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New Explorations in China’s Healthcare Insurance System

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It is critically important to build up a set of institutional arrangements for the basic healthcare security system, including expanding the coverage of enrolment, raising-up of financing level, improving benefit structure, reforming payment modes, and promoting governance reforms of public insurance agents



New Explorations in China’s Healthcare Insurance System


ChangCe Thinktank of Sinosight Thinktank

China Research Center for Public Policy


Executive Summary


1.         The official proposal for a new round of health reforms has been released. One of the highlights in the proposal is moving towards universal coverage of healthcare security. A proposed basic healthcare security system comprises of three public healthcare insurance programs, namely Urban Employees’ Basic Healthcare Insurance, Urban Residents’ Basic Healthcare Insurance and Rural New Cooperative Medical System (NCMS) as well as two healthcare safety net programs targeting poor people in urban and rural areas.


2.         Healthcare security is indispensable part of social security system. The newly set principle of universal coverage of healthcare security over the whole population is not only a new guideline for China’s forthcoming healthcare reforms, but also of strategically importance to socioeconomic development at large. It is at this point that the official new healthcare reform proposal has profound implications beyond the healthcare sector.


3.         It is critically important to build up a set of institutional arrangements for the basic healthcare security system, including expanding the coverage of enrolment, raising-up of financing level, improving benefit structure, reforming payment modes, and promoting governance reforms of public insurance agents.


Expanding the Coverage of the Basic Healthcare Security System


4.         The goal of expanding coverage of the basic healthcare security system has been set by the official new healthcare reform proposal, namely, every public healthcare insurance program covering 90 percent of targeted populations by 2011.


5.         In 2008, the two public healthcare insurance programs in urban areas have covered 60 percent of urban residents. In rural areas, the NCMS covered 99.8 percent of rural residents.


6.         Urban healthcare insurance develops unevenly across localities. Coverage rates are not correlated with economic development levels. There is tremendous space for expanding the coverage rates of urban basic healthcare insurance in some economically prosperous provinces in coastal areas.


7.         It is not very difficult in rural areas to achieve the goal of universal coverage of healthcare insurance within three years, but it is not easy to raise up the financing level and to offer adequate benefit package to enrollees. The major challenge for achieving universal coverage of healthcare insurance lies in urban areas.


8.         Both Urban Employees’ Healthcare Insurance targeting working population as well as retirees and Urban Residents’ Healthcare Insurance targeting non-working population face severe challenges to expand their coverage rates. The former, which is actually a compulsory social health insurance scheme, has to resolve the problem of contribution evasion widespread among private sectors, while the latter must overcome the problem of “adverse selection” as it is an insurance scheme on a basis of voluntary enrolment.


9.         To achieve the goal of 90 percent coverage rate within three years, local governments have to make tremendous efforts. If the central government may adopt the coverage rate as a major benchmark to measure the performance of local officials, the universal coverage of the basic healthcare security system would be achieved.


Raising Up the Financing Level and Improving Benefit Structure of the Basic Healthcare Security System


10.       A major challenge for China’s healthcare reforms is to raise up the financing level and improve the benefit structure of public healthcare insurance programs. The financing level of the basic healthcare security system and its share of China’s total health expenditure have increased considerably over the past years. Nevertheless, the financing through the system accounted less than 30 percent of total health expenditure in 2007.


11.       The financing levels of public healthcare insurance programs show tremendous urban-rural disparity. In urban areas, the basic healthcare security system financed 30.1 percent of total health expenditures in 2007, while in rural areas only 16.7 percent.


12.       To adequately pool financial risks of medical expenses for rural residents, the financing levels of NCMS must be considerably raised up. While increasing government subsidies, enrolment fees for peasant families should go up as well.


13.       Over the past years, the spending level from the basic healthcare security system has grown up, but it accounted less than one-third of total revenue of healthcare providers in 2007. That means that the levels and rates of co-payment for patients are still very high.


14.       As co-payment rates are still very high, Urban Residents’ Healthcare Insurance and NCMS fail to fulfill the functioning of adequately pooling financial risks for their enrollees. At the same time, as purchasing power is limited, the two insurance schemes could not serve as third-party purchasers, and thereby are not capable of promoting rational provision of medical and pharmaceutical services by providers.


