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Updated On: Jul 05, 2011

SIIA Associate Fellow Therese Leung surveys China's innovative plans to correct price distortions in health care, and believes that a better cure would be more widespread implementation.

This commentary was featured in the South China Morning Post (Hong Kong) newspaper, 5 July 2011.

by Therese Leung

When its latest five-year plan was revealed this spring, Beijing once again declared its commitment to reduce the crippling cost of health care for mainland residents. On the surface, it seemed like another lofty goal without any concrete remedy.

Do not be fooled by the opaque language. As part of its shift away from the "growth at all costs" strategy, the Chinese government has embarked on dozens of innovative experiments which will determine the shape of the health care system of 1.3 billion people. This is the same pragmatic, experimental approach that Beijing has taken to economic growth - and it is betting that it can now reduce the flawed incentives in China's current system which drive up health care costs.

The Chinese health care system is notorious for promoting perverse financial incentives for providers. Since the government subsidises only 10 per cent of a hospital's total operating costs, providers depend on patients' fees from drugs and diagnostic tests to survive financially. It results in the overdelivery of unnecessary, inappropriate and expensive care in order to generate revenue. For example, 75 per cent of all patients in China who suffer from a common cold are prescribed antibiotics, whereas the international average is only 30 per cent.

Beijing is aware of these problems, has diagnosed the symptoms, and is now experimenting with the best course of treatment.

One experiment that was successful at reducing costs was at Jining Medical College Hospital in Shandong province. This pilot test recalibrated the incentive structure for providers by adopting a prospective case-based payment method, where payment rates were set in advance for each disease or case, instead of using the traditional fee-for-service system which retrospectively reimburses providers for services and gives an incentive to arrange more costly treatment.

The payment rates were based on a predefined clinical treatment protocol designed by an expert group of specialists and which doctors were required to follow to treat each disease. The goal was to control the increase in medical expenditure, including by reducing the number of unnecessary drugs, examinations, and the length of stay for treatment.

The cost savings were significant. Expenditure decreased by 33 per cent over two years, with the largest reduction for expensive treatments such as heart surgery. Reductions in drug expenditure were also sizeable, falling from 40 per cent to 12 per cent of total revenue.

The case-based payment method has not yet been rigorously evaluated, but the method seems successful at restricting health expenditure growth. Although concerns remain over the extent to which the quality of care is compromised under this system, the Ministry of Health has recently taken steps to further develop this model for a small handful of diseases across China.

Not all experimental reforms to the provider payment system have had the intended result. Beijing has made multiple attempts to delink the incentives for providers to prescribe drugs from their need to generate a profit, but has been unable to reduce the large share of prescription drug spending on total health expenditure in China - 54 per cent of outpatient expenditure was spent on drugs in 2008, a disproportionately high amount when compared with other countries.

The government allows providers to charge their patients a fixed 15 per cent mark-up of the listed drug price, so providers have an incentive to overprescribe the most expensive drugs to maximise their profit.

In 2009, Beijing tried to alter these incentives by placing a cap on drug prices. It established an "essential medicines list", a list of vital drugs that providers would be required to prioritise when treating patients and to offer at cost.

While some drug prices fell, there have also been unintended negative consequences. The plan only applied to state-owned lower-level hospitals and community health clinics which have lost some 60 per cent of their revenue as a result. Doctors then fled these clinics for more lucrative jobs in urban community hospitals where the local governments have more money to supplement the hospitals' lost revenue.

With no other way of generating income and an inadequate level of financial subsidies from the local government to compensate for the lost drug revenue, many of these community clinics are now teetering on the brink of insolvency. Ironically, these are the same primary care institutions the government is trying to make the cornerstone of its health care system overhaul.

Successes and failures are to be expected in this process, and these outcomes underline the difficult challenges of reforming a multilayered, dysfunctional system.

Beijing should be commended for its commitment towards the goal of providing affordable health care to the Chinese public. But it is also time to stop gathering data and tinkering at the edges and instead decide on a broader implementation plan.

Executing and managing the transformation of a sickly health care system will be no easy task, but this is one illness where the treatment should not be delayed.

Therese Leung
About the author: 

Dr. Therese Leung is an associate fellow with the Singapore Institute of International Affairs and a senior research fellow at the Centre for Health Policy and Management in the National University of Singapore.