WPS3978

Health Service Delivery in China: A Literature Review

Karen Egglestona, Li Lingb, Meng Qingyuec, Magnus Lindelowd and Adam Wagstaffd

a Economics Department, Tufts University, Medford, MA 02155, USA
b China Center for Economic Research, Peking University, Beijing, China
c Centre for Health Management and Policy, Shandong University, Jinan, China
d The World Bank, Washington DC 20433, USA

Abstract

We report the results of a review of the Chinese-language and English-language literatures on service delivery in
China, asking how well China's health care providers perform, what determines their performance, and how the
government can improve it. We find current performance leaves room for improvement, in terms of quality,
responsiveness to patients, efficiency, cost escalation, and equity. The literature suggests that these problems will
not be solved by simply shifting ownership to the private sector, or by simply encouraging providers--public and
private--to compete with one another for individual patients. By contrast, substantial improvements could be (and in
some places have already been) made by changing the way providers are paid--shifting away from fee-for-service
and the distorted price schedule toward prospective payments. Active purchasing by insurers could further improve
outcomes.

Corresponding author: Adam Wagstaff, World Bank, 1818 H Street NW, Washington, D.C. 20433, USA. Tel. (202)
473-0566. Fax (202)-522 1153. Email: awagstaff@worldbank.org.

Keywords: health service delivery; provider payments; China.

World Bank Policy Research Working Paper 3978, August 2006

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange
of ideas about development issues. An objective of the series is to get the findings out quickly, even if the
presentations are less than fully polished. The papers carry the names of the authors and should be cited
accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors.
They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they
represent. Policy Research Working Papers are available online at http://econ.worldbank.org.

Acknowledgements: The authors benefited from the comments of Mr. Fei Zhaohui of the Chinese
Ministry of Finance, who was the discussant for this review at a workshop held in Beijing in July 2004,
and from the comments on earlier drafts by Dick Meyers of the World Bank.

I. INTRODUCTION

How do China's health care providers perform? What determines their performance?

How can the government improve it? To answer these questions, we undertook a review of the

Chinese-language and English-language literatures on service delivery in China, as well as

looking at lessons from abroad. The review comes at a key moment in China's health reform

process. There is broad agreement that the health service delivery system is not functioning

well, but there is considerable disagreement about how to fix it. Some argue for turning over the

entire system to a free market. Others recall the benefits of a centrally planned health system.

The truth--this paper argues--lies somewhere between these two extreme views.

II. PROVIDER PERFORMANCE IN CHINA'S HEALTH SECTOR

Quality is a key dimension of any provider's performance. Like many countries, China

does not have a strong system for monitoring the quality of care. But several indicators suggest

quality could be better. The skill of providers is low, especially at the village level. A large-scale

study of 46 counties and 781 village doctors in 9 western provinces conducted in 2001 found that

70% of village doctors had no more than a high school education and had received an average of

only 20 months of medical training.1

There is widespread evidence of unnecessary care being provided in China, especially

drugs. In 1998-99, a study conducted in 4 township health centers and 8 village clinics in Wuxi

County of Chongqing and Min County of Gansu concluded that less than 2% of drug

prescriptions were `rational'. In the case of village clinics, only 0.06% of drug prescriptions were

deemed reasonable.2 Unnecessary care makes for costs that are higher than necessary. For

example, one study found that 20% of all expenditure associated with appendicitis and

pneumonia treatment was clinically unnecessary.3 In the study, as much as one third of drug

expenditures were considered to be unnecessary by a panel of reviewing physicians. The panel

concluded that, for both conditions, length of stay (LOS) could be reduced by 10-15% without

any adverse effects on health outcomes.

There is some evidence that health care quality in China has improved over time, but

these improvements seem to be confined primarily to urban areas.4 For patients--especially

poor ones--unnecessary expenses associated with low quality can make the difference between

health care being affordable and being unaffordable. In some situations, unnecessary care may

also have adverse health consequences.

