China’s Health Care System and Reform: Reinforcing the ‘Iron Triangle’

Wharton and the Guanghua School of Management at Peking University recently ran a course titled, “China’s Healthcare System and Reform.” The course provided an overview of the structure and functioning of China’s health care industry, and the issues facing payers, providers and producers. With lectures by a series of invited experts, the course looked at the major transitions currently underway that are transforming the industry and the role of the 2009 Chinese health care reforms in shaping the various sectors of the industry. It also looked at the demographic trends and governmental initiatives that serve as the context for these developments. The course aimed to draw comparisons between the Chinese and U.S. health care systems and reforms, highlighting where the two systems converge and diverge, along with the common issues they both face.

The course was arranged and led by Wharton health care management professor Lawton R. Burns and Gordon G. Liu, professor of economics at Peking University’s Guanghua School of Management. 

After the course, Burns and Liu spoke with the China Health Human Resources about the current state and future direction of health care in China, drawing on examples from the U.S. health care system. (Editor’s note: The following is an excerpt from that interview.)

In your opinion, what are the major problems and challenges currently faced by China’s health care system?

Lawton R. Burns: China is undergoing several dramatic trends in terms of its socio-demographics, economics and public health that simultaneously create supply and demand challenges for its health care system.  Socio-demographic trends include rapid urbanization, the largest internal migration in human history, declining fertility rates, longer life expectancy, and an increase in the elderly population. These trends challenge the Chinese health care system to develop more hospital capacity, ambulatory care capacity and alternatives for long-term care and home health care.

Economic changes include a growing middle class, rising GDP per capita, rising disposable incomes, and an increasing gap in the incomes between urban and rural residents. These forces foster increased demand for higher quality and more accessible health care services, as well as greater equity in the provision of these services.

On the public health side, China is now facing the same epidemic of chronic diseases and lifestyle issues witnessed in the West. This includes problems of heart disease, hypertension, stroke, diabetes and cancer. China’s population also includes a high percentage of smokers and a growing number of workers exposed to occupational health issues. Finally, there are serious environmental problems that need to be dealt with, including pollution (air, water, soil) as well as the re-emergence of some communicable diseases.

Many of these problems are intertwined. They all require significant investments in manpower training, infrastructure expansion, insurance coverage and population and preventive health to deal with them.

Some major transitions are currently underway that are transforming China’s health care industry. What do you consider to be the major financial and managerial issues that China’s public hospitals are facing?

Burns : Right now, hospital care in China is provided almost entirely [90% or more] by the public sector.  This reliance on public funding has had several enormous impacts on health care cost, quality and access — what we refer to as “the iron triangle” of health care. Starting with the reforms of the late 1970s, public financing of health care fell as public sector investments were directed elsewhere. Hospitals were faced with a shortfall in covering their operating costs; to make up for this shortfall, the government allowed them to mark up the prices charged to patients for higher-end therapies and services [drugs, devices, surgeries]. Higher prices combined with a fee-for-service payment system led to the over-prescribing of pharmaceuticals and diagnostic tests. Because physicians were employed by one hospital, and because hospitals gave their physicians financial incentives to increase utilization of these expensive therapies, providers had aligned incentives to engage in technology wars with other hospitals in order to attract patients to receive these therapies and maximize their utilization. This increased the revenues of the public hospitals.

However, it also increased the cost of health care, increased the amount of money patients had to pay out-of-pocket for health care [since insurance did not cover these therapies], and may have hurt quality of care through the provision of unnecessary services. For their part, patients from all over China have flocked to the urban tertiary hospitals offering high-tech care in the belief that the quality of their services and physicians is superior. In doing so, they have bypassed local hospitals and ambulatory care [e.g., township health centers], which lie under-utilized, and instead opted for long queues at urban facilities.

This has resulted in several problems that need to be addressed. The urban public hospital sector needs to be counterbalanced by improved primary care delivery, both in urban and rural areas. This will help to deal with rising costs and long queues. The public sector can also benefit from increased competition from the private hospital sector, which has emerged in just the last fifteen years.  Such competition might force public hospitals to improve their efficiency and eliminate corruption. Restrictions on physician employment and practice at just one public sector hospital are just now being loosened, which will allow the private sector hospitals to build their medical staffs. Private hospitals need to be freed from the onerous regulatory approval process they now face in order for this to happen. The urban hospitals also need to reduce their reliance on selling expensive drugs to support their operations. This can occur as the government increases its operating subsidies to hospitals and as pharmacy operations are split off from hospital-based care.

