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1、 An Economic Analysis of Health Care in China (draft 8/8/06) Gregory C Chow Princeton UniversityAbstractAfter describing the institutions for health care in China as they evolved since 1949, this paper presents statistical demand functions for health care. It applies the demand functions to explain
2、the rapid increase in health care demand and the resulting rapid increase in price when supply failed to increase. The failure in increase in supply was traced to the system of public supply of healthcare in China. The reform experience of Suqian city in the privatization of healthcare is reported t
3、o demonstrate the positive effect of privatization on supply. The governments health care program for the urban and rural population is described and an evaluation of it is provided.Outline1. Introduction2. Changes in Health Care Institutions 3. Demand Functions for Health Care 4 Supply for Health C
4、are: Public or Private? 5. Governments Program for Health Care 6. Evaluation of the Current Health Care System7. Conclusion1. IntroductionWith a population of over 1.3 billion China has received much attention, including its spectacular economic development since 1978 and the accompanied deteriorati
5、on of health care for a substantial segment of its large rural population. Section 2 of this paper recounts the success of the PRC in improving the health conditions of its population from 1949 to 1980 and describes the changes of the public heath care system after 1980. In section 3, statistical de
6、mand equations for health care are estimated. Using only annual time-series data from 1995 to 2003 I have estimated an income elasticity of somewhat above unity and a price elasticity of about 0.7. Using cross-section data on per capita expenditure for health care and per capita total consumption ex
7、penditure for urban and rural population separately I have found the total expenditure elasticity of demand for medicine and medical services to be approximately unity with small standard errors for both populations. Taking their average value 1.042 as given I have used time series data to estimate
8、price elasticity, obtaining a value of 0.63 with a small standard error.In section 4 I document the surprising fact that the per capita supply of healthcare did not increase from 1989 to 2004 when output of almost all other consumer goods increased rapidly in the course of Chinas rapid economic deve
9、lopment. I trace the cause to the public supply of health care, and use the recent reform experience in Suqian city to show that privatization can lead to a rapid increase in supply as it did for that city. Government programs for the health care of urban and rural population will be described in se
10、ction 5. Section 6 is an evaluation of the governments programs. Section 7 concludes. 2. Changes in Health Care InstitutionsSince 1949 the Chinese government has had an extensive program to improve the health conditions of the Chinese people. One indicator of the improvement is the decline in the an
11、nual death rate from about 17 per 1000 in 1952 to 6.34 per 1000 in 1980, as shown in Table 12.1 of Chow (2002). As another indicator, life expectancy was 40.8 years in the early 1950s, 49.5 in the early 1960s and 65.3 in the late 1970s when economic reform began (see World Population Prospects: The
12、2004 Revision: http:/esa.un.org/unpp/p2k0data.asp). In the mean time many diseases were eliminated or brought under control. Programs for hygiene and health protection were introduced. A large number of health personals were trained and healthcare institutions were established by 1980. See Chow (200
13、2, pp. 212-3) for details. Before economic reform started in 1978 the Communes in rural China provided health care through a three-tier system that was managed and financed locally. In the first tier, the part-time barefoot doctors in health clinics provided preventive and primary care. For more ser
14、ious illnesses, they referred patients to the second tier: commune health centers, which might have 10 to 30 beds and an outpatient clinic serving a population of 10,000 to 25,000 and which were staffed by junior doctors. The most seriously ill patients were referred by the commune health centers to
15、 the third tier: county hospitals staffed with senior doctors. The “cooperative medical system” (CMS) that organized the barefoot doctors and provided other medical services to the rural population was part of the commune system and was financed by the communes welfare funds. Thus the CMS served the
16、 dual role of a supplier and a collector of insurance funds for the farmers to pay for the services. Healthcare can be adequately supplied in a planned economy if the planning authority, as represented by the Commune leaders in the present case, controls all resources to produce healthcare including
