Journal of Asian Public Policy

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China's ongoing public hospital reform: initiatives,

constraints and prospect

Jingwei Alex He

To cite this article: Jingwei Alex He (2011) China's ongoing public hospital reform:
initiatives, constraints and prospect, Journal of Asian Public Policy, 4:3, 342-349, DOI:
10.1080/17516234.2011.630228

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Published online: 14 Dec 2011.

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 Journal of Asian Public Policy
Vol. 4, No. 3, November 2011, 342–349

RESEARCH NOTE
China’s ongoing public hospital reform: initiatives,
constraints and prospect
Jingwei Alex He*

Faculty of Arts and Sciences, the Hong Kong Institute of Education, 10 Lo Ping Road, Tai Po,
New Territories, Hong Kong SAR

The first phase of China’s ambitious national health-care reform will be concluded in
2011. However, public hospital reform – its central component – has not been proceed-
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ing smoothly. Heavy vested interests, enormous budgetary demands and the congested
policy gridlock have made it extremely difficult to succeed. Nevertheless, a number of
promising initiatives are presently being undertaken and are expected to make substan-
tive progress. This article reviews the process of this ongoing public hospital reform,
examines three central initiatives and analyses major constraints. It argues that with the
policy gridlock gradually relaxed, governments should embark on the ‘strategic pur-
chasing’ of medical services and properly control hospital behaviours by revising the
heavily distorted incentive structure.
Keywords: initiative; public hospital; health-care; hospital reform; China

Introduction
The outcome of China’s ambitious national health-care reform needs to be scrutinized
this year. Investing as much as 850 billion yuan RMB, the first phase of this reform is
committed to make significant progress in five fronts, namely, increasing the coverage of
major health insurance schemes, establishing the national essential drug system, enhancing
primary health networks, achieving equal entitlement of basic public health services and
executing pilot programmes of the public hospital reform. In light of widespread public
discontent on China’s health system and rising expectation on the current reform encour-
aged by its elegant blueprints, the government has been under pressure to deliver decent
outcomes to restore people’s trust.
Health-care in China is a typical ‘wicked’ problem – in the language of public pol-
icy analysis, but the wickedness of different aspects varies. Among the five components
of the current reform programme, the first four – in the view of the Chinese policymak-
ers – are something that could be done with increased budgetary injection, and indeed,
the expansion of insurance coverage and the reinforcement of public health network as
well as primary care have received significant financial resources in the past few years.
However, the public hospital sector reform is not in the list (He 2010). As underscored by
Chinese Premier Wen Jiabao, this reform will be the toughest ‘hard bone’ in this round
of health-care reforms.1 Ultimately, the outcome of this reform will be directly judged by
the empirical experience of numerous Chinese citizens whose primary contact with the

*Email: jwhe@ied.edu.hk

ISSN 1751-6234 print/ISSN 1751-6242 online

© 2011 Taylor & Francis
http://dx.doi.org/10.1080/17516234.2011.630228
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 Journal of Asian Public Policy 343

health system is public hospitals. Practically, people’s primary criterion is to see whether
the rampant cost escalation could be curbed and whether they could receive affordable care
without compromising quality. Yet, international experiences suggest that public hospital
reforms, whichever approach adopted, are destined to be difficult given the complex web
of vested interests, perverse incentive schemes and various opportunistic behaviours preva-
lent in the medical sector (Jakab et al. 2003). The ongoing public hospital reform in China
could not be exempted.
This article reviews the process of the ongoing public hospital reform, examines three
central initiatives and analyses major constraints. The data used in this article come from
secondary resources and a series of in-depth interviews. The secondary materials were col-
lected from statistical yearbooks, policy documents and newspaper reports, while a number
of semi-structured interviews were conducted between July 2009 and June 2010. The in-
depth interviews were aimed at understanding the positions of major policy actors and
probing the implications of the ongoing reform initiatives on policy implementation at the
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local level. The interviewees included senior officials from the Ministry of Health (MOH),
Provincial Health Bureau, Provincial Labour Bureau, Municipal Health Department and a
couple of vice mayors in supervision of health affairs. The provinces that the author visited
were Guangdong, Fujian, Zhejiang and Shanxi. In general, this article presents a policy
analysis of the ongoing public hospital reform based on a comprehensive understanding of
its key initiatives, major constraints and future prospects.

