Review

Early appraisal of China’s huge and complex

health-care reforms
Winnie Chi-Man Yip, William C Hsiao, Wen Chen, Shanlian Hu, Jin Ma, Alan Maynard

China’s 3 year, CN¥850 billion (US$125 billion) reform plan, launched in 2009, marked the first phase towards achieving Lancet 2012; 379: 833–42
comprehensive universal health coverage by 2020. The government’s undertaking of systemic reform and its affirmation See Editorial page 777
of its role in financing health care together with priorities for prevention, primary care, and redistribution of finance See Comment page 782
and human resources to poor regions are positive developments. Accomplishing nearly universal insurance coverage in University of Oxford,
such a short time is commendable. However, transformation of money and insurance coverage into cost-effective Department of Public Health,
services is difficult when delivery of health care is hindered by waste, inefficiencies, poor quality of services, and scarcity Oxford, UK (Prof W C-M Yip PhD);
Harvard University, School of
and maldistribution of the qualified workforce. China must reform its incentive structures for providers, improve Public Health, Department of
governance of public hospitals, and institute a stronger regulatory system, but these changes have been slowed by Health Policy and Management,
opposition from stakeholders and lack of implementation capacity. The pace of reform should be moderated to allow Cambridge, MA, USA
service providers to develop absorptive capacity. Independent, outcome-based monitoring and evaluation by a third- (Prof W C Hsiao PhD); Fudan
University, School of Public
party are essential for mid-course correction of the plans and to make officials and providers accountable. Health, Department of Health
Economics, Shanghai, China
Introduction system, beginning in the 1980s. A description of the (Prof W Chen PhD,
Prof S Hu MSc); Shanghai
China unveiled its ambitious health-care reform plan in problems China faced before the reforms and their causes
Jiaotong University, College of
April, 2009, and committed to spending an additional is provided in the appendix. The 2002 SARS outbreak Public Health, Shanghai, China
CN¥850 billion (about US$125 billion) in the ensuing shocked the country’s leaders, exposed the inadequacies of (Prof J Ma PhD); University of
3 years, with the goal of provision of affordable and the public health protection system, and showed how York, Department of Health
Sciences, York, UK
equitable basic health care for all by 2020. The reform is government neglect had left the health system unprepared
(Prof A Maynard DSc)
anchored in five interdependent areas: expanding to deal with its core responsibilities.
Correspondence to:
coverage to insure more than 90% of the population, The basic tenet of the April, 2009, health-care reform Dr Winnie Chi-Man Yip,
establishing a national essential medicines system to was to reinstate the government’s role in health care, University of Oxford,
meet everyone’s primary needs of medicine, improving especially in provision of public goods and—in line with Department of Public Health,
the primary care delivery system to provide basic health the nation’s guiding principle to build a harmonious Oxford, OX3 7LF, UK
winnie.yip@dph.ox.ac.uk
care and to manage referrals to specialist care and society—in promotion of equity.2,14,15 This move marked a
hospitals, making public health services available and major departure from the reliance on the market of the
See Online for appendix
equal for all, and piloting public hospital reforms.1–3 preceding two decades. In the 2009–12 phase of the
Is China on the path to achieving its stated goal? In this reform, China adopted various interdependent strategies
report, we assess strategies adopted in the 2009–12 phase to build the foundation for achieving its goals, starting
of the reform and their progress, examine gaps in policy with a commitment to double annual government
priorities, discuss challenges to the reforms, and provide spending on health care. The new funding was targeted
recommendations for the way forward. at provision of public health, infrastructure-building,
training for provision of primary health care, and
Goals, priorities, and strategies subsidisation of enrolment in insurance programmes,
Although the pursuit of universal health coverage is shared with built-in mechanisms to affect redistribution across
by countries worldwide, China’s priorities and strategies regions and target vulnerable populations (eg, elderly
are indicative of its prereform environment and the events people with low income, children, women). The reform
that led to the reform. Before announcing health-care
reform, the Chinese Government was faced with wide-
spread public discontent stemming from unaffordable Search strategy and selection criteria
access to health care, major financial risks associated with We based our Review on reports (international and domestic), official documents, and
out-of-pocket medical expenses, and growing inequalities published work. We searched PubMed, Google Scholar, EconLit, Medline, the Social Science
in access to health care and health status across regions Research Network, and China Knowledge Resource Integrated Database for articles and
and populations of different socioeconomic status and research published since 2000; we also included cross-references, landmark or highly regarded
between urban and rural areas.4–9 Health improvement fell reports, and work suggested by peer reviewers. We restricted our search to works published in
short of what China’s rapid economic growth could have English or Chinese and used the search terms “urban resident basic medical insurance”,
afforded.10 Some previously eradicated infectious diseases “health insurance”, “cooperative medical scheme”, “migrant”, “health access”, “financial risk
re-emerged while non-communicable diseases (NCDs) protection”, “rational/irrational drug use”, “health expenditure”, “equity”, “resource allocation”,
increased unabated.11–13 The underlying causes of these “manpower”, “skill mix,” “governance”, “public hospital reform”, “healthcare reform”,
poor circumstances are complex but their roots lie in the “non-communicable disease”, “health system performance”, “evaluation”, and “China”, and
government’s neglect of the health-care system as it combinations of these terms. The date of the last search was Dec 7, 2011.
transformed China’s socialist economy into a market

