The Iron Triangle and China’s Health Care Dilemma

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Wharton's Lawton R. Burns discusses his new book on China’s health care system.

chinas-healthcare-systemLawton R. Burns, a Wharton health care management professor, has been studying the relationship between physicians, hospitals and health care delivery for more than two decades. In this Knowledge@Wharton interview, he discusses his just-published book: China’s Healthcare System and Reform, written with co-author Gordon G. Liu. The book offers a sweeping overview of how China’s provider-centric health care system works — and where it doesn’t work. It also delves into “the public and nascent private insurance industry; biotechnology, pharmaceuticals and medical devices,” while considering the impact of shifting demographics on the industry. Burns is also the author of India’s Healthcare Industry: Innovation in Delivery, Financing and Manufacturing.

An edited transcript of the conversation follows.

Knowledge@Wharton: I’d like to welcome Lawton Robert Burns. He’s a professor of health care management here at Wharton and he has a new book about China’s health care system, entitled China’s Health Care System and Reform. His co-author is Gordon G. Liu, an economics professor at Peking University. Thank you for joining us. Tell us what the big arc of this book is about.

Lawton R. Burns: This book began as a global modular course back in 2012. I went over to Beijing, I met up with Gordon Liu, who I’ve known for a few years. He was actually a U.S.-trained economist. We taught a global modular course on China’s health care system and reform. What we’ve done here is, we’ve tried to embody what we taught in that course into a book.

It covers the entire health care industry in China, which is very provider-centric. China’s health care system really revolves around its hospitals. Most of the physicians in China are employees of the hospital. But then we branch out from there, after looking at hospitals and doctors, to study the public and nascent private insurance industry; biotechnology, pharmaceuticals and medical devices.

And then, the real big thing you have to look at in China is public health’s changing demographics. The rise of chronic illness. The rise of a for-profit hospital industry in China to supplement the public sector. The growing long-term care industry. We cover all of that as part of the book.

Knowledge@Wharton: To a casual observer, China was a pretty poor country by western standards, 20 or 25 years ago. I’m imagining that their health care system at that time reflected that. Obviously, they’ve come a long way in that time. Can you talk about what’s happened, briefly, over that period? And then, where they’re trying to go? Because, part of the book talks about a number of reforms that they’re trying to introduce now, but they’ve already come a long way, I gather.

“China is very much like us in some ways. They have a hospital-centric health care system, which is very expensive.”

Burns: China’s economy took off after [Chinese leader] Deng Xiaoping came into office in the late 1970s, and they had the economic liberalization starting in the late 1970s, early 1980s. China’s health care system lagged behind all that because the emphasis was put on economic development not on health care. So, it wasn’t even until you get to the late 1990s, early 2000s that the Chinese leaders decided that they ought to take some of that surplus they’ve created, and start pumping it back into the domestic consumption, the domestic economy.

That’s where you see a number of insurance reforms beginning. The biggest one was in 2009, with China’s version of Obamacare, which was extending insurance coverage to over 95% of the population.

Knowledge@Wharton: What were the biggest challenges?

Burns: The biggest challenge is — China is very much like us in some ways. They have a hospital-centric health care system, which is very expensive. They also have a mosaic of insurance policies, both public and private. Mostly public. We have Medicare and Medicaid, two different public policies. They have three different public policies. One for the urban employed, one for the urban non-employed, and one for the rural. And so, it’s this mosaic, and it’s not closely coordinated. Each one of those had their reforms in the late 1990s, early 2000s. By using these three pillars, China has extended health insurance coverage to most of the population.

So, they’re like us in some ways, but there’s no national health insurance. There’s a smattering of different types of public insurance plans. But their coverage is broad, covers most of the population, but it doesn’t go very deep. So, it only covers a handful of things, and the rest of Chinese health care is paid out-of-pocket.

Knowledge@Wharton: So, would it be something like catastrophic coverage only?

