in reliance upon market exchange to dictate the organization, financing and delivery of health services, including such basic programs as vaccinations. Consequently, a disintegrated rural health sector has become increasingly inequitable, inefficient and unstable. Therefore, any new initiative that combines the market and planning functions would need to address the issue of organization and integration of different services (e.g. preventive and curative services), and among different health care organizations (e.g. village, township and county level health facilities). Finally, the Chinese experiences show that a health care system needs to be dynamic, rather than static, to keep pace with people's changing demand and needs. China found that demand for medical care is directly related to income. As their income increases, many peasants go directly to higher-level facilities such as county hospitals for services. Moreover, they become less interested in and less supportive of primary care services provided by the barefoot doctors. Meanwhile, disease conditions changed with economic development. Having reduced communicable and infectious diseases, China is now confronted with the problem of preventing and treating chronic illnesses. Having improved sanitation and drinking water, it is now faced with environmental pollution. Facing these changing demand and needs, any static health care system is doomed to failure that was organized to deal with the previous epidemiological profile. To meet those new challenges, China might need to do two major things simultaneously: first, to
Transformation of China's rural health care initiate systemic a n d organizational reforms such as reorienting the current system from focusing o n t r e a t m e n t to emphasizing prevention of chronic a n d degenerative diseases, establishing a cooperative working relationship between now separate systems of disease prevention and curative medicine, and second, C h i n a needs to p r o m o t e technical a n d professional development, such as upgrading e q u i p m e n t and increasing technical competence o f the rural health workers. The collapse of C M S has generated m a n y concerns. H o w C h i n a is going to structure a new system of financing and organizing health services that meet the changing d e m a n d and needs of the p o p u l a t i o n will be of wider international interest. Nonetheless the Chinese experience already can benefit other nations as they struggle to formulate their health care financing policy for their rural population.
16.
17. 18. 19. 20.
21. REFERENCES
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1. Hsiao W. C. Transformation of health care in China. N. Engl. J. Med. 310, 932, 1984. 2. Gu X. et al. Financing health care in rural China: preliminary report of a nationwide study. Soc. Sci. Med. 36, 385, 1993. 3. Sidel R. and Sidel V. W. The Health of China. Current Conflicts in Medical and Human Services for One Billion People. Beacon, Boston, 1984. 4. Halstead S. B. el al. Good Health at Low Cost. Rockefellow Foundation, New York, 1985. 5. McPake B. et al. Community financing of health care in Africa: an evaluation of the Bamako Initiative. Soc. Sci. Med. 36, 1383, 1993. 6. Zhang, Z. Review of the early period of Cooperative Medical System. Chin. Hlth Econ. 6, 52, 1992. 7. Zhu A. A series of studies on the rural Cooperative Medical System. Chin. Hlth Econ. 4, 37, 1988. 8. Lu M. and Timmer P. G. Developing the Chinese rural economy: experience of 1980s and prospects of the future. HIID Development Discussion Paper No. 428. AFP, September 1992. 9. Perkins D. H. Completing China's move to the market. J. Econ. Perspectit, es 8, 23, 1994. 10. The Chinese Ministry of Public Health. Health Statistic Yearbook. People's Health Press, Beijing, 1987. 11. Zhou S. et al. The need for reestablishing Cooperative Medical System. Chin. Rural Hlth Serv. Admin. 4, 65, 1991. 12. Zhu A. A systematic study of rural cooperative medical system. Chin. Rural Hlth Serv. Admin. ll, 22, 1988. 13. The Chinese Ministry of Public Health. Chinese Yearbook o f Health. People's Health Press, Beijing, 1992. 14. The Chinese Ministry of Public Health. Chinese Yearbook o f Health. People's Health Press, Beijing, 1991. 15. Liu G. et al. Privatization of the medical market in
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socialist China: a historical approach. HIth Policy 27, 157, 1994. Wei Y. China's health care financing, utilization, and future strategies. In Proceedings o f the Senior Seminar on Health Care Financing (Edited by the Department of Planning and Finance, the Chinese Ministry of Public Health). Ministry of Public Health, Beijing, 1991. Du L. et al. Strategic Studies of the health care financing and resource allocation in China. Monograph. Ministry of Public Health, Beijing, 1992. Shi W. Strategic aspects of reestablishing cooperative medical system. Chin. Rural HIth Serv. Admin. 6, 31, 1991. Li X. Cooperative Medical System is a good form of health care financing in poor areas. Chin. Rural Hlth Serv. Admin. 