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 Review
package seeks to reduce health expenditure by improving
efficiency and quality in two spheres that consume
substantial amounts of health resources: the pharma-
ceutical sector and public hospitals.
Financing of public health and primary health care
In 2011, the government provided ¥25 per head (raised
from ¥15 in 2009, with future increases promised, ¥6·5
is about US$1) for primary health-care providers to
deliver a defined package of basic public health services
for the population in their catchment areas. The package
was designed to combat the increasing burden imposed
by NCDs, which account for more than 80% of China’s
annual deaths,16 and improve prevention and care for
vulnerable populations while not neglecting the ongoing
challenges of infectious disease (appendix).11–13,17–20 The
central government directs its share of subsidy towards
the western and central regions. For example, the
division between central, provincial, and municipal or
county funding is ¥20·0, ¥4·0, and ¥1·0, respectively,
for Ningxia, a northwestern province and ¥0·0, ¥7·5,
¥7·5, and ¥10·0, respectively, in Shandong, a richer
eastern province (unpublished). The government further
identified eight priority public health interventions
targeted at vulnerable populations in rural areas,
financed by specially allocated transfers from central
government (appendix).21,22
China’s long-term strategy to improve efficiency of
resource allocation involves building a strong delivery
system based on primary health care, anchored in
community health centres in cities and township
health centres in rural areas. Providers of primary health
care are eventually to serve as so-called health gate-
keepers, managing referrals to specialist care and
hospitals. They are charged with delivery of the publicly
funded package of public health care we have described.
To these ends, the government directed its new funding
to building and strengthening the infrastructure for
primary health care with a focus on rural areas and
improving the workforce. Initiatives to address the
maldistribution of workforce include: waiving tuition
fees for medical students who are willing to work at
township health centres for least 3 years after graduation,
recruiting to meet the target of one-licensed-physician-
per-township health centre by the end of 2011, selecting
physicians from county hospitals to receive on-the-job
training in tertiary hospitals, and encouraging experi-
enced physicians from tertiary hospitals to rotate to
county hospitals to train staff.23,24
To align the incentives for primary health care to
provide public health care and basic health care and to
discourage profit-making activities, mark-ups on drugs
dispensed by these facilities have been eliminated
(zero-profit drug policy). To further encourage providers
of primary health care to improve services, the public
health budget decided by capitation is tied to an annual
performance assessment.
834
Subsidisation of universal health insurance coverage
By 2011, the government was subsidising each rural and
urban resident not covered by the Urban Employee Basic
Medical Insurance (UEBMI) programme ¥200 (a ten-
fold increase since 2003) to enrol in the New Cooperative
Medical Scheme (NCMS) or the Urban Resident Basic
Medical Insurance (URBMI), respectively, with the
individual contributing another ¥30–50 (table 1). The
central government pays half the enrolment subsidies
for the western and central regions but none for eastern
provinces. For example, the division between central,
provincial, and municipal or county funding is ¥124,
¥68, ¥8, respectively, in Ningxia and ¥0, ¥55, ¥75, and
¥70, respectively, in Shandong. A complementary
Medical Assistance programme managed by the Civil
Affairs Ministry pays the individual contribution for
poor families.
Establishment of an essential medicines programme
To reduce irrational drug use (eg, counterfeit drugs,
overprescription of antibiotics, and intravenous injec-
tions) and to improve access to safe and effective essential
drugs, the government introduced an essential medicines
programme for public primary health-care institutions,
with the intention of extending them to private providers
and hospitals.25
At the programme’s core is the National Essential
Medicine List. Theoretically, selection of drugs for this
list is based on: need according to the disease burden,
safety and clinical efficacy, affordability, past use patterns,
and availability of supply.26 The list for primary health-
care institutions, issued in August, 2009, contained
307 generic medicines (205 chemical and biological
medicines and 102 Chinese herbal preparations).27
Provinces can supplement the list according to their
economic situation and specific needs.
A province-based competitive-bidding system managed
by provincial governments was established with the goal
of reducing prices while assuring quality. The National
Development and Reform Commission, which tracks the
price and supply of essential medicines in the market,
sets price ceilings for drugs on the essential list, and
manufacturers bid through the internet. These drugs
are procured for the whole province in bulk at the agreed
bid prices and supplied to facilities or relevant city or
county organisations for further distribution. All public
primary health-care institutions are required to stock and
prescribe only drugs from the National Essential
Medicine List and to sell them at cost (zero-profit drug
policy). Local social health insurance programmes must
provide higher reimbursement for listed drugs than for
non-listed drugs.
Reform of public hospitals
Public hospitals in China deliver more than 90% of the
country’s inpatient and outpatient services, absorbing
2·9% of gross domestic product.28,29 In addition to
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UEBMI URBMI NCMS