15.       In response to this situation, the official new healthcare reform proposal formulates a new principle of “government subsidizing the demand side,” namely to increase the government subsidies to the basic healthcare security system. It is a timely and effective measure to raise up the financing level of the system.


16.       After the implementation of the new healthcare reform proposal, it can be expected that the basic healthcare security system can mobilize 630 billion CNY per year on average. If 80percent of its fund is spent out, public healthcare insurance agents would pay at least 504 billion CNY per yea, accounting approximately 70 percent of medical expenses by enrollees. As a result, out-of-pocket payment would become moderate, and healthcare security for the Chinese people would be substantially increased.


17.       After the universal coverage, co-payments rate is expected to drop down the level of 30 percent. The financial risks of co-payment for enrollees can be further pooled by supplementary and/or complimentary private health insurance.


Controlling the Balance of Public Healthcare Insurance Funds at Reasonable Levels


18.       Normally, public healthcare insurance schemes would spend most of their funds to pay medical bills for enrollees. In China, a widespread problem is that public healthcare insurance funds in many localities have accumulated large amount of balance. As a result, enrollees have not enjoyed adequate healthcare security they deserve.


19.       Urban public healthcare insurance programs are administered by the Ministry of Human Resources and Social Security (MOHRSS), while NCMS is administered by the Ministry of Health (MOH). Public information releasing of insurance funds is different across the two ministries. The MOHRSS makes public the information on fund revenue, fund expenditure and accumulated balance every year at national and provincial levels. By contrast, the MOH releases the information of NCMS’ funds on a selective basis. While the information on fund revenue and expenditure at the national level as well as fund revenue at the provincial level are available, the information on fund expenditure in every province as well accumulated balance are not released to the public.


20.       Nationally, the NCMS funds have recorded positive balance every year since the program was launched in 2003. Over the past years, the balance rates decreased, dropping down from 40.3 percent in 2004 to 15.6 percent in 2008. As the NCMS funds have accumulated a considerable amount of balance, there is space for increasing spending level for the program.


21.       In 2007, the fund revenue of Urban Residents’ Basic Healthcare Insurance was 4.3 billion CNY, but expenditure was only 1.0 billion CNY, less than one-fourth of revenue. As this program kicked off in the late half of the year, it is understandable that the most of money in the fund was not spent out. In 2008, although the fund balance rate considerably decreased to 39.9 percent, it was still very high.


22.       Urban Employees’ Basic Healthcare Insurance also records high fund balance rates. In 2007, the program’s fund balance rate was 29.9 percent, and the amount of accumulated balance was 247.7 billion CNY. According to expenditure level of 2007, 247.7 billion CNY could sustain the payment of 19 months.


23.       Among the provinces with the highest fund balance rates, Jiangxi, Zhejiang and Tibet ranked top 3. In Fujian, Guangdong and Guangxi, the fund balance rates are also more than 40 percent. Only in Hainan and Shanghai were the rates below 20 percent.


24.       One of reasonable factors explaining high balance rates in Urban Employees’ Basic Healthcare Insurance is that retirees do not need to pay enrolment fee. As the course of aging goes forward, it is necessary to keep a relatively high rate of balance so as to meet the needs of aging enrollees in the future. Nevertheless, as we have found, the dependency ratio of the program, namely the ratio of the number of employees to that of retirees among enrollees, stabilized over the past years. Furthermore, the provinces with the highest balance rates are not ones with highest dependency ratios. Therefore, the problem of high balance rates is largely subject to mismanagement by local public insurance agents.


25.       To some extent, a large amount of fund balance means inefficiency of fund management. In response to this, the new healthcare reform proposal puts forward the goal of decreasing fund balance rates in public healthcare insurance programs. According to the goal, the appropriate balance rate has been set for NCMS at the level of 15 percent or below. We suggest that the Ministry of Finance (MOF) and the MOHRSS impose a similar regulation on maximum fund balance rate on Urban Residents’ Healthcare Insurance.


26.       It is relatively more difficult to regulate the fund balance rate of Urban Employees’ Healthcare Insurance. To set a reasonable level, we need to conduct an in-depth study in dynamic changes of dependency ratios across regions and estimate the influences of the aging of enrollees.


