Winnie YipAssistant ProfessorWinnie YipAssistant ProfessorTable 1. Average Cost Recovery Ratio at Various-Level HospitalsTable 2 Annual Real Rate of Growth of Health ExpendituresTable 3. Health Insurance Coverage in ChinaB. Organization of Health Care DeliveryTable 4. Differential policies towards for-profit and non-profit hospitalsDifferential pricing policies by hospital typePrice schedule adjustmentPrice control will continue for the majority of sReferencesEconomic Transition and Urban Health Care in China: Impacts and Prospects Winnie Yip Assistant Professor Harvard School of Public Health & William C. Hsiao K.T. Li Professor of Economics and Health Policy Harvard School of Public Health To be presented at the Conference on Financial Sector Reform in China September 11-13, 2001Economic Transition and Urban Health Care in China: Impacts and Prospects Winnie Yip Assistant Professor Harvard School of Public Health & William C. Hsiao K.T. Li Professor of Economics and Health Policy Harvard School of Public Health Abstract This paper has three primary objectives. First, it illustrates how economic transition from a centrally planned to market-oriented economy inevitably transforms the foundation of social protection policies. Economic reform affects China’s urban health care through two primary channels. 1) A large proportional decline in government revenue constrained state capacity to finance health care. This, together with the subsequent perverse incentives that providers were subject to, has led to rapid cost escalation and unaffordable health care. 2) In the absence of any new health care financing policies, the transformation of state-owned enterprises and growth of the non-state sector threatened access to health care coverage for retirees, employees and their dependents. China’s experience also shows that the need for transformation of the social sector is not obviated by gradual economic reform or rapid economic growth. Second, it critically examines the potentials of current urban health reform initiatives in alleviating existing problems in China’s urban health care. The announced policy attempts to move China from a supply-side system, driven by perverse incentives and outdated central planning measures, to a demand-side system with a unified social insurance scheme as a powerful purchaser of health services. Our preliminary analysis suggests that these policies primarily target at the insured population and create a multi-tiered system under which the patients and the uninsured population would most likely bear the biggest burden of health care costs and risk. Finally, we raised additional challenges that China need to confront in order to restore a function-able urban health sector to provide affordable and equitable health care for its urban population. 1I. Introduction The transition of a socialistic central planning economy to a capitalistic market-based economy represents a paradigm shift reflecting fundamental changes in underlying social values. Socialistic economies emphasize equity and assuring basic human needs such as food, health care, housing, and education for all through central planning. In contrast, market-based economies emphasize individual responsibility and choice, market incentives and economic growth. Economic transition from plan to market therefore inevitably transforms the foundation on which social protection policies were based in the pre-reform era. Many scholars have emphasized how China differs from other transitional economies in terms of initial conditions and gradual transition (e.g., Sachs and Woo 1994). The most distinctive feature of China’s experience has been its unprecedentedly rapid economic growth, in contrast to the dramatic economic contractions during initial transition in most other transitional economies. Over the past 20 years, real output has increased nine percent annually and economic output has more than quadrupled. However, China’s experience shows that the need for transformation of the social sector is not obviated by gradual economic reform or rapid economic growth. In the early 1980's, the Chinese government initiated major economic reforms that brought about significant disruption to the traditional channels of health care financing. However, the government did not develop a coherent health policy to harmonize the health sector with the new economic environment. In the urban areas, many inefficient state enterprises subject to market forces suffered deficits. The enterprises could not adequately fund the health insurance for their workers and retirees, jeopardizing their access to health care. Transition from state- to private-ownership further reduced workers’ access to insurance coverage. At the same 2time, shrinkage in government budgets forced public hospitals to engage in revenue-generating activities to cover their expenses. However, under the administered and irrational price structure, hospitals had incentives to over-prescribe drugs and high technology procedures, leading to inefficient use of resources and rapid cost escalation through the late 1980s and 1990s, rendering health care unaffordable for most people. The paper is organized as follows. The next section gives a brief overview of China’s urban health care system before economic reform. The subsequent section analyzes the impact of economic reform on health sector performance, focusing on two primary pathways. First, the large proportional decline in government revenue constrained state capacity to finance health care. Second, the transformation of state-owned enterprises threatened access to health care coverage for retirees, employees and their dependents. Section IV describes the current urban health reform initiatives. Section V provides a tentative assessment of the potential for current reform initiatives to address existing problems in urban health care in China. The last section raises additional challenges that China has to confront in order to restore a function-able health care system to assure affordable access to reasonable health care for its urban residents. II. Urban Health Care Before Economic Reform Established in the 1950s, China’s health protection system for urban residents were built upon three pillars: enterprise-based financing; public delivery system with substantial government subsidies; and price control for medical services and inputs. A.