Beyond the apparently low technical quality of care, patients have expressed

dissatisfaction about providers' responsivenes. For example, in a recent sample interview with

642 urban residents, roughly 70% expressed satisfaction with health care services, and 65% were

satisfied with the attitudes of the health providers.5 However, 54% complained that their doctors

were not clear about their disease status, and 4% said that they or their relatives had open conflict

with the health providers (yiliao jiufen).

The efficiency of China's health care providers is also a matter of concern. In recent

years, the number of providers has increased while caseload has been falling. Bed-occupancy

rates are, as a result, falling, especially in township hospitals where bed occupancy was low to

start with. Provider productivity--measured in terms of patients per provider per day--is also

falling in rural areas, from a relatively low base. There is also evidence of waste in the use of

high-tech equipment.

A further concern as far as provider performance is concerned is the rapid cost escalation

that China's health sector has witnessed in recent years. Costs have risen much faster than per

capita income and prices generally. This reflects in part a more complex caseload (less infectious

diseases, more NCDs) and the adoption of new technology. Whether costs have risen `too' fast is

not clear-cut. But what is clear is that the extensive overuse of drugs and high-tech medical

procedures is a matter for concern. Rapidly rising health care costs in China have probably been

one of the factors behind the fall in demand for health care over the last 10 years. And they have

made health care increasingly unaffordable for China's poor families.

China's health system also displays considerable inequities in, for example, utilization

and outcomes between rural and urban areas, and across income groups. How far these can be

blamed on providers is unclear--utilization and outcomes reflect demand-side and supply-side

factors. What can be said, however, is that in recent years--in contrast to the 1960s--the health

service delivery system in urban areas has developed much faster than in rural areas, and there is

a growing gap in quality of care between rural and urban areas.

All in all, the performance of China's health care providers--like providers in many

countries--shows considerable room for improvement. What explains this weak performance?

And how can the government improve it?

III. DOES OWNERSHIP MAKE A DIFFERENCE?

One hypothesis--often expressed in China--is that poor provider performance reflects

the heavy emphasis on public ownership above village level. The international evidence on

whether ownership matters--mostly from the United States--is mixed. Some studies suggest

ownership and profit-status of providers do not make a difference--that ultimately it is other

factors that determine performance.6 Other authors disagree and conclude that technical quality

is lower and mortality higher in for-profit hospitals.7 While many studies focus on the difference

between for-profit and non-profit hospitals, there is less evidence on the differences related

specifically to ownership. Some studies suggest that public hospitals perform worse than private

ones, but this may simply reflect their status as "providers of last resort", whereby they are

forced to handle more complex cases.

The limited evidence available from the Chinese health sector is consistent with the

international literature: it suggests that ownership probably matters less than people often think.

For-profit and public providers are just as likely as one another to over-prescribe drugs, and for-

profit providers are just as likely to deliver preventive activities as public ones, provided they are

paid properly to do so.8 Patients often express a high level of satisfaction with the responsiveness

of private providers, but also express some concern about their qualifications and motivations.9

There is some evidence that for-profit providers in China have a more efficient management.

However, this reflects at least in part the fact that public providers are constrained by the relevant

stakeholders in a way that private providers are not. It may not be ownership per se that makes

the difference, but rather the willingness of stakeholders to stay at arm's length from day-to-day

decision-making.

All of this has important implications for the reform agenda in China's health sector.

Provider behavior is influenced by a wide range of factors--financing, autonomy, market

structure, accountability arrangements, etc. Ownership may be related with these factors, but

often it is not the primary determinant. As a consequence, privatization is not likely to be the

panacea that some in China believe it to be.

IV. IS COMPETITION THE ANSWER?

Another commonly heard view in China is that the health sector needs more competition.

The international literature suggests extreme caution on this point, and is very clear on one key

point: competition for individual patients is not the answer. Patients lack the knowledge to be

informed consumers as in a typical market. This blunts competitive pressures, and makes

patients vulnerable to exploitation by providers who take advantage of their superior knowledge

of medical matters.