Integrating the Basic Healthcare Security System and the National Essential Medicines System


27.       Another challenge for China’s new healthcare reforms is the relationship between the basic healthcare security system and the national essential medicines system. According to the proposal, “all essential drugs will be incorporated into the lists of reimbursable drugs in the basic healthcare security system, and the reimbursement rates for essential drugs will be higher than rates for non-essential drugs.” That means that against the background of the universal coverage, public healthcare insurance agents will become major payers for essential drugs.


28.       A wrong image in the public, on the mass media, and evening the mind of many policymakers is that essential medicines are cheap drugs. It is worth noting that it is not beneficial to the health of people to highlight the low price levels of essential medicines. To ensure the accessibility and affordability of essential medicine, the key lies at who the payers are but not at if their prices (wholesale or retailer) are cheap. If essential medicines are among reimbursable dugs in public healthcare insurance programs, they would be affordable to most insured people.


29.       As serving as major payers, public healthcare insurance agents deserve an appropriate role in selecting essential medicines. All drugs selected into the national list of essential medicines should be affordable to insurance agents; otherwise, they could not become “essential medicines” even if they are really “essential” to particular patients in the course of clinical services. Many debates in the selection of essential medicines lie in the fields of medicine and pharmaceutical sciences. To some extent, however, such “scientific” debates have blurred the focus of institution-building, namely, the budgetary limits of insurance programs.


30.       The formulation of a list of essential medicines must be open and transparent. Openness and transparency do not mean that the selection process has to be dominated by discussions and debates among clinical and pharmaceutical experts even if they are chosen impartially. Face-to-face discussions and debates occurring in a variety of selection and evaluation often result in endless bargaining, and eventually few consensuses are reached. A “scientific” procedure should be conducive to manifest “overlapped consensus” during the process of highlighting disagreements and narrowing the scope of disagreements. To make consensus and disagreements open to the public is helpful to the manifestation of “overlapped consensuses.”


31.       The National List of Essential Medicines serves as a safety net of pharmaceuticals. All dugs in the list should be highly accessible to the people in any way. Due to the budgetary limits of the basic healthcare security system, the national list may have to be “short.”


32.       In many areas, local governments should be allowed to make necessary adjustments in implementing the system of essential medicines, in particular adding more drugs in the pool of essential medicines. Yet it does not mean every province needs to formulate their local versions of essential medicines list. Rather, what they need to do is to renew the lists of reimbursable drugs in their basic healthcare security system.


33.       Part A of the list of reimbursable drugs in urban basic healthcare insurance programs actually serves as the list of essential medicines in the cities. The list of NCMS reimbursable drugs serves as the list of essential medicines in rural areas. The renewal of these lists should be carried out on regular basis, according to objective, open, and transparent procedures.


34.       The use of essential medicines is critical. The failure of the exiting essential medicines system is rooted in the distorted institutional arrangements in public healthcare providers. As the prices of most medical services are set by the government at extremely low levels and the government imposes harsh regulations on price, most public healthcare providers heavily rely on drug sale for generating their revenues. As a result, prescription behaviors in public hospitals are generally distorted. Pharmaceuticals are not recommended on the basis of cost-effectiveness, but rather on sale profits. As de facto professional drug salespersons, doctors in public providers are inclined to recommend drugs to patients as many as possible and as expensive as possible.


35.       Facing the well-known problem of so-called “generating revenues from drug sales,” the government is planning to compel public healthcare providers to use essential medicines as much as possible. To adopt such a measure means that there is no incentive for public providers to use drugs on the basis of cost-effectiveness, and to promote the rational use of drugs.


36.       The distorted incentive in public providers is rooted in two inadequate government regulations. One is as mentioned the harsh regulations on low prices of healthcare services. The other is profit margin regulations on drug sale in public providers. The ceiling profit margin is set as 15percent. Under these regulations, public providers tend to purchase drugs with relatively higher wholesale prices, so as to make more profits in the ultimate link of drug sale. Such drug purchasing behaviors are possible and likely because to some degree public providers enjoy de facto monopoly in the healthcare sector in many localities.


37.       To remove such a distorted incentive, the correct way is to carry out regulatory reforms, namely removing some inadequate regulations and maintain necessary regulations. Concretely, the government needs to remove price formulation regulations on healthcare services and profit margin regulations on drug sales, and may maintain price ceiling regulations on both healthcare services and drug sales.