12, 25, 1988. Gu X. et al. Medical services research of the rural population in the PRC. In Research in the Rural Medical Care System in China (Edited by The Health Policy and Management Expert Council, the Chinese Ministry of Public Health). Shanghai Science and Technology Publishing House, Shanghai, 1991. The Chinese Ministry of Public Health. Health Statistic Yearbook. People's Health Press, Beijing, 1988. World Bank. China--The Health Sector. The World Bank, Washington DC, 1984. China Network for Training and Research in Health Economics and Health Care Financing. Financing and organization of health care for the poor rural population in China: report on project activities, a conference paper presented at the I H P P Asia Meeting, Olongapo city, 16-17 May 1994. Yie Y. Report of a research study on China's rural health care. Chin. Rural Hlth Serv. Admin. special issue, 1986. Hsiao W. C. Cooperative health care: a comprehensive strategy to finance health care for developing nations. A keynote paper presented to the Worm Health Organization's Leadership Conference, Geneva, Switzerland, 26 June, 1992. Policy Research Unit of the State Council. Speeding up the reform and construction of rural cooperative medical system, a working paper, 1994. Liu Y. Different models of health insurance in China. Chin. Hlth Econ. 60, 22, 1988. Lin Z. et al. A study on peasants' ability to pay for health insurance. In A Collection o f Health Management Papers (1988-1990) (Edited by Shanghai Medical University). Shanghai Medical University Press, Shanghai, 1991. Huang R. Hospital insurance in addition to cooperative medical system. Chin. Rural Hlth Serv. Admin. 3, 38, 1991. Akin J. S., Birdsall N. and de Ferranti D. Financing Health Services in Developing Countries: an Agenda for Reform. The World Bank, Washington, DC, 1987. Luo W. Studies on health care financing and resource utilization in rural China. Chin. Hlth Econ. 1, 37, 1993. The Chinese Ministry of Public Health. Health Statistic Information in China 1948-1988. People's Health Press, Beijing, 1991.
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T R A N S F O R M A T I O N OF CHINA'S RURAL HEALTH CARE FINANCING Y U A N L I LIU, I W I L L I A M C. L. HSIAO, 1 Q I N G LI, 2 X I N G Z H U L I U 3 and M I N G H U I R E N 4 ~Harvard University School of Public Health, Program in Health Care Financing, 1350 Massachussets Avenue, Holyoke Center 726, Cambridge, MA 02138, U.S.A., 2Department of Health Economics, Training Center for Health Care Management, Beijing Medical University, Beijing, People's Republic of China, 3Department of Social Medicine, Shandong Medical University, Jinan, Shandong 250012, People's Republic of China and 4Department of Health Policy and Law, Ministry of Public Health, Beijing, People's Republic of China Abstract-In the late 1970s China launched its agricultural reforms which initiated a decade of continued economic growth and significant transformation of the Chinese society. The agricultural reforms altered the peasants' incentives, weakened community organization and lessened the central government's control over local communities. These changes largely caused the collapse of the widely acclaimed rural cooperative medical system in China. Consequently China experienced a decreased supply of rural health workers, increased burden of illnesses, disintegration of the three tier medical system, reduced primary health care, and an increased demand for hospital medical services. More than ten years have elapsed since China changed its agricultural economic system and China is still struggling to find an equitable, efficient and sustainable way of financing and organizing its rural health services. The Chinese experiences provided several important lessons for other nations: there is a need to understand the limits of the market forces and to redefine the role of the government in rural health care under a market economy; community participation in and control of local health financing schemes is essential in developing a sustainable rural health system; the rural health system needs to be dynamic, rather than static, to keep pace with changing demand and needs of the population. Key words--rural health care, China, transformation, financing
INTRODUCTION In China, about 800 million people live in rural areas. China's rural health care has undergone significant transformation during the past decade. The present study examines the driving forces for and consequences of major changes in China's rural health care financing, and explores important lessons that can be drawn from the Chinese experiences for other nations. In the late 1970s China inaugurated agricultural system reform which marked the beginning of a decade of continued economic growth and significant transformation of the Chinese society. Today, the economic success of the agricultural reforms cannot be seriously doubted. However, economic development is only part of the overall improvement in human welfare. Social development, including health care, is another part. In China, social sector development has not gone hand in hand with economic development, especially in rural health care. China achieved remarkable health improvement for its rural population before the reforms. The rural health care system, Cooperative Medical System (CMS), was characterized by its collective financing, prepayment and organization of health services through a three tier system. This community financ-
ing and organization model of health care was believed by many to have contributed in a significant way to ChinKs success in accomplishing its 'first health care revolution' by providing prevention and primary care to almost every Chinese and reduced infant mortality rate from about 200/1000 live births (1949) to 47/1000 live births (1973-1975), increased life expectancy from 35 to about 65 years [1-4]. Following the implementation of the agricultural reforms in the early 1980s, however, the C M S collapsed. China's rural health care financing went through profound transformation. How did the CMS, once a model for many developing countries, collapse in China? Is it a change for the better? What are the major issues facing China's rural health financing today? What major lessons can be learned from the Chinese experiences? This paper will address these questions, with the intention of drawing from the Chinese experiences some valuable lessons for other nations as well as for China. This paper is divided into three sections: the first section presents a descriptive analysis of the transformation of the Chinese rural health care financing its dramatic changes and the underlying causes; then, we will discuss about the current problems in the Chinese rural health care and the extent to which these problems are attributable to the inadequacies of