What can be potentially useful, however, is competition among providers for contracts

from purchasers (e.g. insurers). The evidence is limited, mostly coming again from the U.S.,

where, for example, competition for Medicare contracts appears to have improved patient

outcomes and lower costs.10 Elsewhere in the OECD, several other countries--including the

Czech Republic, New Zealand, Sweden and the United Kingdom--have experimented with

having hospitals compete for contracts. However, as a recent OECD report put it, "[these

initiatives] have not achieved the expected results and have run into considerable patient and

provider opposition. However, as these experiments were discontinued after a relatively short

period, more time may have been needed for positive results to appear".11

Contracting is likely to work better when the contract can specify quantity and quality

clearly, both can be monitored easily, and contracts can be enforced.12,13 There has been some

success with contracting public health interventions, such as malaria control programs, nutrition

programs (Senegal) and reproductive health programs (Bangladesh).14 These services are

relatively straightforward for contractual specification. Contracting for appropriate clinical care,

by contrast, is often more challenging.15

An area where health care sector competition may prove more straightforward is in input

markets. For example, in many countries there is a competitive labor market for hospital

managers, who attract similar compensation packages from both for-profit and non-profit

hospitals. Similarly, competition in the markets for physicians, nurses, and medical equipment

and materials, and support services such as maintenance, catering, cleaning, and laundry can help

to allocate resources in a way that rewards, and thus stimulates, improved performance. Input

markets are generally less prone to `market failure', since they often feature organized

purchasers and suppliers with similar information and market power.

The evidence to date from China on the benefits of competition--be it competition

between providers or in markets for inputs--is very limited and research on this topic would be

useful. In the meantime, policy reform in China could usefully learn from the lessons of

international experience. The performance of China's health sector will almost certainly not be

improved by encouraging competition between providers for individual patients. In fact, such a

policy is likely to exacerbate existing problems. Where competition could be useful is in a

market for purchaser contracts, and in input markets. That would mean developing the

purchasing capacity of insurers such as BMI and NCMS--an issue we will return to later.

Careful monitoring will be vital, not least to ensure there are no unwanted side-effects. In order

to realize the potential benefits of competition in input markets, providers would need be given

more autonomy to make decisions about what inputs and services should be contracted for, and

from whom to contract. Again, careful monitoring would be vital.

V. PRICES AND PROVIDER PAYMENT

The evidence is not at all clear, then, on how ownership and competition impacts on

provider performance. By contrast, what is clear from studies to date is that how providers are

paid matters in health care. Furthermore, payment-related incentives can be improved without

changing ownership, and without introducing competition.

Providers in China--like providers in many countries--receive payments from three

sources. The bulk (over 60%) comes out-of-pocket payments paid by fee-paying patients.

Government subsidies--largely from provincial and county governments, rather than from

central government--account for 20% of health spending. Insurers--largely social insurance

agencies such as CMS and BMI, rather than private insurers, such as China Life--account for

the remaining 20%.

The prices paid by fee-paying patients are set by government, with the dominant concern

being to make sure that basic services are affordable to the whole population. Prices have tended

to be set below cost for simple and non-invasive care, and above cost for more complex care.

The intention is that patients who need `basic' care receive it, while patients who want the less

basic and more expensive care pay enough for it to enable the provider to cross-subsidize the

basic care from their profits on the more expensive care. Government subsidies have been based

not on performance or throughput, but rather on staff numbers and the stock of beds. This

encourages hospitals to expand their workforce and their bed stock, but not to improve the

quality of their care or their efficiency. Health insurers--the final payer--vary in the way they

pay providers in China. However, only some have moved beyond fee-for-service (FFS).

The emphasis on FFS coupled with the distorted price schedule has resulted in providers

generating demand for expensive care. Simple and non-invasive care tends to be under-provided,

leading to concerns about low--and in some cases--falling coverage of key public health

interventions, while high-tech diagnostics are over-provided. This is reflected in the rapid

adoption of new technology in China's health sector and the recent rapid growth of hospital

revenue per patient episode. It is the latter rather than rising utilization that largely accounts for

the rapid growth of health spending in China, which has averaged 12% per annum in real terms

during the 1990s (Fig 1). Because of the markup pricing scheme that has long been in force,

drugs are also profitable--hence their over-prescription. China's high average length-of-stay

(LOS) is another example of incentives at work--because hospitals that are paid of a FFS basis

can claim reimbursement for the additional day, they have an incentive to keep patients in

hospital.