2008 2010 2008 2010 2008 2010
Target population Formal sector urban Formal sector urban Children, students, elderly Children, students, elderly Rural residents Rural residents
workers workers people without previous people without previous
employment and employment and
migrants (in some cities) migrants (in some cities)
Risk-pooling unit City City City City County County
Enrolment, % 80·7% 92·4% 63·8% 92·9% 90·0% 96·6%
Total premium per person (¥)* 1443 1559 131 138 96 157
Government subsidy per person 0 0 80 120 (200 in 2011) 80 120 (200 in 2011)
Central government contribution 0 0 40 60 (100 in 2011) 40 60 (100 in 2011)
Individual contribution† 2–3% of salary 2–3% of salary 20–170 in central and 20–170 in central and 20–30 in western 20–30 in western
(about ¥494–741)‡ (about ¥494–741)‡ western provinces; western provinces; and central and central
40–250 in eastern 40–250 in eastern provinces; 30–50 in provinces; 30–50 in
provinces‡ provinces‡ eastern provinces‡ eastern provinces‡
Employer contribution† 6–8% of salary 6–8% of salary 0 0 0 0
(about (about
¥1483–1977)‡ ¥1483–1977)‡
Benefit design
Inpatient reimbursement rate (%)§ 67·0% 68·2% 43·8% 47·9% 37·8% 43·9%
% of counties or cities covering general Savings accounts Savings accounts 12·5% 57·5% 29·1% 78·8%
outpatient care
% of counties or cities covering outpatient Savings accounts Savings accounts 61·6% 82·7%¶ 63·0% 89·4%¶
care for major and chronic disease
Total reimbursement ceiling NA Six-times average NA Six-times disposable NA Six-times income
wage of employee in income of local residents of local farmers
the city

¥6·5 is about US$1. UEBMI=Urban Employee Basic Medical Insurance. URBMI=Urban Resident Basic Medical Insurance. NCMS=New Cooperative Medical Scheme. NA=data not available.*For URBMI and NCMS,
total premium can be greater than the sum of government subsidies and individual contribution because local governments can contribute more than the minimally required amount. †Variations exist in
western, central, and eastern provinces because individuals in richer provinces contribute more than the minimum required amount. ‡2009 data. §% total inpatient expenditure reimbursed by insurance taking
into account deductible, copayment, and ceiling. ¶Rates as of end of March, 2011.

Table 1: Summary of three social health insurance programmes28,30,32,35

specialist and tertiary services, Chinese public hospitals

Ministries
have an important function in general outpatient care
because patients’ trust in clinics and community health MOH NDRC NDRC MOF MOHRSS MOCA Org MOHRSS
(planning) (pricing) (social security) Dept (personnel)
centres is low and they often seek care at large hospitals
for simple health problems. The long-term success of
health-care reform therefore depends on whether the UEBMI/ Medical
NCMS URBMI assistance
government can reform the hospital sector to improve
the quality and efficiency of service provision and to
control growth of health expenditure. The governance
Investment decision Financial power (eg, income, use of funds) Personnel management
structure of hospitals is a core reform area. China’s public
hospitals have an archaic and complex governance
structure. The Ministry of Health has responsibility for Public hospitals

the population’s health, but various ministries have Strategic planning and Use of profits Staffing Management and use
powers to allocate public and insurance funds for health development and surplus decisions of assets
care, to set prices and payment methods, and to decide
on human-resource allocation and capital investment Figure: Dispersion of power between ministries and public hospitals
(figure). Competing ministries often pursue their own MOH=Ministry of Health. NDRC=National Development and Reform Commission (detailed function in parentheses);
bureaucratic interests and issue policies and regulations MOF=Ministry of Finance. MOHRSS=Ministry of Human Resource and Social Security. MOCA=Ministry of Civil Affairs.
that contradict the socioeconomic purposes of public Org Dept=Organisation Department of Chinese Communist Party. NCMS=New Cooperative Medical Scheme.
UEBMI=Urban Employee Basic Medical Insurance. URBMI=Urban Resident Basic Medical Insurance.
hospitals. In short, the Ministry of Health has the
responsibility for health care but no means to control
provision of health services. and are faced with conflicting policies and rules from the
Public hospitals, however, are unclear about their many ministries that govern them. For example, the
functions, social responsibilities, and accountabilities Ministry of Health wants hospitals to prioritise healing

