Note: China's ineffective health system reform has recently sparked national debates. The following article prepared by a China Health Rural Study team with the World Bank sheds some light on the issue, particularly, for Chinese farmers.

All health systems face challenges. Arguably, China's faces more than most. There is broad agreement on the problems, but much less on how to tackle them.

The weaknesses in China's public health system - laid bare by SARS (severe acute respiratory syndrome) - reflect the way that public health programmes are financed. Local governments rely largely on their own resources to meet recurrent and capital public health expenditures. The result is that in provinces where the public health challenge is greatest, public health programmes - such as surveillance - are weakest. Public health agencies try to supplement meagre government allocations with revenues from other sources. Sometimes patients end up paying for public health interventions.

This is likely to have negative effects on coverage, and poses a public health threat to the local community, the rest of China, and indeed the entire international community.

With avian flu on the horizon, and buoyant central government fiscal revenue, now might be a good time for the government to think about reforming the finance of public health.

Having the government fully finance core public health activities makes good economic and public health sense. It would mean ensuring that spending levels reflect public health needs or challenges.

This could be achieved by raising the amount that central government transfers to local governments for public health activities, and then allocating transfers through a formula that captures local public health needs. The delivery of public health activities at the local level could also usefully be rationalized, with core population-based activities such as surveillance delivered by a single agency, funded in full by government, and under a greater degree of central oversight than at present.

In personal health services, too, there are problems. They are also caused largely by the way that services are financed. The combination of limited health insurance, especially among the poor, and high and rapidly rising health costs results in people either not getting the care they need, or getting care but falling into poverty. To make matters worse, the care they receive is often poor quality, and sometimes medically unnecessary.

This reflects the lack of quality control mechanisms and the perverse incentives providers face. As with public health agencies, the government finances the basic costs of health facilities, and allows them to raise additional revenues from patients. In efforts to keep basic care affordable, the government sets the price of basic care below cost, and allows providers to earn profits on drugs and high-technology care. The result is that providers end up creating demand for high-margin care.

The government's introduction of a new co-operative medical scheme (NCMS) in rural areas is a step in the right direction. Residents and local and central governments share the cost. A major problem with the scheme is that the current level of insurance coverage is so small that farmers will still end up paying the bulk of their health care costs out of their pockets. Revenue needs to be perhaps as much as five times as large as it is now. How could this be done?

First, enrollees would likely be willing to pay more to keep down out-of-pocket payments. In October this year, China Daily reported on a co-operative scheme in one county dedicated to providing basic care. The scheme is a supplement to NCMS, which focuses on catastrophic care. Households have shown themselves willing to contribute part of the cost of the scheme. The scheme fills a gap left by NCMS. It would make more sense for the NCMS to fill the gap, expanding the scope of its coverage to include both basic and catastrophic care.

Second, additional revenues could be raised by redirecting the monies that government currently pays directly to facilities through NCMS. This would have the merit that government subsidies would follow the patient, instead of the government currently having to second-guess - through population and bed norms - which facilities need support the most.

If a scaled-up NCMS is to be affordable to poor households and poor local governments, a way needs to be found to link payments to income. One way to do this would be through the tax-transfer system: Use central government revenues to increase the size of the NCMS central fund, and target the transfers from the fund to poor local governments. Another way would be through a health insurance solidarity fund as in many countries: Have households and local governments contribute to this fund according to income, add existing central government contributions, and pay everyone the same NCMS "capitation" payment.

In addition to scaling up NCMS, it would be wise to introduce reforms to the way providers are paid, monitored and organized. It's highly desirable to move away from the current system of fee-for-service coupled with distorted prices. A better way to pay providers would be to pay them a fixed price for each type of diagnosis, a system known as diagnostic-related groups, or DRGs. Zhengan county in Shaanxi Province is using DRGs to pay providers in its NCMS. They have also been widely used in China's urban health insurance scheme, and have been found to be a more effective way of controlling costs than co-payments by patients.

In addition to paying providers better, NCMS could engineer quality improvements and greater efficiency by performing other "purchaser" functions as well - identifying the health needs of the local population, setting up a benefits package, contracting with providers and monitoring performance, introducing clinical guidelines, drug lists, utilization reviews, and so on.

Some regulatory reforms may also be useful. Examples include the separation of drug prescribing and dispensing, tighter regulation of equipment and infrastructure investments, and a tighter system of certifying and licensing professionals. Government has a key role to play here.

Whether organizational reforms are needed as well is not as clear-cut as many assume. For example, in cases where providers are paid sensibly and monitored carefully by insurers and government, the evidence suggests that it makes relatively little difference whether they are government-owned or private, or for-profit or not-for-profit.

Reforms such as the ones just described would bring China's system more in line with those of countries who are members of the OECD, the Organization for Economic Co-operation and Development, a unique forum where the governments of 30 market democracies work together to address the economic, social and governance challenges of globalization as well as to exploit its opportunities.

They would take time and resources to implement, but are not impossible. There are, in fact, parts of the country that are already carrying out the suggested recommendations. In health reform, as in so many areas, China can learn as much from itself as it can from other countries.

(China Daily 11/26/2005 page4)