Figure 1: Inpatient revenues have been rising largely because of rising costs of care*

20%

s
mret 15%
Hospital
ealrni 10% revenue per
inpatient
a..pegnahc 5% No. inpatients

0%
Hospital
% -5% inpatient
revenues

-10%
91 92 93 94 95 96 97 98 99 00 01
19 19 19 19 19 19 19 19 19 20 20

*Source: China National Health Economics Institute China National Health Accounts Digest, 2002. Data refer to large hospitals
only.

Some efforts have been made to improve matters. In 2000, the government sought to

reduce the distortions in the price schedule, by increasing the prices of professional services and

reducing the price of high-tech care. A study in Shaanxi found that this resulted in a shift in

expenditures from high technologies to basic professional services, and a reduction in growth

rates of expenditures for secondary and tertiary hospitals, using four diseases as tracers.16

However, a study in four provinces of Beijing, Gansu, Shandong and Henan, concluded that high

technologies are still highly profitable, encouraging hospitals to acquire high-tech equipment.17-19

Reform of drug prices has also begun, but again apparently with mixed results. Starting

in 2000, the central government began to change its drug pricing policy from controlling the

entire range of prices for all pharmaceuticals to controlling retail prices for selected products

only. One rationale for the reform was that cost-effective drugs would be utilized more if the

prices of these drugs are reduced.20 The government declared that retail prices should be reduced

by an average of 15% before the end of 2001.21 However, in a recent study--albeit one based on

a small sample--it was found that the new drug-pricing policy did not work in controlling drug

expenditures, because hospitals could maintain high drug revenues by increasing drug utilization

and shifting utilization from drugs whose prices had been reduced to high-price drugs.22

Beyond reforms to the price schedule, there have been more radical reforms, involving a

switch from FFS to a superior payment method. Some of these efforts have been evaluated.

Typically, they have been initiated by insurers or government. Hainan Province, for example,

implemented prospective payment for six key hospitals in January 1997. Average expenditure

per admission fell below that of the other hospitals that had continued to be paid FFS, and the

growth in spending on high-tech services was reduced.23 Whether there was any adverse effect

on quality is not known.

Jiujiang, one of the original pilot cities for the new BMI, started out using FFS to pay

hospitals, but in late 1996 switched to a fixed charge per inpatient day, having experienced a

high rate of growth of medical expenditures under FFS.24 In 2001, the province switched again

in an attempt to further curb expenditure growth, this time to capitation.25 After the switch to

capitation, medical expenditure per insured inpatient fell from 2320 yuan to 1778 yuan, and the

share of drug spending in total spending fell from 76.5% to 59.8%.25

Zhenjiang, the other BMI pilot ciity, started out using a fixed charge per inpatient day,

but in 2001 started to experiment with a DRG-based payment method for 82 diseases.24,26 Rates

were fixed--hospitals could retain any savings, but bore the loss if actual expenditures exceed

the fixed rates. Reimbursement rates for each disease were set according to average expenditure

incurred over the previous three years in treating the disease in question, less any unreasonable

expenditures.26 In Zhenjiang in 2003, the average expenditure for diseases using DRG payment

method was 25% lower than the province average in the same level hospitals.26

In subsequent nationwide implementation of BMI, many cities followed the leads of

Jiujiang and Zhenjiang in switching to payment methods other than FFS. Many have adopted a

fixed charge per inpatient, but not all. For example, in Guangdong Province in 2002, 13 of the

18 municipal cities used this method, two used FFS, two used capitation, and one used a fixed

charge per inpatient day.27 In some cases, a variety of different payment methods are used

alongside a fixed charge per inpatient. In Guanzhou, Zhenjiang, Dalian, Liuzhou, Mudanjiang

and Xiamen, DRG and FFS were also used for some specific diseases such as TB, mental

disease, and late stage treatment of tumor.28 Less evidence on impacts is available for these cities

than for Jiujiang and Zhenjiang.