Burns: Up until the time these reforms were extended, going into a hospital was catastrophic. The cost of a hospitalization could be as much as half your annual family income. And so, these insurance extensions were designed to correct some of that, to prevent medical bankruptcy from hurting the Chinese population. The insurance coverage covers primarily these large, expensive in-patient hospitalizations, but nothing in terms of primary care, or preventive care, or things like that.

Knowledge@Wharton: It’s one reason they may save a lot, because they know they’re responsible for a lot of their health care expenses.

Burns: Well, they have to save for a lot of other things too, like education and retirement. One part of the book goes through the whole Social Security system, and the pensions. All of these areas are big problem areas for China, and they’re trying to figure out how to balance them all.

Knowledge@Wharton: You have a concept in the book called “The Iron Triangle of Health Care.” Can you tell us what that is?

Burns: Yes. It was not my idea. The person who taught the course that I’m teaching here at Wharton before me was Bill Kissick, who was a physician over in the medical school. He actually wrote a book on it in the early 1990s and he coined the Iron Triangle, which is how I start every course here at Wharton.

The Iron Triangle is basically that every society has three public policy goals they’re trying to achieve in health care: improve quality, increase access and reduce the rate of increase in health care costs. Bill Kissick called it the ‘Iron Triangle’ because they were competing goals. If you can imagine an equilateral triangle, where each of those goals is an angle, and they’re all 60 degrees, if you want to expand one angle, like increasing access, it’s going to come at the expense of another angle, such as cost containment.

We’ve seen that here with Obamacare. Obamacare was slated to cost a trillion dollars to increase access to coverage for over 20 million people. So, you can’t have it all. You’re going to have tradeoffs. And so, we apply that logic to the Chinese health care system. They face the exact same set of tradeoffs. They’ve increased access to health insurance for over 95% of the population, but at the same time, the rate of increase in national health spending in China is accelerating. It used to be that 3%, 4%, 5% of GDP was spent on health care. It’s now 7%, and going higher. And so, they’re facing the exact same problems we are. How do you control rising health care costs and increase access to health insurance to the population?

Knowledge@Wharton: What’s the role of private insurance?

Burns: Private insurance really hasn’t taken off much there. We’ve had a number of U.S. and western insurers try to go over there and set up shop, almost all unsuccessfully. One reason may be the fact that the private sector in China is distrusted. The public sector is trusted. I also don’t think there is a widely perceived need among the Chinese population to buy insurance coverage for something you haven’t incurred yet. It’s like, would you rather save the money, or buy an insurance policy? And then if you distrust the fact that it’s a private, for-profit insurance company, there may be some reticence there. That’s a work in progress.

Knowledge@Wharton: You spoke about some of the major challenges there. For example, the demographic time bomb. But, there are other things, too, including the pollution levels, which have a huge effect on the health of the population.

“What you have there is a 4-2-1 demographic structure: Four grandparents, two parents, one child. And so, that one child is going to be really taxed.”

Burns: The changing demographics is a big worry for China. But I think an even bigger worry for China is the environmental pollution. The environmental pollution is in terms of the air, as we all know, from Beijing. The water. The soil. Sometimes, the livestock and the poultry, and things like that. There are all types of pollution over there, which effect the health of the population.

Just to give you a quick illustration. I was teaching a master class to the Wharton alumni back in 2014, over in Beijing. A number of Wharton faculty and the new dean, Dean [Geoffrey Garrett], went over there. I was teaching a class in Beijing to the Wharton alumni, and I casually mentioned that, of course you know that the average lifespan of a Beijing resident is five years less because of the pollution levels. And nobody in the audience knew that. So, I thought I had committed the world’s biggest faux pas, but it turns out, it’s documented evidence. But that’s just how serious this problem is.

Knowledge@Wharton: It’s almost like an arms race, isn’t it, because you’re trying to introduce better health care, but at the same time, there’s so many elements contributing to bad health outcomes.

Burns: There are forces pushing for better health promotion. Addressing the chronic illness problem. Getting people access to health insurance so they can get access to health care services. But, at the same time, you have these environmental forces. You have public policy forces pushing against them.