17、 capital facilities, personnel and medical supplies. After economic reforms in agriculture the above healthcare system collapsed as the system of Communes collapsed. Publicly provided healthcare became the responsibility of the local governments which, in poor regions, did not have the financial res
18、ources from taxation to supply adequate healthcare. The facilities and services deteriorated. Barefoot doctors found it more profitable to work full-time in farming or to set up private practices outside the system. As incomes of farmers increased the demand for better-quality medical care increased
19、. With limited supply prices went up. The low-income farmers cannot afford to pay for healthcare of the same quality as was previously supplied under the collectively financed CMS.In the language of the World Bank (1997, p. 3): “The shift away from a communal system deprived the rural cooperative me
20、dical system of its sources of community-based financing. As communes gradually disappeared, so did the cooperative medical system. Only about 10 percent of the rural population is now covered by some form of community-financed health care, down from a peak of 85 percent in 1975. (There is much vari
21、ation in coverage among provinces, however, because of differences in interpretation of national policy.) As a result, some 700 million rural Chinese must pay out of pocket for virtually all health services. Without insurance, medical expenses can lead to deferral of care, untreated illness, financi
22、al catastrophe, and poverty.”For the urban population before economic reform health centers and hospitals associated with state-owned enterprises and other government institutions cared for the employees and their family members. With urban economic reform in the 1990s state-owned enterprises were m
23、ade financially independent and downsized. State enterprises and other government organizations had difficulty in financing the health care of their employees. During this period, along with the restructuring of the state enterprises to become share-holding companies that are to be relieved from the
24、ir burden to provide welfare support to its employees and their families, the Chinese government was in the process of establishing a medical insurance system to replace the previous system. Under the new insurance system introduced in 1998 in addition to government contribution, the employer contri
25、butes 6 percent and the employee contributes 2 percent of his wage. The large number of non-state enterprises can also participate in this insurance system or can afford to pay wages to their employees that are sufficient for them to be self insured. In other words, the government has instituted a n
26、ew insurance system to pay for health care for the urban population after the gradual reform of the state enterprises but has not provided a similar insurance system for the rural population after the rapid privatization of farming. Besides government neglect, the second reason for the rural populat
27、ion to receive much less adequate health care is their low income. As the data in Table 1 below show between 50 to 60 percent of health expenditures are individual expenditures. Only about 16 percent are provided by the government. In 2002, per capita consumption expenditures of the middle income gr
28、oup among urban households was 5452.94 yuan, about 3.3 times the corresponding figure 1645.04 yuan for the rural households, as shown in Table 3 below. The ratio of the mean net urban income per capita of 7730.3 yuan to rural income per capita of 2476 yuan in 2002 is 3.11 (see China Statistical Year
29、book 2004, Table 10-1). Table 3 also shows how much more the urban residents spent on medicine and medical services in 2002 than the urban population. As a result of government neglect and income disparity the rural population receives much less health care than the urban population in China. This i
30、s one of the most serious social-economic problems in China. 3. Statistical Demand Functions for Health CareWe will show that the theory of consumer demand is applicable for explaining the aggregate data on the quantity of health care provided, the relative price of health care and real income, and
31、that the estimated statistical demand function can be used to explain the changes in the ratio of health care expenditure to GDP. There has been a rapid increase in health care expenditures in recent years, at a much higher rate than GDP. The ratio of health expenditure to GDP (data in Table 1 and T
32、able 2 respectively) increased from 2257.8/58478.1 = 3.86 percent in 1995 to 6584.1/116741.2 = 5.64 percent in 2003. This fact can be explained by an income elasticity of demand close to unity together with a price elasticity less than unity as will be explained at the end of this section. Note in T