Protracted policymaking and the 16-city pilot

Commenced in March 2009, China’s new national health-care reform made clear assign-
ments to related ministries, commissions and local governments in order to overcome the
notorious policy deadlock that resulted from sectoral interdependency, which is in part
responsible for past rounds of failed reforms (Huang 2009). Involved in all five components
of the new reform, the MOH was entrusted to take a leading role in the public hospi-
tal reform, with collaboration from the State Commission of Planning and Development,
the Ministry of Finance (MOF) and others. The MOH vowed to conclude the national
pilot programmes in 2010 and apply the experiences obtained to the nationwide reform
in 2011. Unfortunately, supposed to be announced in late 2009 and launched in early
2010, the announcement of the policy document for national pilots was postponed for at
least twice and was not released until late February 2010. It was said that the inability of
reaching a consensus among ministries was responsible for this protracted policymaking
process.2
Public hospitals are the principal constituencies for the Chinese health bureaucracy,
and the latter has been long criticized for protecting public hospitals and tolerating their
inefficiencies as well as various malpractices (Aitchison 1997, World Bank 1997, Duckett
2001, Hsiao 2007, Yip and Hsiao 2008). Thus, it was unsurprising to see the MOH’s
efforts in trying to bargain for more budgetary allocation in the then upcoming hospital
sector reforms, which were to some extent justifiable given the remarkably low contribu-
tion of government subsidies in hospital incomes (less than 10% on national average).3
These proposals, however, received questionings from more powerful ministries, espe-
cially the MOF, which proves a fiscally conservative bureaucracy and often assumes
scepticism over financial requests from the health sector (Lieberthal and Oksenberg 1988,
Aitchison 1997, Duckett 2003). Their concerns were not unjustifiable either though, given
the intrinsic inclination of health providers in inducing demands and providing unnec-
essary care, which have been very rampant in China. The vast inefficiencies as a result
 344 A.J. He

of induced demands, overprescription, abuse of high-tech diagnostic tests and irrational

competition for state-of-the-art medical technologies have extraordinarily inflated China’s
overall health expenditure (Hsiao 1995, Blumenthal and Hsiao 2005). The policymakers
understand this better than others do.
Despite other issues, debates mainly took place over the government’s subsidization on
public hospitals. The policymakers were unwilling to see budgetary injections once again
eaten by inefficient use, and therefore the final programme did not lay out specific guide-
lines on this issue while generally stating that government subsidies should be increased
(He 2010). This, however, undermined the pressure from the centre to local governments
on assuming more financial responsibility and allocating significant budgetary increment.
The policymakers soon realized this and in the ensuing policy directives it was stressed
that local governments must honour their promises in subsidizing public hospitals.4
Carrying out local experiments before universalizing certain policy schemes is a defin-
ing feature of China’s public policy practice. The public hospital reform also started from
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local pilots. The MOH’s original plan was to select 100 public hospitals in 12 representa-
tive cities to undertake pilots led by itself, but this scheme was somehow modified into a
16-city pilot programme guided by the MOH while provincial governments were required
to select one to two cities with ‘ripe conditions’ to undertake local-level experiments. The
16-city pilot generally encourages one hundred followers to bloom (bai hua qi fang), as
even the policymakers in Beijing are unclear about what models are the best. While the
MOH issued general guidelines, local governments and health departments are required to
proceed based on their own fiscal strength, insurance coverage, general level of affluence
and other related socio-economic conditions. Having realized the difficulty in coordinating
various parties, in 2011, the MOH appointed senior liaison officers to all pilot cities with
the aim of strengthening communication and coordination.