Just to give you another illustration. Smoking is a huge problem among Chinese males. It’s estimated that roughly half of all Chinese adult males smoke. Not so much with the females, but with the males. Now, you wonder, why doesn’t China address that? Because we all know that smoking contributes to a lot of chronic illness. It turns out tobacco is the seventh largest state-owned industry in China, and China develops a lot of state revenues from selling tobacco at low prices to its population. So, there’s an illustration where you’re trying to promote health by labeling on cigarette packages, but at the same time, it’s in the state interest to manufacture and sell tobacco to its population.

Knowledge@Wharton: The ultimate conflict of interest.

Burns: Ultimate conflict of interest.

Knowledge@Wharton: There’s a quote connected with all of this that you mentioned before we started. Maybe you want to talk about that?

Burns: Sure. We were teaching this global modular course in Beijing. We have a speaker from [venture capital firm] Kleiner Perkins who’s Chinese by origin. He comes into class, and he says to my class — and so we put it in the book — “It’s questionable whether China will get sick and die before it grows rich and old.”

“I also don’t think there is a widely perceived need among the Chinese population to buy insurance coverage for something you haven’t incurred yet. It’s like, would you rather save the money, or buy an insurance policy?”

Knowledge@Wharton: That kind of wraps it up there. Let’s get back to the demographic time bomb. Many people are aware of China’s aging population, particularly because of the one-child policy. How does that effect the health care situation

Burns: What you have there is a 4-2-1 demographic structure: Four grandparents, two parents, one child. And so, that one child is going to be really taxed, in terms of taking care not only of his or her parents, but then four grandparents. And so, what China really needs is a long-term care system, which it currently lacks, as well as some form of long-term care insurance, or Social Security payments, or disability payments, or well-funded pensions for the people who retire. China has issues in all of those areas.

Knowledge@Wharton: Are these things under development?

Burns: They’ve enacted some reforms on the pensions side. So, pensions for public employees. But, they’re underfunded. And they’re not that big. And so, as health care costs in China rise, then the cost of the care that those elderly are going to need is going to rise. The question is whether that cost escalation in health care will outstrip savings, and wage growth … all of which has taken place in the U.S., and it’s also now taking place in China.

Knowledge@Wharton: Pushing out health care to 95% of the population is an enormous undertaking. How does the health of Chinese stack up against other countries, in terms of mortality rates … whatever the common yardstick is?

Burns: There are lots of metrics there. We have this all in the book. The metrics have obviously improved. But, I think the single biggest increase in the health of the Chinese took place under [former Communist Party chairman] Mao, as a result of investments in public health.

Research shows that over time, public health investments — clean air, clean water, hygiene, sanitation — those have enormous payoffs in terms of mortality and morbidity. China saw the biggest increases in those health outcomes under Mao and his emphasis on public health. We haven’t seen the same rate of increase in those indicators under subsequent leaders, but they’ve been occurring. You can compare China with other countries in southeast Asia, which we have a whole chapter on. And you can see the dramatic improvement in China as a result of this.

Knowledge@Wharton: You’ve written a book about India’s health care system, and now China’s health care system. And, you’ve been studying the U.S. health care system. What do you see as the similarities and differences in these systems?

Burns: We cover this also in the introductory chapter. The similarities outweigh the differences. What I tell my students here, as well as in India and Beijing, is that most of the health care systems operate under some of the same basic processes and principles. Obviously, there are institutional differences, historical differences, cultural differences. But at the end of the day, managing the cost of care, managing the tradeoffs in the Iron Triangle, trying to get people to improve their health behaviors, these are problems that are common to all these countries.

What you learn about managing the problems in this country is immediately transportable to these other countries, in terms of, here are some hypotheses about what might work and what might not

Just to give a quick illustration. We’ve been trying to figure out how to control the rising cost of health care in the United States since the early 1980’s, outside of regulation. One of the first things we did in the early 1980s is we passed what was called the Prospective Payment System, using diagnosis-related groups. It turns out that the United States has exported this concept of diagnosis-related groups to the rest of the world. Everybody uses this. China is now piloting experiments in several of its cities to try to control the rising rate of hospital costs in China, using diagnosis-related groups. So, some of these things are immediately transportable.