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 Review
patients and producing services at minimum cost, but
distorted prices set by the Price Bureau encourage
physicians to overprescribe tests and drugs. Civil-service
rules set by the Ministry of Personnel give job guarantees
to physicians and other personnel, irrespective of
productivity, and hospital directors are appointed by the
Organisation Department of Chinese Communist Party.
Although the government acknowledges that control of
public hospitals must be drastically reformed, it also
recognises the complicity of and resistance from some
stakeholders, including hospital directors and senior
Panel 1: Pilot design of governance reform for public hospitals
Clearly state the roles and functions of public hospitals
Four of 16 pilot cities (Anshan, Baoji, Weifang, and Xiamen) clarified the roles and
responsibilities of public and non-profit hospitals so as to ensure that people have
access to affordable basic health services and to provide emergency services and
medical rescue during disasters. The other cities either did not do so or gave
unclear definitions.
Shift strategy to market competition and private ownership of public hospitals
Two cities (Kunming and Luoyang) shifted from public health-care delivery to
competition between public and private hospitals by selling public hospitals to the staff
(Luoyang) or to private investors for joint public and private ownership (Kunming).
Address dispersion of responsibility and power between various city departments
Establishment of a commission chaired by the mayor or deputy-mayor
Ten cities (Ezhou, Shenzhen, Wuhu, Xining, Qitaihe, Zunyi, Baoji, Weifang , Zhuzhou,
and Anshan) set up commissions chaired by the mayor or deputy-mayor to coordinate
the policies between various government departments that finance, regulate, and
manage public hospitals. The chair of the commission is responsible for the performance
of public hospitals. Four of these cities make the commission directly responsible for the
daily running of hospitals.
Reorganise the responsibilities and power of government departments
Limit power of Department of Health to make health policy or regulations and create a new agency
to manage public hospitals
Six cities (Shanghai, Xiamen, Kunming, Qitaihe, Xining, and Anshan) created a new
agency to manage and operate public hospitals. The Ministry of Health retains power for
policy, regulation, and monitoring of performance of all hospitals.
Xiaman established the Public Hospital Development Management Centre to be
responsible for financial management, investment, and asset management of public
hospitals. The Department of Finance allocates public funds to the Centre.
Kunming established the Hospital Development Centre, managed by a Board with
representatives from the Departments of Finance and Health, the Public Asset
Corporation, and heads of some public hospitals. The Board decides the strategic and
development plan for public hospitals, the major investment programme, and use of
large funds.
Three other cities (Xining, Qitaihe, and Anshan) established similar institutions.
Responsibility and power retained by Department of Health, but responsibilities separated
into two divisions, one for policy, regulation, and monitoring of power and one for
management of public hospitals
Four cities (Wuho, Luoyang, Ezhou, Shenzhen) established a new division within the
Ministry of Health to manage public hospitals.
(Continues on next page)
836
physicians, who are concerned that income or profits
might be adversely affected. It has initially designated
16 cities to test different governance models.
Progress in implementation
China monitors progress of its reform by setting
targets for each level of government to meet. For the
2009–12 phase, most targets are input-based, including
finances, enrolment, training sessions, and buildings.
Few targets are based on outcomes of the reform, such as
health improvement.
Between 2009 and the end of 2011, China will have spent
more than ¥1·4 trillion on health (up from ¥3594 million
in 2008), a third from central government and two-thirds
from local governments, compared with 91% and 9%,
respectively, in 2003 (appendix).28–30 About 50% of govern-
ment funding is for subsidisation of enrolment in
insurance schemes, 30% is for building of supply-side
infrastructure and training targeted at rural institutions
and primary health care facilities, and another 10–16% is
for provision of public health services.31
Establishment of a primary health-care system and
provision of public health
According to government statistics, by mid-2011, targets
set for 2012 for infrastructure-building and training
sessions are close to completion.32 For public health
services, reported statistics (not independently verified)
suggest that the programme will meet government-set
targets for most parts of the basic public health package.
However, progress remains slow for mental health and
variable for the priority interventions for vulnerable and
rural populations, which is indicative of weaknesses in
the delivery system in these areas (appendix).33,34 No data
have been reported for the quality or equitable distri-
bution of public health services or primary health-care
services. Existing data also suggest that primary health-
care facilities have yet to play a gate-keeping role. No shift
in the flow of patients from high-level institutions to
primary health-care facilities has been recorded.28,30
Expanding insurance coverage
By 2011, the three insurance programmes covered more
than 92% of the population.32 Because China’s policy
was to achieve universal coverage with shallow benefits
and then expand the benefits, the first wave of NCMS
and URBMI, initiated in 2003 and 2007, respectively,
covered only inpatient services (NCMS household-based
savings accounts paid for outpatient visits but barely
covered one annual outpatient visit per person). Since
the end of 2010, coverage has gradually been expanded
for outpatient services. Table 1 shows that as of 2010,
taking into account deductibles, co-payments, and
reimbursement ceilings, the beneficiaries of both
programmes still had to bear more than 50% of their
inpatient expenditure and 60–70% of their outpatient
expenditure.28,30,35,36 The government now aims to reduce
www.thelancet.com Vol 379 March 3, 2012