Central initiatives and intentions

Among others, three initiatives remarkably contrast themselves with past policy practices.
First, the profit margin for drugs will be abandoned. In the wake of drastic decline of
government’s subsidies in late 1980s, Chinese public health facilities started to face critical
financial situation. In order to make them survive, the government allowed hospitals to
generate revenues from drug dispensing, by allowing a price markup at 15% for Western
medicine and 25% for traditional Chinese medicine (Liu et al. 2000). However, this policy
has greatly incentivized Chinese hospitals to increase revenues from overprescribing (Yang
2008). Revenue from drug sales has consistently accounted for around 50% in hospital
incomes, a situation rarely seen in other health systems (see Figure 1).
The ongoing public hospital reform has committed to remove this notorious profit mar-
gin, in lieu of which will be a newly created fee scheme called pharmaceutical service
fee (yaoshi fuwu fei). Once implemented, this fee will be collected from insurees’ medi-
cal savings accounts or paid out of pocket. Yet, to date, there has been little progress in
pinpointing the level of charge of this new fee scheme. Given the heavy reliance on drug
revenues, the removal of the profit margin will lead to a huge loss of hospital incomes,
and the pharmaceutical service fee would be certainly insufficient to make up the shortfall
because of the proposed low level of charges. The resolution from the MOH is to require
local governments to assume more responsibilities by injecting more funds to make up
the shortfall that resulted from the abolishment of drug profit margins. Needless to say,
local governments are reluctant to do so because this shortfall may amount to billions of
yuan that would go beyond their fiscal capacities. The author’s interviews with senior local
 Journal of Asian Public Policy 345

2008
2007
2006
2005
2004 Government
Year

2003 Service charge

2002 Drug sales
2001 Others
2000
1999
1998
0 10 20 30 40 50 60 70 80 90 100
Percentage (%)
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Figure 1. Sources of income for Chinese public hospitals, 1998–2008.

Source: Ministry of Health, PRC, 2010.

government leaders and health officials also suggest that this tension would be very likely
to retard the progress of China’s public hospital reform, despite the good intention of this
initiative.5
Second, many localities embarked on corporate governance reforms in attempt to
achieve the so-called regulation–administration decoupling (guan ban fenkai). As men-
tioned before, the Chinese health bureaucracy has been widely criticized for predilection
over public hospitals and as a source of vast inefficiencies, and therefore separating its role
as professional supervisor from administrator was identified as a logical solution. Some
localities – notably Shenzhen, Zhenjiang, Chengdu and so on – have taken a giant step for-
ward by establishing separate regulatory bodies out of or under local health departments.
Although actual names vary (Hospital Management Committee, Hospital Regulatory
Authority and so on), these experiments have been obviously under the influence of Hong
Kong and Singapore’s experiences in restructuring. While drawing clearer lines between
hospital regulation and administration is undoubtedly imperative in China, creating a new
government body in lieu with another may not necessarily be able to address the root causes
of the problematic governance structure. Concerns over potential bureaucratic conflicts or
distorted command chain have arisen.6
Third, the clinical pathway system and payment reforms aim to tackle more funda-
mental incentive problems in the medical system. From the economic perspective, one
fundamental cause of health-care cost inflation in China and the resultant unaffordability
is the overreliance on fee-for-service (FFS) as the dominant method for paying providers
(Hu et al. 2008, Ramesh and Wu 2009). Among several payment systems, FFS has
proved weakest in controlling cost, in spite of its other advantages (Liu and Mills 2007).
Calls for moving away from FFS started to rise from 1990s, and more scientific payment
arrangements have indeed demonstrated their power in several local experiments (Yip and
Eggleston 2001, 2004, Eggleston and Hsieh 2004). These alternative payment methods
include prospective global budget, diagnostic-related groups (DRGs), capitation, per diem
and so on.
While their advantages have long been recognized, however, the adoption to a wider
scale has been sluggish. There are two reasons that explain why. First, employing
these methods is technically sophisticated. Regulatory bodies need to possess abundant
information regarding case mix, profit margin, actual costs and components in treating
 346 A.J. He