Some experts believe that the market for health care equipment from overseas in China’s hospitals has reached a saturation point. What is your viewpoint on this?

Burns : The medical technology industry in China is projected to grow from US$20 billion to US$25 billion over the next three years [2012-2015] — or roughly at a 17% rate. The imaging/diagnostic sector within this industry is not only the largest component of the industry, but also the fastest growing. There are multiple drivers of this growth. First, the 2009-2011 reforms extend insurance coverage to the vast majority of the population; this will likely spur demand for health care services [which are already heavily hospital-based], and particularly in less urbanized areas. Second, the government is going to invest heavily in delivery infrastructure, which will increase supply to meet this growing demand. Third, the government is also encouraging private capital to play a greater role in China’s health care system.

Another factor favoring growth is the fragmented nature of the med-tech market in China. There are three large multinational companies (MNCs) that dominate the high-value, high-end portion of the imaging/diagnostic sector; but there are a lot of domestic firms occupying the lower-value portion of the market with much smaller market shares. The top three MNCs will seek to enter the lower-end portion of the market, just as the domestic firms will seek to enter the higher-end. Given the fragmented market structure, the MNCs may have room to grow as they seek to penetrate the Tier II and III cities and their smaller, county hospitals.  These areas and hospitals may be poised to purchase imaging/diagnostic equipment to meet rising local demand and thereby forestall patients traveling to the major cities for such testing. MNCs may also grow sales by partnering with and/or acquiring domestic firms that operate at these local geographic levels.

At the same time, the MNCs may face some headwinds coming from the government in terms of reduced use of separate pricing for their products and the drive to lower health care costs [perhaps through less sophisticated equipment]. The government’s funding of local county hospital infrastructure may also favor domestic suppliers rather than MNCs, since product procurement will be subject to group purchasing via local tenders. The Ministry of Health is also encouraging use of local brands.

Professor Liu, what are the similarities and differences between the health care systems in China and U.S.? What are the common issues in health care reform that are faced by both countries?

Gordon G. Liu : That is an interesting question. Our feeling is that the similarities are really amazing. Both countries are concerned with the “iron triangle” we mentioned earlier: trying to deliver on cost, quality and access, and do all three at the same time. We find it ironic that China spends only about 5% of its GDP on health care [versus roughly 17% in the U.S.], and yet is similarly concerned with high and rising costs of care. In both countries, the root of concern about costs is the same: Health care is becoming more expensive on an out-of-pocket basis to the average consumer, and is a leading cause of personal bankruptcy.  The driver of these rising costs is also the same in both countries: expensive inpatient hospital care that is driven by the use — and maybe over-use — of expensive technologies, and wasteful competition among hospitals to offer the latest technologies to attract patients willing to pay for them.

There are, of course, other similarities beyond rising costs. Both countries are worried that they are not getting value for the monies being spent — that is, that the quality of care is either undocumented or suspect, that hospitals are expensive bureaucracies in need of streamlined care, that providers are prone to financial conflicts of interest in terms of the treatments they prescribe, and that the dominant fee-for-service systems in both countries incentivize overutilization.  Moreover, both countries are worried about the imbalance between specialists and primary care, the need to promote more primary care delivery, the need to experiment with new methods of paying providers [e.g., bundled payment, capitation, pay for performance], the need to get patients to take better care of themselves, and the need to address the growing incidence of chronic illness.

There are nevertheless differences between the two countries that are just as striking.  China spends much less per capita on health care, the government accounts for a much smaller share of national health spending, and the private insurance industry is just in its infancy. Out-of-pocket spending still represents the biggest share of health care expenditures, although this percentage is falling dramatically as health care reform progresses. Health care is provided primarily through the public sector, while the private sector is viewed as lower quality — just the opposite of the U.S.

What are the lessons and experiences that China can learn from the U.S. for its own health care reform?