co-payment for inpatient services to 30%.32,37 Since 2011,
policies have identified priority diseases for further
reduction of co-payment, including chronic and
major disorders (eg, hypertension, diabetes, cirrhosis,
nephritis, arthritis, asthma, cancer, and cardiovascular
disease). Finally, as a result of early success in reducing
infant and maternal mortality by improving access to
hospital-based delivery,38–40 direct government subsidies
and NCMS together make hospital delivery almost free
to patients.41,42 For priority diseases, local Civil Affairs
Bureaus can design their Medical Assistance pro-
grammes to cover any remaining co-payment for low-
income households.
Establishment of an essential medicines programme for
primary health care
By 2011, the National Essential Medicines List and
province-based centralised-procurement system had been
adopted in all provinces for public primary health-care
facilities. Most provinces have formulated supplementary
lists.43 Drugs deemed to have negative side-effects or low
effectiveness and therefore not selected for the national
list, such as cimetidine and diethylstilbestrol, have been
restored to the provincial supplementary list, raising
serious questions about provincial selection criteria and
the adequacy of the national list in promoting the use of
cost-effective drugs. Also, the media have reported huge
differences between ex-manufacturer, bidding, and retail
prices, suggesting that widespread corruption in the
bidding process is allowing providers to continue
receiving kickbacks.37,44
Public hospital pilot schemes
Panel 1 summarises the key elements of governance
reform. Only four of the 16 pilot cities have defined the
mission of public and non-profit hospitals explicitly as
ensuring that residents have access to affordable basic
health care and providing emergency services and
medical rescue during disasters. Since these defined
social responsibilities could be fulfilled in large cities by
private, for-profit hospitals contracting with social
insurance programmes, the definition exercise has not
in itself advanced the goal of improving governance.
To improve efficiency and quality of services, two of the
16 cities chose to rely mainly on market competition,
while the rest focus on reforming hospital governance.
Many aimed to address the dispersion of powers between
many ministries. Because the dispersion of power
between departments created contradictory policies,
all 16 cities have established a policy-coordinating
commission headed by a top political official. The
government also recognised that governance reform
must be accompanied by improvements in financing,
payment, and personnel policies (panel 2). Cities began
implementing pilot reforms in mid-December, 2010. As
of December 2011, no independent and evidence-based
evaluation has been reported.
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Review
(Continued from previous page)
Change in the decision-making power of individual public hospitals
Hospital development and strategic planning
Most cities reduced the power of hospital directors and established a Board for each
hospital to manage its affairs. The Board has major decision-making power for strategic
direction and expansion of the hospital, the use of profits, controlling over-prescribing,
and monitoring quality of care.
Financial management, include use of profits (residuals)
All cities instituted monitoring procedures to control overprescribing and overtesting.
However, all cities except Anshan continue to give the power for discretionary use of profits
to the hospitals.
Human resource management
Cities relaxed the civil service rules for public hospital personnel. Now they are employed on
contracts with limited terms; reappointment and promotion depend on performance.
Hospital directors have increased discretionary power to hire, fire, and promote staff.
However, senior hospital executives are managed by the Party Organisation Department.
Source: Ministry of Health of the People’s Republic of China. Progress of pilot reform of public hospitals. Beijing, China: Ministry of
Health, July 2011.
Panel 2: Pilot reforms in financing, payment, and human resources of public hospital
Financing
12 cities (Zhenjiang, Xiamen, Weifang, Qitaihe, Wuhu, Luoyang, Ezhou, Zhuzhou, Zunyi,
Kunming, Baoji, and Xining) altered their financing policies by increasing government
subsidies for basic construction, equipment purchasing, professional development, and
pensions for retirees. Special subsidies are granted to government-sponsored public health
services, such as prevention, and emergency treatment. Assistance and training are provided
to secondary-level and community hospitals and rural hospitals.
Payment and incentives
Six cities (Anshan, Xiamen, Wuhu, Ma’anshan, Luoyang, and Baoji) replaced the profit
margin for drugs with a flat prescription fee and adjusted the prices of high-tech tests to
reduce their profit margins. Most cities also established compensation policies to pay staff a
basic salary plus a bonus based on performance. The performance criteria include quality of
services and achieving social responsibilities such as controlling cost escalation.
Human resources
Human resources policies had to be reformed to reduce the restrictions imposed by civil
service rules that greatly restricted the freedom of hospital directors to hire, promote, and
fire their staff. Individual public hospitals can independently recruit staff rather than having
staff assigned by the Health Department. However, the Party Organisation Ministry retains
the power to appoint directors and vice-directors of hospitals.
Source: Ministry of Health of the People’s Republic of China. Progress of pilot reform of public hospitals. Beijing, China: Ministry of
Health, July 2011.
Achievements, gaps, and challenges
By examining the reform priorities against the problems
and their causes in the prereform system, the reforms
are mostly headed in the right direction. Accomplishing
nearly universal insurance coverage in a short time is
remarkable. Although initially shallow, insurance benefits
are planned to gradually increase in scope and depth.
These are major achievements and would have been
impossible without the government’s leadership. China
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now needs to address remaining gaps and challenges to
bring about its stated reform goals.
To assure affordable access to health care and reduce
financial risks, insurance coverage alone does not suffice.
Results of existing studies with rigorous evaluation
methods show that NCMS has increased health-care use
although the magnitude of increase differs across studies.
By contrast, most studies note no measurable effect on
reduction of financial risk.45–55 A study examining the
differential effects of NCMS by eastern, central, and
western regions showed that while NCMS significantly
increased outpatient use in the east and west, it had no
effect on admission to hospital or incidence of cata-
strophic expenditure (defined as out-of-pocket health-
care payment greater than 10% or 20% of a household’s
total consumption expenditure). In fact, NCMS increased
the incidence of catastrophic expenditure among house-
holds in the western region.56 This study primarily used
data prior to 2008. A study with trend data from 2008–2010
from one city showed that inpatient use rate for NCMS
enrollees increased from 5·8% to 7·0%. During the same
period, NCMS reimbursement per admission increased
at 4% on average, however, total expenditure and out-of-
pocket payment per admission increased even faster at
11% and 18%, respectively.57
Studies into the effect of URBMI are scarce. Results of
one study using data from nine cities (appendix) showed
that URBMI had some success in reducing financial
risk.58 Out-of-pocket payments for inpatient admissions
for URBMI enrollees were 26% (p<0·01) lower than
those for uninsured urban residents, despite no
significant difference in per-admission expenditure.58
Meanwhile, URBMI enrollees had moderately higher
rates of use than their uninsured counterparts. Existing
studies are based on data from a particular locale and are
not necessarily nationally representative. The National
Health Service Survey, 2011 sample, will provide the
appropriate data to examine the effects of various
insurance schemes on affordable access and financial
risk at the national level when it becomes publicly
available. However, evidence so far suggests that as long
as inappropriate health care and health-care expenditure
escalation are not controlled, no insurance scheme will
be sustainable and patients will continue to bear heavy
costs of medical care. A predominantly fee-for-service
payment system coupled with a distorted fee schedule
and drug mark-ups are the core culprits of rapid inflation
of health expenditure caused by overuse of tests and
drugs of unclear clinical indication. Slow progress
towards addressing these issues could threaten the goal
of achieving affordable, cost-effective care.
Reform of public hospitals is key to control of growth
of health expenditure, improvement of quality of care,
and reduction of waste and inefficiency. Unless public
hospitals are charged with conserving public resources
and improving the health of patients with minimum use
of resources, they are not likely to give priority to
838
delivering cost-effective, quality services. Self-interest of
physicians and hospital directors might come before
public interest. China has shown that it has the regulatory
and administrative capacity to control physicians’
aberrant behaviour in the short term, but physicians
without strong professional ethics can learn to use the
controls and incentives to their own benefit. Since most
cities continue to give discretional use of hospital profits
to each hospital and because bonuses for physicians are
tied to profits, whether the profit-driven motives of public
hospitals can be curbed without substantial changes in
governance and incentive structures is unclear.
China is correct in prioritising reform of the
pharmaceutical sector to control growth of health
expenditure and to improve quality. Although the main
strategy to establish an essential medicines programme
for primary health-care facilities might be correct,
experience up to now raises doubt about its effectiveness.
A study based on a sample of primary health care facilities
in 83 counties or cities nationwide59 showed variable and
small changes in use of antibiotics, infusions, hormones,
and intravenous injections for outpatient visits in facilities
that had adopted essential medicines programmes
between 2007 and 2010 compared with those that had not
adopted such programmes (table 2). For upper respiratory
tract infection, hypertension, and diabetes, the rural
sample in general showed a greater reduction in
inappropriate drug prescriptions and expenditure in
facilities with an essential medicine programme, but
most of the changes were not statistically significant. The
urban sample showed a more variable pattern, with
general trends of reduced inappropriate drug use for
patients with hypertension or diabetes but increased use
for those with upper-respiratory-tract infections.59
The absence of clear benefits from the essential
medicines programmes might be because they are still in
the early stage of implementation and further analyses
are required to ascertain the causes. However, poor
outcomes might also be indicative of problems in pro-
gramme design and implementation. First, media reports
suggest widespread corruption (kickbacks to providers)
in the bidding process. Thus, despite the zero-profit
policy, income for health-care providers is still not
separated from drug prescription.37,44 Second, selection of
traditional Chinese remedies and other drugs for both
the national and provincial lists is not clearly based on
cost-effectiveness. Under a poorly regulated system, an
important issue is what influence the pharmaceutical
industry might be exerting on drug selection. Additionally,
in view of the inadequate quality control of medicine in
China, competitive bidding on prices has meant that
manufacturers producing inferior medicines have won
some bids. Lastly, without effective enforcement of
contracts, manufacturers sometimes fail to deliver drugs
as contracted, creating shortages.
To achieve equity, China has rightly chosen to substan-
tially increase government financing with an increased
www.thelancet.com Vol 379 March 3, 2012
 Review

