Improvements in medical insurance system to fuel China’s healthcare reform

By By Wang Chaoqun / 08-17-2016 / (Chinese Social Sciences Today)

Since 2009, China has accelerated its reforms to make health care more accessible and affordable.


Patients, doctors and medical insurance funds make up the healthcare system. Of these three factors, medical insurance funds are becoming increasingly important now that the funds’ contribution to total healthcare input has grown from nearly 40 percent to roughly 55 percent from 2000 to 2014, but still lower than almost 73 percent of the member countries in the Organization for Economic Co-operation and Development. In healthcare reform, emphasis should be put on social medical insurance, which constitutes the main body of China’s health care system.


In most cases, the medical insurance system serves as a third party that helps to settle liabilities and manage risks. But it also performs other vital functions.


Theoretically, medical insurance reallocates income in the process of fundraising. Cash compensation and medical subsidies reduce the risk of income loss and medical expenses. These two functions relate to system models. For example, fundraising methods and reimbursement limits as well as income classification all affect the fairness of fundraising. At the same time, the ability to manage risk while ensuring fairness depends on registered participants, compensatory items and reimbursement ratios.

Payments of medical insurance greatly impact medical practices of doctors. The after-treatment payment subsidizes medical service providers based on itemized expenditures. Some doctors tend to prescribe expensive medicine and tests because they rely on sales from treatment for their income, often leading to overpricing and overtreatment. But when payment precedes treatment and hospitals are subsidized according to the number of individuals or kinds of illnesses, profits will drop as doctors prescribe more medicine and tests. In this way, doctors are prone to reducing the amount of medicine and tests, even declining patients with serious illnesses.

Patients will make different medical decisions depending on the type of coverage they have. They will flock to large-scale hospitals for better-quality service without hesitation if the insurance doesn’t cover less-serious illnesses, while patients tend to be more cautious when their insurance covers all kinds of illnesses but with strict reimbursement policies on transfer.

Medical insurance plays a fundamental role in allocating medical resources. The insurance system covers serious illnesses in most cases, leading to a high ratio of hospitalization expenses to healthcare input. Payment based on itemized expenses for services will worsen the urban-rural and interlocal imbalance in medical resources.

The compensatory list clarifies which medical treatments, facilities and types of medicine qualify for reimbursement, blocking the progress of medical technologies and the pharmaceutical industry. But insurance subsidies have strict requirements on hospitals operating costs and clinical information, which is more pronounced when adopting diagnosis-related group systems (DRGs). In this way, health insurance agencies and medical institutions no longer only focus on generating profits and choose instead to informationize themselves.

Patients and medical insurance agencies are the two financial sources of medical service providers. When there is no reimbursement, medical insurance performs no function, and patients assume the entirety of their medical costs. This form of payment based on itemized expenses often leads to overtreatment and unequal distribution of medical resources.

When the reimbursement proportion grows to 50 percent, the medical insurance system still fails to constrain medical service providers. Even if the payment takes place before treatment, insurance funds only balance the account. However, medical service providers tend to shift the medical burden onto the outpatients, nonlocal patients or non-compensatory services. As a result, it is difficult to control medical service providers and healthcare input.

In circumstances like this, relevant government sectors should not only increase the proportion of medical insurance funds to healthcare input but also reform payments as well as reimbursement ratios. These two measures are intended to correct medical practices of doctors.
For example, medical institutions in remote areas and those at the grass-roots level will attract more excellent doctors upon receiving more insurance subsidies, thus help to equalize the distribution of healthcare input and human resources.


Many factors cripple the medical insurance system in China, such as outdated management models, fundraising and reimbursement policies, but low funding ratios and payment based itemized expenses are central to the issue. In 2014, medical insurance funds accounted for roughly 30 percent of healthcare input and almost 50 percent of medical institutions’ sales.
About 50 to 60 percent of Chinese inpatient medical bills were reimbursed in 2014, while in member states of the European Union, the average was nearly 90 percent in 2012.

At the same time, medical insurance funds have less influence on medical institutions when they account for a smaller part of the local hospital’s admissions, which can be seen in the regions with abundant medical resources, such as municipalities directly under central government control and provincial capitals. For example 30 to 40 percent of patients admitted to top hospitals in Beijing and Shanghai are non-local. Therefore, it is not practical to rely on medical insurance agencies to curb local medical spending and alleviate the financial burdens of nonlocal patients.

The reform of payment settlement requires excellent information systems and management models.

At present, there are various databases that have been built by relevant sectors and medical institutions, but these systems don’t share information among each other. The reform cannot distribute medical insurance funds in an equal and efficient way in the absence of basic information concerning medical records, advice and costs.

In terms of management models, the costs of one-on-one between insurance agencies and medical institutions are great while the cost of supervision is considerable, because insurance agencies need to invest heavily in manpower and material resources. Heavy-handed supervision could possibly trigger disputes between the two parties. If hospitals intervene, the disputes could escalate, prompting patients to take out their anger on the insurance companies.


Any reforms to the Chinese healthcare system should focus on two problems. The first is that patients often needlessly seek out the most expensive hospitals. The other is overtreatment. A hierarchical medical system covering all kinds of illnesses should be promoted. Only in this way can patients have the incentive to go to grassroots medical institutions for primary care and be able to obtain reimbursement. At the same time, a referral system should be established that enumerates what illnesses are eligible for compensation based on local economic conditions.


In addition, the registration fee for patients should be raised in recognition of doctors’ value, and patients must also refrain from selecting the higher caliber of hospitals when there is no real need.

To address the problem of overtreatment, payment in advance should be promoted. In the medical insurance system, outpatient service providers are awarded capitation based on how government agencies at all levels distribute funds to insurance participants within their respective jurisdictions. In terms of subsidizing inpatient service providers, the government should adopt the DRGs while staying within the budget.

These two forms of payment will function as a supervisory body to guard against the possibility that doctors could authorize extremely expensive medicine and tests. At the same time, greater financial aid should be allocated to medical departments that lack doctors, such as pediatrics and gynecology, as well as to medical institutions on the grassroots level or those in remote areas that attract the best doctors.

Better capabilities in fundraising and management are necessary to carry out the reforms.

When it comes to fundraising, the urban workers medical insurance system should cover migrant workers. Enterprises and workers can both pay half insurance to lower the financial burden of the employers. An outpatient insurance system covering all kinds of illnesses should be established after closing workers accounts for medical insurance. Now that the retirement age has been raised, retirees can use a part of their pension to pay for their medical insurance. In addition, governments on various levels should increase health care funding.

Related sectors should expand insurance coverage to build a universal system. Funds for medical insurance and medical aid require an integrated administration. At present, the management model involves sectors concerning healthcare, civil affairs as well as human resources and social security. At the same time, compiling medical information will lay the bedrock for reforming payments and collective bargaining between insurance agencies, and medical providers will greatly reduce the bargaining and supervision costs.

The aforementioned medical insurance system will sharply reduce the waste of medical resources by as much as 20 percent, according to the World Health Organization, which estimates that to be the average proportion wasted in each country.

Redesigning the medical insurance system will help to promote healthcare reform in China which is not a fight on a single front. Instead, reform involves various aspects, among which the medical insurance system is foremost.


Wang Chaoqun is from the College of Public Administration at Central China Normal University.