“There’s no national health insurance. There’s a smattering of different types of public insurance plans. … It only covers a handful of things, and the rest of Chinese health care is paid out-of-pocket.”

Knowledge@Wharton: What haven’t I asked you that’s important to know about the Chinese health care system? And also, where is it going? Where will it be?

Burns: Let me take your first question. What you haven’t asked me is, the problem China has is just the sheer size and complexity of the government in the country. There’s a national government, there are provincial governments, there are local governments. And the national government sets policy, but the provincial and local governments have to come up with the money. This was enacted 20, 30 years ago.

And so, you have this disjunction between who sets policy, and who has to implement it, with what resources? And that’s always a tug-of-war as to whether or not the lower levels of government want to do — or can afford to do — what the upper levels of government suggest.

That’s a vertical dimension. The horizontal dimension is just the sheer number of ministries in the Chinese government that have something to do with health care. So, you’ve got this horizontal division of labor. You’ve got this vertical division of labor. And getting any kind of concerted action, where strategy actually gets implemented, is totally problematic. That’s one of the biggest problems China has. Just overcoming the size and complexity of their government.

Knowledge@Wharton: In general, where do you see all this reform that they’re undertaking going? What will it look like? How much progress might we see in, say, three to five years?

Burns: The government has been using the high growth rate in China recently to take some of that surplus and plow it back into the domestic side, to spur domestic consumption and to switch from an export economy to a domestic-consumption economy. And so, what they’d like the Chinese to be doing is spending more of the money that they’ve made on their own health care.

The question is whether or not the Chinese want to spend it on health care, versus save it; for retirement, for their children, things like that. So, that’s one issue.

I think the other thing China’s going to have to worry about is, they have all these initiatives to try to do things. One of the initiatives in the more recent five-year plans was to develop a biotechnology sector. That’s easier said than done. And so, they’ve developed at least four different biotech clusters across China, mostly in the eastern coast of China. And hopefully, develop a life-sciences sector, developing novel therapeutic drugs, based on biotechnology.

That is not easy to do, and as we’ve studied elsewhere in the health care program, what it takes to put together a biotechnology cluster really requires the confluence of government help, private sector involvement, and a lot of equity and venture capital to pull all of these things together. It’s an ecosystem of things. Plus, all these local universities with talent to spare. China’s ability to pull this off will be contingent on its ability to replicate some of the things we see in Cambridge, Mass., or San Diego, Calif.

Knowledge@Wharton: It sounds like there’s a lot of potential for business opportunities. But, whether or not the environment will allow these things to flourish, with all sorts of rules and regulations on investment, and that sort of thing, and repatriation of capital, that kind of thing — I guess it remains to be seen.

Burns: You know what I say to companies who are thinking of investing in China? I think they have to know two things. They have to know the local landscape in China, and our book can help with that. There are other things they could read, as well. But, it gives you the lay of the land of all the different sectors in health care, and how they’re operating, and the issues they face.

The other thing is to understand why things work, wherever it is in the world. If you understand why the biotech sector took off in the U.S., and it hasn’t taken off as much in other countries, or, why the medical device sector is so prominent in the U.S., but not so prominent in other countries, then you can [start to figure out] what are the conditions needed for these sectors to really thrive in China?

Knowledge@Wharton: What are some of those things that make it work?

Burns: We’ve already talked a little bit about biotech. You need a confluence of three or four major actors, all working in concert. And these are in local areas. You know, large parts of the U.S. would like to emulate Cambridge and San Diego. Even Philadelphia would like to be a biotech cluster. But it’s not easy to do. It’s not even easy to do here, let alone in China.

Secondly, with medical devices: The success of the medical device industry has really rested on the partnerships between the medical device companies and the physicians who implant or utilize those medical device products. And so, you need a cadre of specialists who are really good at using these technologies, who demand these technologies, but who also help to invent or come up with the ideas for the new technologies. And so, China doesn’t have that cadre of specialists, implanting specialists, the way the U.S. does. That’s one of the things they’re going to need.

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