Use of antibiotics (%) Infusion rate (%) Use of hormones (%) Use of IV injection (%) Average expenditure per
prescription (¥)
2007 2010 Change 2007 2010 Change 2007 2010 Change 2007 2010 Change 2007 2010 Change
(2010–07) (2010–07) (2010–07) (2010–07) (2010–07)
Upper respiratory tract infection
Urban
EM 60·79 59·65 –1·14 34·70 39·50 4·80 7·34 8·10 0·77 37·73 44·59 6·86 62·88 44·34 –18·54
Non-EM 75·28 68·40 –6·88 44·84 47·96 3·12 13·57 8·76 –4·81 50·51 53·00 2·50 59·21 55·86 –3·35
Difference (SE)* ·· ·· 5·74 (17·73) ·· ·· 1·68 (22·50) ·· ·· 5·58 (9·70) ·· ·· 4·36 (22·46) ·· ·· –15·20 (22·69)
Rural
EM 76·62 75·84 –0·78 33·40 33·31 –0·09 21·33 15·51 –5·82 46·72 47·63 0·91 30·34 31·80 1·46
Non-EM 82·04 70·77 –11·27 30·38 42·19 11·81 27·88 22·26 –5·62 51·50 58·29 6·79 22·01 33·65 11·64
Difference (SE)* ·· ·· 10·49 (8·22) ·· ·· –11·90 (10·77) ·· ·· –0·20 (9·55) ·· ·· –5·88 (11·26) ·· ·· –10·18 (12·79)
Hypertension
Urban
EM 3·66 4·23 0·57 13·84 1·67 –12·17 0·00 0·00 0·00 16·66 3·61 –13·05 85·31 77·34 –7·97
Non-EM 0·00 10·00 10·00 5·36 4·00 –1·36 0·00 0·00 0·00 7·14 4·00 –3·14 64·24 27·28 –36·96
Difference (SE)* ·· ·· –9·43 (9·17) ·· ·· –10·81 (13·39) ·· ·· ·· ·· ·· –9·90 (13·49) ·· ·· 28·98 (44·17)
Rural
EM 18·55 21·12 2·57 16·96 11·93 –5·04 0·00 2·08 2·08 17·45 10·72 –6·73 43·90 27·94 –15·96
Non-EM 8·89 13·69 4·80 15·00 26·08 11·08 2·22 7·14 4·92 13·33 18·94 5·61 32·78 41·11 8·33
Difference (SE)* ·· ·· –2·23 (13·27) ·· ·· –16·12 (13·16) ·· ·· –2·84 (4·17) ·· ·· –12·33 (12·36) ·· ·· –24·28 (17·27)
Diabetes
Urban
EM 0·00 3·30 3·30 2·47 1·74 –0·73 0·00 0·00 0·00 33·13 12·67 –20·45 168·47 143·50 –24·97
Non-EM 16·67 0·00 –16·67 0·00 0·00 0·00 0·00 0·00 0·00 0·00 0·00 0·00 73·23 29·33 –43·90
Difference (SE)* ·· ·· 19·97† (10·03) ·· ·· –0·73 (4·54) ·· ·· ·· ·· –20·45 (23·40) ·· ·· 18·93 (74·49)
Rural
EM 17·59 1·41 –16·18 11·11 8·00 –3·11 3·70 2·17 –1·54 20·99 21·92 0·93 53·24 56·16 2·92
Non-EM 0·00 12·50 12·50 12·50 12·50 0·00 12·50 0·00 –12·50 0·00 41·07 41·07 58·13 52·94 –5·19
Difference (SE)* ·· ·· –28·68† (14·99) ·· ·· –3·11 (23·40) ·· ·· 10·96 (8·93) ·· ·· –40·14 (29·93) ·· ·· 8·09 (45·51)