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its financing system. Finally we discuss the lessons from the Chinese experiences. CHINA'S RURAL HEALTH CARE FINANCING: CHANGES AND DRIVING FORCES
The System Prior to the Reform Before the 1980s agricultural reform, health services for China's rural population were organized and financed through the CMS which was an integrated part of the overall collective agriculture production system and social services. CMS organized rural health care into a three tier structure. The first tier comprised 'barefoot doctors' who provided both preventive and primary-care services including drugs. The barefoot doctors, like the peasants who worked on farming, received a certain number of work points for each working day in a health post. For more serious illnesses barefoot doctors referred patients to the second tier: township health centers which were collectively owned and operated by the township government. The medical workers at the health centers (most qualified of them are assistant doctors) received a modest salary funded by the subsidies from the government and revenues generated by the services they provided. Finally, the most seriously ill patients were referred to the third tier: county hospitals. In rare cases, the patient may be referred to an urban tertiary hospital. Under the CMS, village health stations, township health centers and county hospitals were integrated within the three tier system by a vertical administrative system. County hospitals and township health centers provided regular technical assistance and supervision to the lower level organizations. Financing of the CMS generally took the form of a pre-payment health plan. Most of the villages organized Cooperative Medical Funds with funding from three sources: (1) Premium assessment. Depending on the benefit structure of the plan and the local community's economic status, 0.5-2% of a peasant family's annual income (4-8 yuan) were to be paid to the Fund; (2) Collective Welfare Fund. According the State's guidelines, each village contributed a certain portion of its income from collective agricultural production or rural enterprises into a welfare fund; (3) Subsidies from the upper level governments. In most cases, this subsidy was used to compensate health workers and purchase of medical equipment. Gradually developed in the 1950s as a mutual assistance mechanism to establish access to basic drugs and primary health care [6], Cooperative Medical System had its rapid development during the 'cultural revolution' (1960s-1970s), when CMS was given political priority. Starting from 1965, as part
of the efforts to stabilize the socialist system and strengthen 'the proletarian class dictatorship', Mao, then the Chairman of the Chinese Communist Party, personally called on communes throughout the country to adopt the model of CMS. At the peak, 90% of the rural population were covered by the CMS schemes [7]. The rapid growth of CMS helped Chinese peasants to improve their access to primary health care and improve the integration of public health and medical services. Unfortunately, CMS collapsed almost over night, when China began its agricultural system reform in early 1980s. Perhaps unintentionally, the reform had 'thrown out the baby with the bath water'. A Decade of Transformation (1980s-1990s) The agricultural reform China's agricultural reform officially began with the Communist Party Plenum of December 1978, when the household-responsibility system was instituted in agriculture sector. The two principle components of China's rural reforms were the decollectivization of Chinese agricultural production and gradual moving the pricing and production of agricultural commodities toward a free market. Markets had existed before 1978 but were tightly controlled where government set prices and production quotas. With agricultural reform, about 80% of agricultural commodities were bought and sold in competitive markets in 1990 compared to 8% in 1978 [8]. Decollectivization happened more rapidly. By the end of 1983, the collective system of people's communes and the production teams had largely disappeared, replaced by each household farming its own leased land and retaining all the earnings. Agricultural production responded immediately and dramatically to the reforms. From 1978 to 1984, the growth rate of the Chinese agriculture in valueadded terms was five times what it had been over the previous two decades. Farm income and consumption grew even more rapidly [9]. Thus, the reforms were very successful in spurring agricultural output and improving efficiency. Major changes in China's rural health care after reform (1) Collapse of CMS. Following the agricultural reforms in the early 1980s, most CMS schemes collapsed. The vast majority of the rural population obtained their health services on a fee for service (FFS) basis rather than the previous prepaid basis. Table 1 shows the significant decrease of the number of villages covered by CMS schemes after the reforms. Most villages have dissolved their CMS because its main source of financing, the welfare fund supported by the collective farming income, had disappeared. Preventive services provided under CMS, financed out of central government and local welfare funds, were essentially free to the individual.
Transformation of China's rural health care Table 1. The percentage of villages with CMS (1958-1989) Year
% of villages with CMS
1958 1960 1962 1968 1976 1979 1981 1985 1987 1989
10.0 32.0 46.0 80.0 90.0 90.0 58.2 II.0 5.4 4.8
Source: 1958-1979 figures were estimated by Anhui Medical University, 1986. 1981-1989 data are provided by the MOPH.