33、able 1 that health care expenditure out of government budget is only about 16 to 17 percent of the total whereas individual expenditure accounts for 55 to 60 percent. This fact supports the application of demand theory to explain health expenditures since the consumers have to pay for them. Table 1
34、Expenditure for Health CareYearTotal nominal (100 million)Government BudgetarySocial ExpenditureResidentIndividualPercent GovernmentPercent Individual19952257.8383.1739.71135.017.050.319962857.2461.0844.41551.816.154.319973384.9522.1937.71925.116.452.819983776.5587.21006.02183.316.054.819994178.6640
35、.91064.62473.115.855.920004586.6709.51171.92705.215.559.020015025.9800.61211.43013.915.960.020025790.0908.51539.43342.115.757.720036584.11116.91788.53678.717.055.8Source: China Statistical Yearbook 2002, Table 21-469; China Statistical Yearbook 2005, Table 22-37.Demand equations for health care can
36、be estimated by (1) using only aggregate time series data and (2) using cross-section data to estimate income elasticity as a check on the estimate obtained in (1) and to be combined with the time series data to improve our estimate of price elasticity. Note that this demand analysis deals with the
37、quantity of health services demanded and not the health conditions as measured for example by the death rate or life expectancy of the population in relation to income or the distribution of income, a subject discussed in Deaton (2003), among others. Time series data on quantity of health services Q
38、, GDP, a price index pr of health care, consumer price index and population are given in Table 2. Table 2 Time-Series Data on Aggregate Demand for Health CareYearConsumerPrice IndexGDPNominal (100 million)Price index of healthcare prQuantity of health servicesQ= exp/prPopulation(10 thousand)19953.02
39、858478.11.0002257.812112119963.27967884.61.1242542.012238919973.37174462.61.3812451.012362619983.34478345.21.6192085.512476119993.29782067.51.8082311.212578620003.31089468.12.0092283.012674320013.33397314.82.2202263.912762720023.306105172.32.4022410.512845320033.346117390.22.6162516.9129227Source: C
40、onsumer Price Index (1985=1.00) is from China Statistical Yearbook 2005, Table 9-2; GDP from Table 3-1; Price index pr for health care services from the Table “Consumer Price Indices by Category” under “medical and health care services (preceding year = 100)” in China Statistical Yearbook from 1997
41、to 2004. The entry in the 1997 Yearbook is 1.124 for 1996 as compared with 1 in 1995)We define the quantity of health care Q, as exhibited in column 5 of Table 2, as the ratio of total health care expenditure in Table 1 to the price index pr (1995 =100) of health care service in Table 2. It is the a
42、mount of health care services measured in 1995 prices. Note the very rapid increase in the price of healthcare in China. We further define the relative price p of health care as the price index of health care pr divided by the consumer price index in Table 2 and real income Y as GDP in current price
43、s divided by the consumer price index. Let q and y denote respectively per capita quantity of health care and per capita income, obtained by dividing Q and Y respectively by population as given in the last column of Table 2. A regression of lnq on lny and lnp based on the 9 annual observations from
44、1995 to 2003 yields the following result: lnq = 1.178(.395) lny 0.707(.222) lnp 2.564(.490) R2/s = 0.635/.0449 (1)Income elasticity of demand for health care is estimated to be 1.178 with a standard error of 0.395 and price elasticity is estimated to be .707 with a standard error of 0.222. These est
45、imates are reasonable. It will be shown below that the income elasticity estimate is close to the estimates for both urban and rural residents from cross-section data. Table 3 Cross-section data on per capita health expenditure and total expenditure 2002Low income householdsLower Middle income house
46、holdsMiddle income householdsUpper middle income householdsHigh income householdsUrban: Total expenditures3259.594205.975452.946939.958919.94Medicine and medical services225.67286.56382.83510.15657.33Rural: Total expenditures1006.351310.331645.042086.613500.08Medicine and medical services57.5774.889
47、0.73116.49201.72Source: China Statistical Yearbook 2003, Table 10-7, for urban data in 2002; Table 10-23, for rural data in 2002 (rural data for previous years are not available in Yearbook).Next, cross-section data are used to estimate income elasticity of demand for health care. Table 3 shows cross-section data on per capita expenditures for medicine and medical services for five different income groups among the urban