Source: Ministry of Health of the People’s Republic of China. Report on the implementation of national essential medicines policies. Beijing, China: Ministry of Health, 2011.59 EM=essential medicines list.
IV=intravenous. *Difference is change in drug prescriptions and expenditure of EM facilities–change in drug prescriptions and expenditure of non-EM facilities, for the disorders listed. †p<0·05.

Table 2: Prescription of drugs and expenditure per prescription for EM and non-EM facilities in 2007 and 2010

share from the central government, and with funding
targeted to low-income regions and subsidised social
insurance. However, some gaps remain. First, in view of
the huge variations in needs and local fiscal capacity
within regions and provinces,22,60 regional targeting is too
crude. Second, the depth of insurance coverage is
inequitable. Table 1 shows wide variations in premiums
across programmes and regions because local governments
from richer regions can afford to increase their premium
subsidies more than those in poorer regions. Vulnerable
populations such as migrant workers are not insured in
the cities in which they live and work, but are covered by
the NCMS in the rural community in which their
permanent residence is listed, which creates barriers to
accessing care because co-payments for using providers
outside the NCMS counties are usually greatly increased.
Uninsured migrant workers are much more likely to
forego care when ill than are insured individuals who live
and work in the same region.61–63
China recognises that to improve the population’s
health and manage growth of health-care costs in the
long term, it has to give priority to prevention of illness
and to primary health care. In addition to specific NCDs
such as hypertension, diabetes, and mental illnesses,
specific chronic disorders such as cancer and cardio-
vascular diseases are prioritised for increased insurance
reimbursement. The major obstacle China confronts in
strengthening its public health and primary health care
is a shortage of human resources. Although the govern-
ment has identified training family doctors as a top
priority23 and plans to train 300 000 of them over the next
10 years,64 these targets seem hard to reach. Retention of
qualified health professionals in rural areas, especially in
poor regions, has been difficult.
Even with staff available, incentives for primary health-
care workers to deliver public health services might be
lacking. The zero-profit policy is aimed at reducing incen-
tives for primary health-care facilities to overprescribe.