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already overtaxed medical facilities at the county levels. (4) The increase of private medical practices. In 1982, only 5% of village health posts were privately owned practices. But by the end of the 1990's, this proportion increased to about 48% [14]. While these private health posts do render health care that people need, they operate with minimum supervision and also are profit driven. Consequently, studies found that these private practices overprescribed drugs, gave unnecessary injections and induced demand which resulted in cost escalation, as well as crowdingout preventive care [15].
Driving Forces for the Transformation Now preventive services are financed through several mechanisms: user fees, prepayments, and contributions of various levels of governments.
(2) Disintegration of the three tier medical system. Many barefoot doctors left the health profession with the introduction of the household production responsibility system. The agricultural reform improved the income derived from farming. Many barefoot doctors left health sector for full-time farming, particularly when they could no longer be compensated by the CMS for their health work. Some barelbot doctors, however, converted their health posts into private practices on a fee-for-service base. According to the published statistics [10], the total number of barefoot doctors in practice decreased from 1.8 million to 1.3 million between 1978 and 1985. The inter-connection and cooperation among different rural health facilities also weakened or lost after reforms. Under the CMS, village health stations, township health centers and county hospitals were closely interrelated to each other within the three tier system. County hospitals and township health centers provided regular technical assistance and supervision to the lower level organizations. An effective referral mechanism was built into the system. After collapse of CMS, these health care organizations became independent institutions. Often, they compete for patients in order to increase revenues [l l, 121.
(3) An increased demand for higher-quality medical care. Demand for medical care is directly related to income. Agricultural reforms in China prompted rapid economic development and increased peasants' income. In the prosperous communities, despite the availability of barefoot doctors, many peasants went directly to county hospitals for medical services. The peasants were willing to pay higher out-ofpocket costs to obtain what they believe is better services from more qualified medical staff. From 1982 to 1992, the annual visits to county hospitals and above increased from 1.223 billion to 1.439 billion, while the figure for township clinics decreased from 1.467 billion to 1.015 billion [13]. The shift in demand toward services rendered by better trained health workers has put additional pressure on the
Government's laissez-faire policy Although the changes in China's rural health financing were largely caused by the agricultural reform rather initiated by explicit government policy, the government could have intervened to minimize the undesirable social consequences. However, the Chinese government adopted a laissez-faire policy toward rural health care by default. Under the agricultural reform, the Chinese government continues to fund a large part of preventionprograms, investments for hospital beds and health manpower training. However, the government reduced its financial support for the recurrent costs of hospitals and clinics, especially the ones operated by collectives and local communities. As shown in Table 2, while the size of China's government health budget remained almost constant in terms of the percentage of the total government budget spent on health, public subsidies to the rural health care decreased drastically during a ten year period between 1978-1988. The government believed that hospitals and clinics should rely on user fees to finance their recurrent costs and that would force competition among health care providers which in turn would improve quality of services and operational efficiency. This laissez-faire policy toward rural health care left the rural population to finance and organize their Table 2. China's health budget and subsidies to rural health care (1978-1988) Year
Health budget*
% of total budget on health
Subsidies to C M S t
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988
2.2 2.6 3.0 3.2 3.7 4.1 4.8 5.4 6.4 6.4 7.1
2.0 2.0 2.4 2.9 3.2 3.2 3.1 2.9 2.7 2.5 2.6
39 34 26 24 29 28 29 25 28 25 22
*Billion yuan. tMillion yuan. Source: Du L. et al. Strategic studies of the Chinese health care financing, 199Z
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own primary care services at the village level. Most health posts became fee-for-service practices operated by unsupervised 'village doctors'. Patients received their services according to their ability to pay. The government didn't make any serious attempt to replace the CMS so the equitable and efficient method of financing and provision of health care under CMS could be retained.