In the rural sector, there has also been some experimentation with alternatives to FFS,

though no evidence on impacts appears to exist. In two counties of Xinjiang, the county

government--through the CMS fund--paid 40-50 yuan per month to each village practitioner.

In return, the village doctors provided free diagnostic and treatment, except for certain items--

such as a delivery--for which they received additional fees.29 In Kuanyang township of

Guizhou Province, all contract village clinics were managed by township health centers for

purchasing and charges for drugs. Payment for village practitioners included three parts: a basic

salary, an indicator-based bonus (indicators included the number of home visits and patient

satisfaction), and a performance-based bonus (performance included cost containment). The

basic salary was 300 yuan a year for each practitioner.30 In Wushe county in Henan, each

household contributed 10-30 yuan to form the fund. With the total fund, village clinical

practitioners were contracted to provide free physical examinations once a year. The CMS

member is entitled to receive discounted services ranging 15-20% for defined services in village

and township health facilities.31 In Wuxue county in Hubei, village doctors and THCs are paid a

capitation payment by CMS, and in return they are expected to provide defined basic health

services to CMS members with the fixed allocation of the fund (10 yuan for the village and 10

yuan for the THC a year). If the CMS fund is not balanced, 70% of the deficit should be covered

by THCs and the rest is covered by village clinics.29,32,33 In two counties of Gansu Province,

DRG payment has been used by the CMS.34

Interestingly, some providers in China have of their own volition moved away from FFS.

For example, some hospitals have introduced diagnosis-related groups (DRGs) for fee-paying

patients, in the hope that they may be able to attract more business by developing a reputation for

transparency in pricing. The earliest documented experiment of DRG pricing was in three

hospitals in Ha'erbin county in Heilongjiang in 1994.35 By the end of 2000, 16 hospitals in

Ha'erbin had started using DRGs.36 Since then, DRG use has been reported in many other parts

of China, including Jining county in Shandong, Fouzhou county in Fujian, Wen county in Henan,

Tangshan county in Hebei, Hangzhou and Leqing counties in Zhejiang, Zhenjiang county in

Jiangsu, and Hongya county in Sichuan.37 There is, unfortunately, little evidence on the

consequences of these initiatives. However, the evidence that does exist suggests that the

adoption of DRGs brought down costs. In the Red Cross Hospital of Ha'erbin, total

expenditures for acute appendicitis decreased after implementation of DRGs, and the proportion

of drug expenditures in total expenditures decreased from 50% to 15%.36 In Jining Medical

College Hospital, for the five diseases monitored, total expenditure per case decreased by 30-

50% following implementation of DRGs, drug expenditure per case fell by 34-64%, and average

length of stay fell by 0.4-2 days.38 Nothing appears to be known about the effects of DRG

adoption on other dimensions of health care, including quality of care and "cream skimming"

(providers deliberately avoiding the more complicated cases within each diagnostic group).

There have also been some experiences with alternative provider payment methods for

outpatient care. Shanghai switched to a capitation based payment for outpatient care for the

government insurance program.39 While findings indicate a slow-down in cost-escalation, reform

design and available data do not permit a rigorous assessment--a problem that arises with many

payment reforms in China as well as in other countries.

In many cases, provider payment reforms have been introduced in conjunction with other

health system reforms. For example, Meng et al. report on a comparison between Nantong, an

urban health insurance pilot city that implemented both provider payment reforms and new

forms of contracting, and Zibo, a city that did not implement reforms.40 They find a smaller cost-

increase in Nantong, without measurable impact on quality. Similar results have been found in

other studies.41

Moving completely away from FFS to a fully prospective payment system can be risky--

providers may skimp on quality unless the payer quality thresholds are laid down, and unless

quality and quantity can be monitored effectively. Some prospective payment systems also create

incentives for risk selection.42 In China, some steps have been taken to promote quality and deter

misconduct by hospitals. For example, in Qingdao, where a global budget has been used,

payments to hospitals have been reduced if they admitted fewer than 95% of the number of

patients they had admitted the previous year.43 A mixed payment system--combining FFS and

prospective payment--offers an alternative approach to solving this problem, and has become

popular across the OECD.