each disease, labour cost and so on. Arguably, many local governments do not have these
capacities. Second, the government organizational reform in 1998 granted the authority of
managing social health insurance schemes to the Chinese labour bureaucracy who has dif-
ferent interests and policy agendas vis-à-vis the health bureaucracy (Aitchison 1997). This
fragmentation of authorities has made policy coordination more difficult, and local labour
authorities often claim that they are not ready to launch payment reforms. Hopefully, these
two problems will be addressed in the current reform. The fragmentation of authorities
has been largely overcome by the coordination at the central level and now the labour
bureaucracy is collaborating well with the health bureaucracy on payment reforms. In the
mean time, the experiments on clinical pathways (linchuang lujing) will address the tech-
nical difficulty and pave the way for more scientific payment systems conducive to cost
containment (He 2010).
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Relaxing the policy gridlock

Aside from these three key initiatives, a couple of other efforts are also leading public
hospitals towards best practices or attacking the high-powered perverse incentives embed-
ded in the Chinese medical system. These efforts include electronic case record system,
performance-based salary, the two-way referral scheme and many others. The government
has embarked on a systemic and holistic approach to overhaul its public hospital system
with concerted measures, but challenges remain. Among various chronic problems plagu-
ing the Chinese health system, cost inflation is the central symptom (Hu et al. 2008, Yip
and Hsiao 2008). The rapid cost escalation coupled with poor insurance coverage and per-
verse payment system impoverished numerous Chinese households and spurred enormous
dissatisfaction. Bending the curve of soaring inflation is one of the integral missions of the
ongoing public hospital reform.
There is no single explanation for rapid cost inflation in China, which is the result of
a series of interconnected system failures. David Legge et al. (2009) described this as a
policy gridlock (delineated in Figure 2) where problem A must be solved in order to solve
problem B, but problem B requires a solution to problem C, and the solution to problem
C depends on finding a solution to problem A.7 Putting it in detail, the precipitous drop
of government subsidies forced hospitals to generate most of their revenues from user
fees and drug sales. Desperately pursing profits, most hospitals adopted revenue-related
bonus system to incentivize doctors to engage in profit-making behaviours. Trapped in the
ambivalence of making hospitals survive and ensuring affordability, the government set
artificially the prices for basic services below costs while allowing larger profit margins to
drugs and high-tech procedures. Unsurprisingly, doctors were induced to prescribe drugs
and procedures with higher profit margin, which in turn greatly inflated health-care costs
(Liu et al. 2000). Moreover, the collapse of the old insurance schemes left most Chinese
people unprotected by risk pooling, and thus had to pay medical bills out of pocket; mean-
while, the dominance of FFS and weak control from the third-party insurers could not
impose essential controls on providers’ profit-seeking incentives. In addition, the collapse
of the referral system made gatekeeping mechanisms exist in name only (Yip and Hsiao
2008). Large hospitals are always overutilized while primary care institutions are remark-
ably underutilized, causing massive inefficiencies and accelerating cost inflation. Apart
from these, the wide existence of informal payments (hongbao) and drug commissions
(kickbacks) compounded by the low level of remuneration also give individual doctors
strong incentive to provide unnecessary and cost-inflationary care (Yang 2008).
Although this illustration is by no means complete given the complexities of China’s
health-care system, it does reveal the interconnectedness of many root causes of cost
 Journal of Asian Public Policy 347

Low formal salary Pricing Subsidy

Rampant informal payment Artificially-set low hospital fees Very low government subsidy

High price for hi-techs and drugs Generating revenue for survival

Revenue-related bonus

UNNECESSARY COST
Drug commission CARE ESCALATION
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Weak third party control Weak gate keeping

Fee-for-service Weak referral system

Health insurance Health system

Figure 2. Chinese health policy gridlock in relation to cost escalation.