Factors affecting the fall of CMS External forces: (a) Economic forces. The essential financial base of the CMS was the collective welfare fund. The communes and work brigades supervised the collection of welfare funds and CMS's operation. Under the new householdproduction responsibility system, the collective welfare fund largely disappeared and the power of the brigades to coordinate production and manage social services also ceased to exist. So in many places the once very effective rural administrative organizational structures have been weakened. Hence, the CMS also lost a key pillar of its administrative foundation. (b) Sociological changes. Along with changes in peasants' living standards, peasants' social cohesion and attitudes also changed. Once peasants were all members of the same commune where fortunes and risks were equally shared. Now they are independent producers and consumers who are supposed to look after their own interests. Therefore, the willingness to pay into a CMF, a mechanism for riskpooling and redistributing benefits between the rich and poor, between the healthy and sick, decreased. (c) PoliticalJbrces. Many policy decisions in China were driven by ideologies. Having just experienced the disastrous cultural revolution, all the 'glorious achievements' of the past political movements were questioned. In the post-Mao era many 'products of the cultural revolution', namely institutions established at the time, were abolished. CMS was labeled as such a product of the cultural revolution. Political pressures were created to disband CMS. In some areas where CMS had strong popular support, villages were forced to abandon the system, much to the dismay of the local people [ll]. Internal problems of the CMS. Economic, social and political factors were necessary, but may not be sufficient, conditions for the downfall of the CMS. Without its internal problems, perhaps CMS would not have dissolved so rapidly. Two major internal problems had plagued CMS" (a) Poor management. Since CMS was established in many communities as a political under-
taking, financial solvency and economic efficiency of the schemes were often ignored. The decision to collect funds was quite arbitrary and there was no technical base for premium assessment. Local cadres, serving as managers of the funds, often did not know how to manage the scheme effectively and efficiently. No explicit quality and cost control mechanism was built into the system. Most of the CMS schemes were organized at the village level, a very small risk-pooling base. In case of adverse selection and moral hazard problems, the small CMS fund were easily exhausted. As a result, many communities experienced financial instabilities with their CMS. (b) Corruption. Under CMS, many local cadres enjoyed preferential treatment by receiving expensive drugs and more favorable reimbursement of large medical bills. They received these greater benefits because they had the power to appoint and dismiss any health care workers or managers of the CMS funds. Past studies of CMS often cited corruption as the number one problem with the system [12]. The rise and fall of China's CMS has revealed its advantages as well as weaknesses. The government needs to take an important but appropriate role with regard to initiation, organization and management of the system. On one hand, the rapid development of CMS schemes could not have been possible without government's initiatives and support. On the other hand, many internal problems of the CMS schemes, such as corruption, are in part a result of the excessive government control. In addition, people at the local level were powerless in the decision making processes. One lesson of the Chinese CMS experience was the need to balance the role of the government's control and community participation in the CMS. A decade has passed since the inception of the economic reform and the collapse of the CMS. Are China's rural population better off without CMS? The next section will address the consequences of the collapse of CMS.
CHINA'S RURAL HEALTH FINANCING: PROBLEMS AND CHALLENGES
The major issue of health care financing in rural China is how to generate and allocate adequate resources to provide effective, equitable and affordable health services for a population of about 800 million. Therefore, any evaluative study on the Chinese rural health care financing would need to examine its impact on the rural health care system as a whole. It would be misleading to say that after reform the rural health care is a complete failure. The standard of living has risen rapidly in a majority of the rural communities. People now have improved housing,
Transformation of China's rural health care
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Table 3. The health expenditure in 1980 prices Items
1980
Total health expenditure (100 million yuan) % of health expenditure financed by out-of-pocket payments made by rural population % of health budget for the urban sector Source: Wei Y. China's health care financing, utilization and future strategies, 1991.
better food and cleaner water. The rural health care system is by no means a total disaster. All this can be used to explain the continued health improvement as measured by the increase of life expectancy and decline of infant mortality. However, the issue is: how much of the potential positive effects of the economic reform on health and health care could have been offset by the negative effects generated by the changes? In the following section we will identify some major problems faced by China's rural health care today. These problems and challenges with regard to access, equity, and efficiency may be direct or indirect results of the changes that have taken place in China's rural health care financing.
Access Affordability of health services (1) Rising medical costs and financial burden of illnesses. It was estimated that the average health spending in China has increased almost six times from 1978 to 1988 [17]. Table 3 shows that the financial burden of illnesses for the rural population had risen after the collapse of CMS. The relative higher medical costs restrained the medical service utilization and affected the living conditions of the rural people, especially the poor. (2) Poor health leads to poverty. After the collapse of CMS, many uninsured were exposed to the risk of catastrophic medical expenses. When an uninsured person becomes severely ill, this person must pay a large medical bill. According to a survey on 1013 poor households, 48.9% of the surveyed families cited illness of their family members as the reason for the poverty situation [19]. Controlling for the average income, it is found that the uninsured rural population has a significant higher risk of suffering from the illness-induced-poverty than their counterparts who are still covered by C M S [20].
Availability of health facilities The three tiered health care delivery system disintegrated with the collapse of CMS. Many barefoot doctors have left the health profession for fulltime farming; the number of village health posts decreased; and, the staff and beds of middle-level facilities were reduced. During the period from 1980-1988 the number of township clinic beds decreased from 775,413 to 726,124 and the number of health personnel working in these facilities also decreased from 1,037,543 to 870,355 [14]. It should be
132.00 23.90 41.36
1985
1989
233.40 307.00 33.40 46.00 50.00 48.07
noted that these changes were only partly related to the collapse of C M S and in certain areas, the decline of township clinics represents efforts to consolidate the system of service provision as a way to solve the quality and efficiency problems in the old system. However, for a majority of the rural communities where shortage of health facilities are commonplace, the decline of both village and township health facilities may exacerbate the existing access problems. More studies are needed to ascertain the actual impact of these changes.