38.       At the same time, it is also important to reform payment modes of public healthcare insurance. Now fee-for-service payments are prevalent in many localities, and it is well known that such a payment mode provides an incentive for provider-induced over-consumption, including abuse of drugs. As payment modes normally serve as a lever to prescription behaviors, payment reforms are of importance to the removal of the inadequate incentive in public healthcare providers.


39.       The existing centralized tendering and purchasing for drugs has nothing to do with the removal of the distorted incentive in public healthcare providers. Actually, this institutional arrangement does not serve as public procurement, but rather this has set a higher barrier for market entry into the pharmaceutical market in public hospitals. It is easy for drugs with high tendering prices to be purchased by public hospitals, and cheap drugs are largely abandoned by public hospitals any way.


40.       It is necessary to conduct an independent, in-depth study in the existing centralized tendering and purchasing for drugs. It is only based on empirically solid research that a well-functioning public procurement for drugs could be established. Public procurement for drugs needs to be based on market competition, and public healthcare insurance agents can play a crucial role as payers.


Pushing on Governance Reforms in Public Healthcare Insurance Agents


41.       An important issue is accommodation of public healthcare insurance agents as purchasers of healthcare services on behalf of enrollees. The question is whether existing public healthcare insurance agents, which are organized as budgetary units of administrative hierarchies, have an incentive to serve well for enrollees. Therefore, governance reforms in public healthcare insurance agents become a key to the success of new healthcare reforms in China.


42.       At the core of public purchasing of healthcare services are payment reforms. Healthcare insurers (public or private) around the world are searching for (entirely or partially) replacing traditional fee-for-service payment and salary with combinations of multiple new payment modes, such as capitation, global budget, episode-based payment (e.g., DRGs), per diem payments, performance-based payment, and so on. All payment modes have their own strength and weakness, and they are suitable to different healthcare services.


43.       Selecting and combining multiple payment modes for different healthcare services need sophisticated professional training. Healthcare insurance agents also need to negotiate with healthcare providers on selection of payment modes. To use some payment modes also need to be command of healthcare service data collecting and analysis. Above all, paying for healthcare services is a highly professional job.


44.       The professionalization of healthcare purchasing is in the stage of underdevelopment. First, healthcare purchasing is yet to be a profession, and thereby third-party administrators (TPAs) of healthcare insurance are almost not known in China. Second, professional training of healthcare purchasing is yet to be institutionalized, in particular in higher education. Third, existing public healthcare insurance agents have no incentive to bolster their own professionalization as they are occupying monopolized positions.


45.       It is desirable to push for professionalization and corporatization of public healthcare insurance agents. In breaking up their administrative links with government organs, public healthcare insurance agents should transform themselves into independent public service providers. Intensifying competition among all healthcare insurers (public or private) is conducive to governance reforms in the healthcare insurance sector.


46.       Another approach is to promote public-private partnership in the healthcare insurance sector. What is urgently to be done is that the government supports the development of private health insurance through direct subsidy and/or tax preferential policies. One the one hand, private health insurance can play supplementary and/or complimentary roles in the whole national healthcare security system; on the other, competition from the private sector can bolster public healthcare insurance agents to improve performance.


47.       Commercial health insurance is extremely underdeveloped in China. Its financing level accounted only 3.4 percent of total health expenditure and 6.2 percent of private health spending in 2007. Although the space for increased private health insurance is huge, potential needs are yet to be transformed as actual demands.


48.       Commercial health insurance companies serving as TPAs to manage public insurance funds has emerged, but is still in the stage of early development. The commercial TPA coverage over population of enrollees in NCMS and Urban Residents’ Healthcare Insurance was only 4.0 percent and 0.7 percent,managing 8.3 percent and 0.1 percent of funds respectively.


49.       Supplementary or complimentary health insurance is rather underdeveloped as well in China. One of explanatory factors is that payment reforms are a weak-link in both commercial and social healthcare insurance in China. Most commercial health insurance companies focus on controlling over moral hazards of enrollees, but rather on controlling behaviors of healthcare providers.


50.       It can be expected that public-private partnership in the healthcare insurance sector would be developed in some localities in the near future. Initiatives by local governments are critical. A situation with managed competition would take shape in the long run. This is one of directions for further health insurance reforms in China.