1. Introduction. 1.1 Background and problem statement

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3 1. Introduction 1.1 Background and problem statement Health and economic development should be understood as a mutual process. There are four pathways through which health can contribute to economic prosperity (Bloom and Canning, 2000): first, healthier people can work longer hours and are physically energetic and mentally robust, and consequently tend to be more productive; second, healthier people enjoy a longer life expectancy, creating stronger incentives for human capital investment such as education and skills development; third, greater longevity induces higher individual savings during their productive years, providing more investment in physical capital, with a healthy and educated workforce acting as a strong magnet for foreign direct investment; fourth, mortality declines concentrated among infants and children typically initiate the transition and trigger subsequent declines in fertility, leading to reduced population growth and increases in the proportion of population at the working age 1, an important determinant of economic growth and per capita income. Conversely, economic growth and income increases should result in improved health through providing greater demand on better nutrition, living environments and health-related merchandise and services. However, the case of China does not fully correspond with this process, specifically in the latter relationship. Since the beginning of the economic reform in China, the World Bank report series (1984, 1992, 1993) on health and health care services have consistently warned the potentially negative impact of a more market-oriented economy for vulnerable segments of the population. A trend of marketization in China health systems, similar to the experience in the economic sector, leads to health care access being increasingly dictated by the ability to pay (Jamison, 1984; Chen and Zhu, 1984). In urban areas, health care was mainly financed by the Government Insurance System (GIS) for government employees, and Labor Insurance system 2 (LIS) for the enterprise works; whereas in rural areas, as a 1 Demographic change creates a window of opportunity for economic growth, but not one that remains perpetually open (Bloom and Williamson, 1998). 2 The LIS is a self-insurance scheme subsidized by the government by tax expenditures. 1

4 result of agricultural collectives transitioned to household responsibility systems and therefore weakened financial base the original community-based financing scheme called Rural Cooperative Medical System (CMS) quickly eroded and collapsed (Wong, 1994; Liu et al, 1995; Pearson, 1995) leaving the rural population paying out-of-pocket for any health service received. User fees and high direct costs effectively block access for many rural residents lacking adequate income to purchase basic health care when needed (Makinen et al. 2000; Liu and Rao, 2006). Consequently, health shocks and poor health care are correlated with an increase in poverty (Smith, 1999; Wagstaff, 2005). For instance, 22% of poor households identified illness or injury as the cause of their poverty in 1998 (MOH, 1999). Lost workdays and bedridden days are twice as high as the national rural average in poor rural areas (Liu et al, 1996). Rural residents usually do not visit doctor when they are ill, unless or until they are seriously ill. Subsequent medical expenses can then cause financial impoverishment for the rural families (Liu, Rao and Hu, 2002). The widespread lack of insurance in rural China represents an important factor underlying such outcomes (Hsiao, 1995a; Lindelow and Wagstaff, 2005), with 80% of the rural population lacking any type of health insurance in 2003 (MOH, 2004). The greatest discontent voiced by the public relates to the unaffordable access to health care, impoverishment due to heavy medical expenses (commonly known in Chinese as Kan bing nan, Kan bing gui ), and vast inequalities across regions and between urban and rural areas (Hsiao, 2004). Following the guiding principle of building a harmonious society 3 by balancing economic and social development, high priority is placed upon equity. The rural health care system is perceived as being a leading public concern. In October 2002, the China National Rural Health Conference held by the national government in Beijing marked the first rural health policy meeting since The Central Party Committee and State Council jointly announced 9 major 3 The phrase harmonious society emphasized by president of People s Republic of China Hu Jintao proposes the government responsibility is guiding people to the correct direction in life. This is a socio-economic vision and the ultimate goal for the ruling Communist Party of China along with XiaoKang Society, which aims for a basically well-off middle-class oriented society. 2