Equity Inequality in health input (1) Urban-rural differentials. Studies carried out in the early 1980s documented that the urban per capita expenditure on health was about three times the rural level [22]. More recent studies found the gap has widened to a ratio of 5:1. As for government's health budget, between 1980 and 1989 the proportion of government health budgets in urban areas increased by about 18% at the expense of the surrounding rural areas [17]. (2) Differentials by economic level among rural communities. With decentralization, local governments took primary responsibility for most public health expenditures. Therefore, a more affluent county might finance expensive health facilities while a poor county would have to settle for much less. A survey on 20 counties of different economic development stages indicated that the per capita government health budget in high income counties were more than two times that in poor counties and this gap seemed to be widened instead of being reduced during a period of 1986-1988 (see Table 4). According to a recent study of 114 poverty counties, even among those poor counties health expenditures per capita vary with income, although the difference Table 4. Per capita GNP, per capita government health budget (yuan) of 20 counties in China (1985-1987) Income and health budget by type of county 1985 1986 1987
GNP High income counties Middle income counties Low income counties
Health budget
1018 557 351
I 173 681 368
1403 788 391
High income counties 5.14 6.35 6.15 Middle income counties 4.77 4.23 4.37 Low income counties 2.46 2.66 2.61 Source: Luo W. Studies on health care financing and resource utilization in rural China, 1993.
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Table 5. Per capita GNP, per capita expenditures of the state and collective health facilities and per capita government health budget (yuan) in China's 114 poor counties State/collective Government GNP facility exp. health budget < 200 7.04 4.14 200 7.95 4.68 5008.85 4.77 800 9.51 4.89 100~ 9.90 6.85 Source: China Network. Research report on financing and organization of health care for the poor rural population in China, 1993.
Table 6. Utilization rate of health services in the three socio-economic regions Socio-economicregion I
II
1II
Outpatient visits/capita/year 3.0 2.7 4.3 Hospital admissions/1000 52.0 28.0 25.0 Inpatient days/1000/year 542.0 247.0 195.0 Rural income/capita 1987 999.0 524.0 319.0 % of income on medical fees 1.8 2.3 4.7 Source: Gu X. Financing health care in rural China, 1993.
Efficiency Incentive structure
is much smaller than the gap between high and low income counties (see Table 5). The later study also found that 17.5% and 25.4% of the 114 poverty counties were running at a deficit in their county hospitals and their township clinics respectively [23].
Inequality in service utilization A 1988 nationwide study found that not only was the utilization rate significantly different for different populations (depending on whether the population has any insurance coverage), it was also different across regions with different levels of economic status [18]. Table 6 indicates that while the utilization of outpatient services is similar, utilization of more expensive hospital services consistently declines from one region with a high economic level to a region with lower economic level.
Inequality in health status Some studies compared health status of the population still covered under C M S to those without C M S and concluded that C M S has had a positive effect on people's health status [11, 20, 24]. Table 7 shows the increase of the incidence rate of certain communicable diseases, which were once brought under control during the tenure of the CMS, as an indication of relaxed public health in the postC M S era. Although a causal relationship can hardly be established between the collapse of C M S and some indications of declining health status for some populations, it may be concluded that the equality in health status has not improved since the reform. Urban-rural and inter-rural community differentials still exist. The survey of 114 poor counties reported that the infant mortality rate in 36 of those counties was higher than 75/1000 live birth in 1992, compared to the national average of 23.0/1000 live birth of all the Chinese rural counties [23].
(1) Pricing and payment for health services. China's medical pricing policy is inadequate and provides incentives for inefficiency and waste. Under CMS, costs for services were largely funded by the Cooperative Medical Fund. The prices for services set by the government were successively reduced in the late 1950s and 1960s for political and social reasons and then due to the rapid growth of C M S schemes. By the time of decollectivization in the early 1980s, most of the established services were priced substantially below cost. Conversely, services that use newer technologies introduced during the 1980s were often priced well above cost. Prices for drugs were also set higher than cost when county hospitals, township health centers and village health stations as well as private practitioners are allowed to mark up their prescribed drugs by 15-20%. Therefore, health care providers can make profits by selling more drugs and increasing the use of new technology [16]. (2) 'Responsibility system" in health sector. Rural health organizations faced increasing pressure to improve their financial performance. The health sector was one of the last to undergo 'responsibility system' reform that accompanied decentralization. In the reform process, health institutions were gradually pressed by national policies to recover operational costs from user fees. But those fees were set by the government. Price distortions remaining from earlier periods created a natural incentive for overor under-provision of some services by health institutions seeking to maximize net revenues. Recovery of operational costs from service fees and drug charges has increased since the early 1980s from about two-thirds of total revenues to about 80% today. In 1978, the percentage of the total retail values of drugs in the country sold by health institutions was 37.33%. By the end of 1988 this share rose to 57.19% [18]. It appeared that health institutions overprescribed drugs to generate net revenues.