Liu : China is already learning several lessons from the U.S. as it engages in health care reform. China is such a large, diverse country that it really cannot implement a centrally developed reform plan across twenty-two provinces, four centrally administered municipalities, five ethnic minority autonomous regions, and two special administrative regions. Instead, the country is conducting experiments in specific cities and provinces to test out alternative payment models to incentivize providers to render efficient health care. Based on the outcomes of these experiments, China will be in a better position to decide how to reform its primarily fee-for-service payment system. The U.S. is going in the same direction, with pilots funded by the Innovation Center at CMS. China does need a stronger cadre of health services researchers — which we have in the U.S. — to analyze the data from these experiments and suggest future directions to take.

At the same time, there are other areas where China might adopt innovations developed in the U.S. and, in fact, is already doing so. One is the use of diagnosis-related groups (DRGs) to pay for inpatient hospital care. Another is the use of centralized purchasing — both on the insurance side [e.g., bulk buying of insurance coverage for the newly insured enrollees in health insurance schemes] as well as on the product side [e.g., bulk buying of equipment, medical devices, pharmaceuticals and medical-surgical supplies by hospitals from manufacturers]. Use of group purchasing may lead to greater efficiencies in China’s health care system.

Professor Burns, in your opinion, what is the overall development trend for China’s health care reform?

Burns : Right now, it seems to us that China has focused on reforms in the insurance sector that allow its population greater access to coverage and, hopefully, greater access to care by making health care more affordable. China has taken this approach for several reasons. First, there are huge inequities in insurance coverage and per capita spending on health care between the large coastal cities and the rest of the country.  These inequities have increased public discontent that threatens the ideal of harmony in Chinese society as well as social stability. The insurance reforms address this by extending a base layer of coverage across nearly the entire population and into the rural areas. Second, this insurance coverage is designed to stimulate domestic consumption. China’s economy has relied heavily on exports over the past few decades; to sustain growth growing forward, the country needs more domestic consumption. Such consumption has been retarded by the high cost of health care and the lack of insurance coverage [as well as the lack of a social security system], leading to high savings rates among the population.  Insurance coverage is designed to lessen public concern over saving for future health care needs, and thus to stimulate consumption.

Going forward, additional reforms are likely to focus on building provider capacity outside of the major cities down to the district and township levels.  The combination of insurance coverage and provider supply will hopefully lead Chinese citizens to consume health care services more locally, where capacity is underutilized and more inexpensive, rather than travel to the major cities to receive care in large, expensive hospitals.  Other reforms will likely focus on stimulating the domestic manufacturing sector in medical products and technologies.  Such firms may one day supplant the foreign MNCs that now dominate the higher-end portion of these markets.

What is the role that China’s government should take during the health care reform process?

Burns : In our view, the Chinese government should pursue three major avenues to further state health care reform. First, it should continue to take the lead role in health care financing to develop universal health insurance programs through both premium contributions and insurance service management.  While the overall insurance coverage is now over 95% of the Chinese population, there is still much room for improvement. The government needs to integrate the three major insurance programs (UEBMI, URBMI, and NRCMI) and transition provider payment away from the current fee-for-service (FFS) system to models with better and compatible incentives between providers and patients.

Second, the government needs to reinforce its primary role and responsibility for regulation and public health — two areas where market forces have little comparative advantage. Regulatory services range from drug approval to medical licensing for both institutions and professionals. Public health services focus primarily on population-based policy interventions with significant positive externalities. These include disease prevision and control, sanitation and safety, health behavior and education, and maternal and child health.

 

Third, with regard to medical service delivery, the government is undertaking  a number of market-oriented reform initiatives to improve the supply capacity and efficiency in order to better meet the increasing demand.  The major initiatives include vertical integration of tertiary hospitals and community-based clinical centers, liberation of doctors from the current mono-site employment to allow multi-site practice, separation of government regulatory roles from management roles in the operation of public hospitals, and policy support for private entry into the hospital market. Moreover, the 12th Five-Year Health Reform Plan states that private hospitals should be encouraged with policy support to play greater roles in higher end market, while public providers should be more responsible for service supply in urban communities, rural and remote areas.

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China’s Health Care System and Reform: Reinforcing the ‘Iron Triangle’. Knowledge@Wharton (2012, September 11). Retrieved from http://knowledge.wharton.upenn.edu/article/chinas-health-care-system-and-reform-reinforcing-the-iron-triangle/

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