Source: The author; with reference to Legge et al. (2009).

inflation in China. The current systemic reform, however, provides an unprecedented

opportunity to relax the congested policy gridlock with firm political will and sizeable
budgetary outlay. Most important, the gradually increased insurance coverage does not
only reduce people’s out-of-pocket financial burden, but also provides the government
with a strengthened policy lever to control hospital behaviours. The leverage effect would
be augmented by the introduction of more cost-containment conducive payment methods.
Of course, these effects would hardly be realized unless the third-party purchasers exercise
more proactive controls. The government has also been taking actions to press down drug
prices by imposing tighter regulation on the pharmaceutical industries. These efforts will
be vigorously supported by the newly launched national essential drug system.
Nonetheless, a question seems persistent. Who is to pay the bill? Financing issue did
not only protract the policymaking process, but also became a headache to local gov-
ernments. By and large, governments have been funding public hospitals in two streams,
which are recurrent costs (basic salaries and so on) and developmental investments (infras-
tructural projects, equipment procurement and so on). While the national health-care
reform calls local government to shoulder financial responsibilities in recovering more
recurrent costs of hospitals, the expected large loss in drug revenues will require local
governments to increase their subsidies substantively. Nevertheless, this formidable bud-
getary pressure could be largely relieved by improving the efficiency of government
subsidies. Traditionally, government subsidies to public medical facilities were based on
two formulas, a static scheme calculated by number of beds or number of health profes-
sionals, or a dynamic scheme reimbursing hospitals on workload. In the ongoing public
hospital reform and subsequent reforms, increased government funds should strive to revise
 348 A.J. He

hospital incentives by encouraging desired behaviours. This could be done through either
prospective global budget or retrospective subvention system built on strictly set criteria.
Geared up to well-defined policy goals – cost containment for instance – these criteria will
be more able to guide hospitals towards expected directions (He 2011).

Concluding remarks
Public hospital reform is the central component of China’s ongoing national health-care
reform. Yet, it remarkably contrasts with other elements in terms of difficulty to achieve.
While supposed to commence in early 2010, protracted policymaking process had made
it fail to announce the policy guidelines until February. Behind this were intense concerns
within the government on hospitals’ inherent inclination of demand-inducing and tremen-
dous budgetary pressure about which this current hospital reform will bring. Preliminary
experiences are expected to emerge from the nationwide 16-city pilot programmes and
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various experiments led by local governments. Most initiatives are on the right track in
light of international experience and the urgency of attacking highly distorted incentives.
Constraints, however, mainly come from the financial aspect. In order to let every dollar
put into the medical sector make sense, the governments should embark on ‘strategic pur-
chasing’ of medical services with hospital behaviours appropriately controlled. Meanwhile,
however, addressing the wicked problem of health-care in China requires concerted efforts
and a holistic approach to reform, rather than investing funds per se.

Acknowledgement
The author thanks Phua Kai Hong, M. Ramesh and Wu Xun for several discussions on China’s
health-care reforms.

Notes
1. Wen’s online conversation with netizens, 28 February 2009, see http://www.news.cn/zlft2010_
wzzb_more.htm.
2. The announcement of public hospital reform plan got postponed again, jinji guancha
bao (Economic Observer), 29 January 2010, see http://finance.ifeng.com/news/special/xylgg/
20100129/1777214.shtml.
3. 2009 China health statistic yearbook. Beijing: China Union Medical University Press, p. 92.
4. 2011 nian gongli yiyuan gaige shidian gongzuo anpai [Work arrangement of the pilot program
of public hospital reform in 2011] . General Office, State Council, 28 February 2011.
5. Interviews with Dr. Z, Vice Mayor, Y city, March 2010; Dr. S, Director, Provincial Health
Bureau, D Province, June 2010; Mr. Q, Director, Municipal Health Department, Z city,
September 2010.
6. Interview with Mr. Z, Director, Division of Health Management, Municipal Health Department,
Y city, March 2010.
7. From an unpublished manuscript entitled ‘Health policy gridlock: the case of health insurance
in hospital efficiency’. The author thanks Dr. David Legge at Latrobe University for sharing it.

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