Table 7. Incidencerate (I/100,000) of selected communicablediseases in China (1974-1988) 1974 1977 1979 1981 1984 1986 1988 Typhoid and paratyphoid 8.8 12.84 10.61 12.72 9.75 9.76 14 Hepatitis (A and B) 74.2 104.0 103.8 106.0 67.8 97.2 132 Source: MOPH, health statistics information in China 1948-1988, 1991.
Transformation of China's rural health care
System disintegration of rural health organizations Close ties between different level of health care organizations started disappearing after reforms. Under the old CMS village health stations, townships clinics and county hospitals were integrated within the three tier system. An effective and efficient referral mechanism was built into the system so that patient flow was evenly spread between the three levels of health care facilities. With the dissolution of CMS the internal administrative relationship between the three types of health care providers have been either weakened or lost. Without a formal referral system people tend to see private doctors and to use county hospitals much more frequently, bypassing the township clinics [11]. On efficiency ground, however, some patients admitted to the county hospitals could have been well treated by the township clinics [18]. Better coordination and integration of different level facilities can certainly control the duplication and overuse of health services, which is now one of the major problems in China's rural health care system [I1, 15,26]. Facing decreased demand and simultaneous reduction of government support many township clinics are being forced to downsize or close. From 1980 to 1988, the number of personnel working in township clinics declined from 1,037,543 to 870,355 and the number of beds decreased from 775,413 to 726,124 [14]. These developments exacerbated the shortage of bed and personnel in rural areas and produced more crowding at county hospitals. In addition, there may be problems in reduced access to and effectiveness of the rural health care system associated with the much weakened middle-level health facilities in rural China. Efficiency issue aside, the shift of demand toward county hospitals, which largely caused the weakening of lower level facilities, is also indicative of the need for the rural health care system to be dynamic, rather than static. People's demand for medical services is driven, among other things, by the actual and perceived quality of the services rendered. Therefore, rural health care facilities, in order to survive at a time where people have the freedom of choice, need to constantly upgrade their technical as well as marketing skills to attract patients.
THE CHINESE LESSONS
In many western countries, the trend between 1950-1980s has been towards an increasing role for government because of known market failures in the health sector. In China, by contrast, market forces are being introduced to remedy the systemic failures of excessive rather than insufficient government involvement. The agricultural reforms in China-decollectivization and freeing up of markets for agricultural-altered the peasants' incentives, weakened community organization, and lessened the central government's control over local communities. ConSSM 41/8--E
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sistent with its economic policy, the Chinese government adopted a laissez-faire policy toward rural health care which has caused major changes in the country's highly acclaimed rural CMS. The consequences of these changes on rural health care are multifold: a decreased supply of barefoot doctors, disintegration of organized primary care, reduced primary health care, and an increased demand for higher-quality medical services. More than ten years have elapsed since China changed its economic system and China is still struggling to find an equitable, efficient and sustainable way for financing and organizing health services for its rural population. The Chinese experiences provided several major lessons. First, the Chinese experiences demonstrated the need to understand the limits of market forces and define the role of government in rural health care under a market economy. Before the agricultural reform, China achieved remarkable health improvement for its rural population, largely because the government played a strong role in organizing, financing, supervising rural health services. After the reform, the role of the government in agricultural production was significantly reduced. As China moves its agricultural sector toward a market economy, the government adopted a laissez-faire policy in its rural health care and left the market to finance and provide health services. However, under a market economy, the government still has major roles such as provide public goods and set the rules of the game for market operations and enforce them. As for public goods, the government has a responsibility to provide sanitation, clean water, prevention, health education and primary care. In China the government reduced its financial support for basic public health in rural areas and the controllable communicable diseases increased. The emergence of the rural private medical market with minimum public supervision also caused many problems. Equally importantly, the government, as initiator and enabler, should and can provide technical assistance, especially the leadership and management training and public supervision of community financing. Despite availability of financial resources and people's willingness to support community financing schemes, many rural communities were not able to sustain effective operation of the schemes due to lack of managerial know-how. The government has both the responsibility and resources to fill this important gap. In the process of filling the gap it is especially important to reexamine and redefine the role of central government vs local governments. Coupled with China's policy of decentralizing the fiscal responsibilities, health care becomes increasingly a local matter for the rural population, thus the gap between the rich and poor is getting worse, before it's getting better. Although an uniform benefit package for all the people in China is perhaps neither feasible
