China’s Ghost Hospitals: A Hard Landing Ahead for China’s Health Care Reforms

By Damjan Denoble

China is in the midst of a comprehensive $178.3 billion health care reform that is arguably the most ambitious among a series of stalled, largely counterproductive post-1978 efforts to improve access and reduce inequalities between rural and urban areas within China’s regionalized health care system. Unless the health care reforms are accompanied by a reform of fiscal policies, however, the absence of good governance brought on by financial constraints and perverse cadre payment incentives at the sub-national level is likely to undermine efforts to create a robust primary care infrastructure, and will consequently result in reform failure.

The wide-ranging economic reforms of the 1980’s transferred the responsibility for funding health care onto China’s local governments. In areas of China where economic reform resulted in an economic boom – i.e. major coastal cities like Shanghai and the first of the Special Economic Zones in Guangdong and Fujian province – local governments were able to raise enough money from increased tax revenue to greatly counterbalance the withdrawal of Central Government funding. In most of the country, however, Central Government funding decreased while the tax base stayed unchanged or shrunk owing to outward migration to the urban centers and the just mentioned Special Economic Zones.

In order to make up for the fiscal shortfall, sub-national governments all across China had to increase individual user fees, and individual health care facilities had to raise revenues through increased drug sales and higher service prices. By 2001, out of pocket spending had soared to 60% of total health expenditures, bringing to light the fact that most health facilities in China though still ‘public’, in terms of ownership, had become ‘private, for-profit’, in terms of behavior. This quasi-privatization of China’s health care sector led to soaring health cost increases of 16% per year for more than two decades, nearly twice the rate of GDP growth during the same period.

Sparse insurance coverage along with the the increasing unaffordability of health care gave rise to major public discontent in the early oughts, triggering in turn a series of insurance and payment reforms that culminated in the current comprehensive health care system reforms, in 2009. Even though the first, 2009-2011 stage reforms accomplished a great deal – most notably they increased insurance coverage to 95.7% of the population, and reduced out of pocket expenditures to around 36% by 2010 – they have not yet meaningfully decreased the burden of health care on households because health care costs have continued to rise.

This seeming discrepancy arises because decrease in out of pocket expenditures, as a percentage of total spending, are largely a function of increased insurance coverage, and providing insurance is the sort of thing a Central Government can do well on its own. By contrast, reforming the root causes of per capita health cost increases – corruption and petty administrative rents at the local and facility levels – requires the cooperation and collective action of sub-national governments because they are the ones responsible for actual health system management, health policy enforcement, and for the administration of upwards of 90% of health care cost, whether derived from national transfer or local budgets.  When, as described recently by one National People’s Congress legislator, budgetary shortfalls are “getting so bad that if (local governments) don’t sell land, they can’t even pay salaries,” asking local governments to pursue the pressure-filled demands of health care reform, which involve lowering petty administrative rents as well as revenues derived from drug sales and hospital services in health care facilities within their administrative purview, becomes a lot to ask of local officials.

Indeed, the latest progress assessments of the reforms support this assumption. Due to “Fragmentation, information limitations and delays in budget execution across government levels,” the fact that “officials are not held accountable for equity in local health outcomes and for equity and efficiency in public resource allocation within their jurisdiction,” and the additional fact that “sub-national governments have insufficient downward accountability…[so that] citizens’ feedback does not directly determine their outcomes,” China’s sub-national governments seem not to currently “have the incentives or capacity to comply with China’s HSR objectives.”

In our work we’ve seen first hand how China’s local governments are building new hospitals and health care city complexes without even a basic management plan. All that matters in the short term is that the infrastructure is put up so that the local government can sell more land through public auction to support property development, sustain property prices and increase land sale revenue. The real work of making sure the newly built facilities can actually treat patients is left undone. China’s ghost cities have become the stuff of legend, if the reforms aren’t themselves reformed, we may end up seeing ghost hospitals, as well.

Damjan is a Partner at Rubicon Strategy Group, as well as the Managing Editor of Asia Healthcare Blog, where this post originally appeared. You can  follow him on twitter at @Damjan_Denoble.