What are the implications for policy reform? There seems to be considerable scope for

improving provider performance in China through carefully designed and phased payment

reform. This would be most effective if combined with strengthened purchasing functions of

insurers. On the pharmaceutical side, separation of the prescribing and dispensing functions has

the potential of reducing adverse provider incentives. Experience from Taiwan and elsewhere

has, however, shown that such reforms have to reconcile many strong interests, making effective

reform difficult.44

VI. ORGANIZATION MATTERS

The performance of any delivery system reflects a number of organizational choices. For

example, a well-functioning referral system lowers costs and enhances equity.45 In its transition

from the old system, China lost this: patients now choose whichever level of provider they can

afford, so the higher-level (e.g. provincial and county) hospitals are overloaded with higher-

income patients, and the lower-level hospitals (e.g. township) are underutilized and patronized

by mostly low-income patients.

But other aspects of how the delivery of health care services is organized also matter.

Overlapping functions and fragmented service delivery responsibilities need attention. For

example, family planning institutions, township health centers, and maternal and child health

facilities in China have overlapping functions. MOH, military, SOE and other enterprise

hospitals all provide similar services in an uncoordinated manner. And there are also questions

about the roles and responsibilities of different levels of government in service delivery. Several

studies have found that decentralization in China has had a negative impact on delivery,

especially equity of services between richer and poorer regions.46

Finally, quality and efficiency are also affected by the internal structure and management

of delivery organizations. Many hospitals lack effective quality control system, with supervision

responsibilities scattered across different departments and agencies. Moreover, financial

management systems and personnel policies--e.g. in relation to compensation--affect incentives

and provider performance. The study in Zibo and Nantong found that the main factors

influencing unit cost, LOS, and other efficiency indicators were the bonus system, competition

for hospital positions, selection of staff, and the accountability system.

VII. CONCLUSIONS

Current performance by Chinese health care providers leaves room for improvement, in

terms of quality, responsiveness to patients, efficiency, cost escalation, and equity. The literature

also suggests that these problems will not be solved by simply shifting ownership to the private

sector, or by simply encouraging providers--public and private--to compete with one another

for individual patients.

But our review also contains some important positive messages too. Active purchasing by

organized purchasers can be an effective way to affect system incentives. In both the urban and

rural areas, social insurers--e.g. BMI and NCMS--and other purchasers could promote

improvement in service delivery through selective contracting, mixed payment methods with

quality bonuses, drug use monitoring and formularies, and effective gate-keeping.

While some of the problems observed in the Chinese health sector today are due to

excessive or inappropriate government intervention, other problems arise from the government

doing too little. Information asymmetries and other market failures call for effective government

regulation in the health sector. Regulation of advertising can play an important role in protecting

population health and reducing information asymmetries--e.g. in relation to tobacco. There is

also an important place for regulation of behavior in insurance and health care markets, such as

preventing price collusion and "cream-skimming", controlling quality, protecting patient privacy,

and providing information. In health systems that allow a prominent role for markets in shaping

the delivery system, antitrust policy is a crucial tool for establishing a "fair playing field".

In most health systems, the government also plays an important role in relation to the

health workforce. China clearly has major challenges in this area. One challenge, already noted,

lies with the quality of its medical personnel. So far, the focus has been largely on increasing the

quantity of health workers. A clear challenge now is to increase quality, and to ensure that the

distribution of health workers reflects need. But it is not just China's medical skills that need

improving. Its health sector lacks managers, quality assurance personnel, and other key groups.

For example, whatever the role of the market and government in service delivery, a credible

system of supervision and certification of provider competence is necessary.

In summary, Chinese experience matches theory and global evidence, namely that

system-wide incentives shape provider performance. Fortunately, both Chinese and international

experience offer some clear lessons on how these incentives can best be harnessed.

Unfortunately, there are no quick fixes. The interaction of incentives calls for a package of

complementary reforms, including strengthened purchasing and provider-payment reforms,

effective sector-neutral regulation, appropriate vertical and horizontal integration of health care

institutions, and improved provider management.

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