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nor desirable, an increasing role for the central government in health policy research and development, in leading the efforts to relieve the illnessinduced poverty, and in establishing more equitable access to health care in rural areas, as well as an increasing cooperation between the central and local level of government in guiding the health care reforms may be warranted. Second, China's experiences also illustrate the necessity and feasibility of establishing community financing schemes which are for the people and by the people. Equity considerations require the government to play a major role in health care financing, include pooling risks. At China's level of development, the government does not have adequate public resources to finance all the health services. The majority of the health care costs may have to be borne by communities or individuals. However, that doesn't mean that the government should abandon its role in assisting the communities to" develop an organized system. Various studies found a popular demand for collective financing of rural health care services in China. Even in the poorest areas, both peasants and government officials expressed a strong preference for collective financing over the currently dominant FFS system [11, 23]. According to a survey on 114 poor counties in China, 96.2% of the officials interviewed thought that it is necessary to develop a CMS type of financing scheme in the area to replace the current self pay system, 92.3% of them said that establishing such a community financing system requiring certain contributions from the peasants will not impose an additional financial burden upon the local residents [23]. Moreover, Rising medical costs in China have caused an increasing number of households to become newly poverty stricken because of illnessinduced-poverty. Risk pooling mechanisms seem to be needed to prevent poverty and to improve the access to health services. To be sure, there might be problems with operation of any risk pooling schemes such as adverse selection, 'moral hazard' (overutilization), the need to have a large enough pool of participants to assure sustainability etc. All these potential problems need to be considered in program development, so that adequate preventive measures (e.g. compulsory enrollment to avoid adverse selection and copayment provisions to control unnecessary resource use from the consumer side) can be taken. Establishing community financing schemes, on the other hand, need to avoid the problems of the old CMS which was strictly controlled by the government bureaucracies. The instability with old CMS are caused by three problems: small risk pooling base; lack of managerial skills on the part of the managers of the schemes; and lack of public participation and control by the local residents. China's experiences with its CMS provided ample evidence that when a system is heavily controlled by the government, there is a tendency for the government officials to abuse
their power and corrupt the system. Therefore, emphasizing government's role in rural health care does not imply governmental control. Quite the contrary, any new community financing scheme should be controlled by the people, serving the interests of the members of a community, rather than serving the interest of a privileged few. It is an important element of community development and, as such, associated with social and political participation by the people. Third, community financing cannot be cost recovery alone. China, like many other developing countries, has a twin problem: limited health resources and misallocation of available resources. Even in the poorest areas in China, it was found that people were spending and were willing to spend a significant amount of their income for health services [14, 23]. At issue, however, are appropriate mechanisms for resource allocation: should the market play the dominant role in allocating resources and organize health services? China's experiences show that the market does not work well in health care. Before the reforms, despite having less financial resources, a well organized rural health delivery system, the three tier medical system, produced more integrated public health and primary care services and the services were accessible to all. After reforms, the government's laissez-faire policy resulted in reliance upon market exchange to dictate the organization, financing and delivery of health services, including such basic programs as vaccinations. Consequently, a disintegrated rural health sector has become increasingly inequitable, inefficient and unstable. Therefore, any new initiative that combines the market and planning functions would need to address the issue of organization and integration of different services (e.g. preventive and curative services), and among different health care organizations (e.g. village, township and county level health facilities). Finally, the Chinese experiences show that a health care system needs to be dynamic, rather than static, to keep pace with people's changing demand and needs. China found that demand for medical care is directly related to income. As their income increases, many peasants go directly to higher-level facilities such as county hospitals for services. Moreover, they become less interested in and less supportive of primary care services provided by the barefoot doctors. Meanwhile, disease conditions changed with economic development. Having reduced communicable and infectious diseases, China is now confronted with the problem of preventing and treating chronic illnesses. Having improved sanitation and drinking water, it is now faced with environmental pollution. Facing these changing demand and needs, any static health care system is doomed to failure that was organized to deal with the previous epidemiological profile. To meet those new challenges, China might need to do two major things simultaneously: first, to
Transformation of China's rural health care initiate systemic a n d organizational reforms such as reorienting the current system from focusing o n t r e a t m e n t to emphasizing prevention of chronic a n d degenerative diseases, establishing a cooperative working relationship between now separate systems of disease prevention and curative medicine, and second, C h i n a needs to p r o m o t e technical a n d professional development, such as upgrading e q u i p m e n t and increasing technical competence o f the rural health workers. The collapse of C M S has generated m a n y concerns. H o w C h i n a is going to structure a new system of financing and organizing health services that meet the changing d e m a n d and needs of the p o p u l a t i o n will be of wider international interest. Nonetheless the Chinese experience already can benefit other nations as they struggle to formulate their health care financing policy for their rural population.
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