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 Review
However, because drug revenue accounted for more than
50% of primary health-care facilities’ revenue and because
bonuses for staff at such hospitals are tied to drug profits,
this policy has meant financial losses for employees in
these institutions, thereby reducing their motivation for
work. The drug mark-up was initially introduced to
compensate facilities for losses from providing services
priced below cost under the fee schedule set by the
government. However, with the zero-profit policy, many
local governments have not revised price schedules to raise
service fees. In some provinces, the government has
increased direct subsidies to primary health-care facilities,
tied to performance assessment. In practice, local auth-
orities have neither the data nor organisation structure to
do such an assessment. In 2011, the government introduced
a fixed fee that primary health-care facilities can charge per
visit to recoup revenue lost under the zero-profit policy, a
quick-fix that might stimulate providers to increase visits
but does nothing to encourage them to improve quality.
Implementation of reforms is challenged by financing,
technical knowledge, and availability of information.
Local governments are expected to contribute two-thirds
of new government funding, and in poor areas they
might not have the means to do so or might shift funds
from other social needs.58 While top-level government
sets policy goals and directions for NCMS and URBMI,
design and implementation are left to local governments,
many of whom do not have sufficient capacity to design
insurance-benefit packages or to set appropriate provider
incentives. Local governments could adopt on paper a
policy set by higher-level governments, such as pay-for-
performance, but might not have the technical knowledge
to make the programme function properly. Little
established information is available for measuring
performance and organisational structures do not allow
objective assessments or make accountability clear.
Policy recommendations
Health-care reform is complex and dynamic. China’s
reform goals and systemic strategies are exemplary for
other nations that pursue universal health coverage.
Despite its size and heterogenous environment, China
has made big strides towards providing its population
with affordable and equitable access to basic health care
in the past few years. It has overtaken many developing
nations and achieved nearly universal insurance coverage
in less than a decade and has begun to establish some
necessary foundations for primary health care and public
health provision. We provide some recommendations for
further advancing the agenda.
First, China needs to establish mechanisms to transform
inputs into cost-effective services. Perverse incentives
should be removed by revising the distorted fee schedule,
raising fees priced below cost (typically for labour-
intensive services such as consultations and general
surgery), and reducing fees priced above cost (typically for
diagnostic tests and examinations with high-tech
840
equipment). The zero-profit drug policy should be
expanded to the hospital sector and the visit fee for
primary health-care facilities should be eliminated. The
government has already called for replacement of the fee-
for-service payment method with prospective and bundled
methods such as global budget, capitation, and disease-
group-adjusted case-based payment. Importantly, all
insurance programmes should use the same payment
system and companion policies should be installed to
ensure that providers do not compromise quality of care
to save costs. Since China is implementing clinical
protocols, tying payment to adherence to protocols is an
option.
Reform of the irrational incentive structure alone,
however, does not guarantee disappearance of for-profit
behaviours in public facilities and by physicians. The
government needs to clearly identify the public interest
and reform the governance of public facilities so that
ministries, public hospitals, and physicians align their
responsibilities and accountability and put the public
interest first. Chinese policy from 2011 encourages entry
of private hospitals and clinics into the marketplace, in
the belief that such institutions would create competition
to force public facilities to improve quality and efficiency.
However, international experience has shown that market
competition in health care is difficult to create without
carefully designed regulations and institutions to enforce
them. Often, private for-profit hospitals target the rich by
providing luxurious health care. China has yet to develop
a strong, transparent regulatory regime to reap potential
benefits from use of market mechanisms to improve
quality and efficiency.
China has recognised major deficiencies in its health-
care system: inequities, inadequate prevention and
control of NCDs, and shortages of human resources.
The initial efforts to address these problems should
continue and be strengthened. China can expand
its redistribution of resources by adopting funding
formulas that adjust for heterogeneous needs (such as
demographics, health, and socioeconomic indicators)
at sub-provincial or municipality level.65,66 The benefit
structure of all three insurance programmes should be
equalised eventually, which will require substantial
additional public funding. Migrant workers need
insurance benefits linked to their place of employment.
Several cities have already included migrant workers in
their UEBMI or URBMI or in a separate programme for
migrant workers.63,67 Their experiences should be
rigorously assessed and then with improvements, rolled
out nationwide.
Prevention and control of NCDs demand multi-
sectoral strategies that include individual-based, high-
risk group and population-wide interventions aimed at
reducing risk factors such as obesity, tobacco use, and
sedentariness.16,68 China can show its serious commit-
ment to health by increasing taxes on tobacco. The
medical education system has to be reformed to produce
www.thelancet.com Vol 379 March 3, 2012

well-trained primary health-care providers, but China’s
needs are vast and it will take a long time to train enough
family doctors. China could consider task-shifting—
delegating tasks to workers with less training or narrowly
tailored training, such as nurses, community health
workers, or village doctors—to fill the workforce gaps,
especially in low-income areas69 and contracting of private
providers where they exist.
Challenges to implementation of reforms in China
are daunting. Although no straightforward solutions
exist, we conclude by proposing a few options. China
needs to shift the targets it sets for each level of
government from input to output and—better yet—
outcome, including improved health status, quality of
care, patients’ satisfaction, and reduction of patients’
financial burden. China should increase funding but the
rate of increase should be slowed to allow development
of absorptive capacity to transform resources into cost-
effective services. Currently, large portions of increased
resources are wasted and transferred to hospitals,
physicians, pharmacies, and pharmaceutical companies
as increased income rather than improved service
provision for patients. Proper implementation requires
independent scientific monitoring and evaluation to
enable midcourse correction. The world has discovered
that the best-designed reform can fail if not implemented
properly step-by-step. To hold government officials and
providers accountable, China must do independent and
evidence-based performance assessments of costs and
benefits of the reform programme and must systematically
collect data to analyse the causes of success or failure of
the reforms to achieve its stated goals.
Contributors
WC-MY contributed to the overall conceptualisation and analysis plan,
coordinated the various sections of the report, synthesised the findings,
and contributed to the writing of the paper. WH contributed to the overall
conceptualisation, synthesised the findings and led the analysis for the
public hospital section. WC gathered data and information, did data
analysis and wrote the essential medicines section. SH gathered data and
information, and did data analysis for the primary health care and public
health sections. JM gathered data and information, and did the data
analysis of the public hospital section. AM contributed to the interpretation
of data and findings. All authors contributed to the appraisal and
recommendation sections and have seen and approved the final version.
Conflicts of interest
We declare that we have no conflicts of interest.
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