5 national policies to support and strengthen the rural health care financing and delivery systems, the most important of which was the establishment of a rural health insurance system, henceforth the New Cooperative Medical Scheme (NCMS), intended to tackle problems of unequal and unaffordable access to health care and major financial risk due to medical expenditure. The NCMS is ruled as the form of voluntary enrolled as household unit and governmentindividual co-finance. Meanwhile, it explicitly declared that governments (at all levels) have an important financial role to play in the NCMS, representing the first step towards more progressive subsidy policies. Scaled-up from 2003 to September 2009, there are 2,716 counties (including suburban villages executing the New Cooperative Medical Scheme, accounting for almost 95% of counties in China), and 833 million rural people are enrolled. Nationwide, the enrollment rate stands at 94% (MOH, 2010). Can the NCMS achieve its intended goals? As the government has already committed a significant sum to expanding the NCMS in rural areas, it is prudent to consider the evidence regarding how well NCMS has been able to improve access to health care and reduce the financial burden caused by medical expenses. The percentage of the target population covered represents an indicator of the general attractiveness of the Cooperative Medical Scheme (CMS) (Carrin et al, 2005). However, it must be stressed that universal coverage is not equal to effective coverage (Hsiao, ). A nationwide great leap forward type of expansion in the NCMS is certainly striking. In part, it is the likely result of features of the NCMS that are supposed to consider the problem of adverse selection 5, notably the relatively generous government subsidies and the requirement that participation must be at the household level (Wagstaff et al, 2007). On the other hand, the qualitative study also indicates that local governments have exerted considerable efforts to achieve high levels of participation (Wu et al, 2006), even responding by requiring that emigrants 4 This is quoted from Prof. William Hsiao presentation, The challenge of achieving universal health care coverage on the Global health symposium at University of Heidelberg, September 13 th - 15 th, Brown and Theoharides (2009) highlight that the central government has conditional matching funding on local governments achieving 80% enrollment, in order to address the adverse selection. 3

6 enroll with other household members despite sometimes being ineligible for NCMS reimbursement (Brown and Theoharides, 2009). Moreover, concerns have also been expressed that the budget of the NCMS is too small to make a significant impact. At the start-up phase of the NCMS ( ), the subsidy from all level of governments is 40 RMB 6 (US$ 6.3). The premium (US$ 1.6) per enrollee is around one-fifth of the total per capita rural health spending, and such an amount of money is by no means sufficient to provide a comprehensive health benefits package for the rural populations in China; while the copayments are correspondingly set high (Wagstaff et al, 2007). The national average reimbursement rate for hospitalization was around 28% in 2006, whereas outpatient procedures had a higher reimbursement rate in western regions (about 50%), however the national level was only around 34% (Hu and Zuo, 2007). Under such considerations, the impact of the universal coverage of the NCMS in the sense of participation warrants in-depth analysis. Making an assessment preliminarily answers the effectiveness issue of the NCMS, with its efficiency representing another concern. In particular, the Chinese government announced that it would spend an additional 850 billion RMB 7 (USD 125 million) over the next three years in the outlook of the new round of medical reform to invest in five specific areas 8, of which many significant demand subsidies will be placed on the NCMS program. The NCMS will be at a crossroads regarding how to apply its new money to achieve a more effective and efficient health care service delivery. From the demand side perspective, the reimbursement mechanism of the NCMS is relative to its 6 1US$ = 6,38 Yuan (September, 2011). All currency converters in this study are according to this value. 7 China s currency unit, 1 RMB= 1 Yuan. In this study, the currency unit RMB and Yuan are used interchanged. 8 These five specific areas include: (1). Expand insurance coverage with a target of achieving universal coverage by 2011, with significant demand subsidies for the rural population to enroll in the New Cooperative Medical Scheme (NCMS) and for the urban uninsured to enroll in the Urban Resident Basic Medical Insurance (URBMI); (2). Increase government spending on public health services, especially in low-income regions, with the goal of equalizing public health spending across regions; (3). Establish primary-care facilities-community health centers in urban areas and township health centers in rural areas-which will serve as gatekeepers in the long run; (4). Reform the pharmaceutical market; and (5). Pilot test public hospital reforms (Anoymous, 2009a). (Yip and Hsiao, 2009). 4

7 efficiency in reducing financial risk as well as enrollee s welfare changes. The NCMS s resources should be focused on addressing major risks that could result in poverty; while the notion of advocating to expand compensation for comprehensive risks has recognized that its high morbidity might also accumulate financial risks for rural people if they need review or referral due to chronic illness. There is a need to lead new investment in the right direction for arranging reimbursement in the NCMS. Given the same government fiscal costs, how could policy-makers adjust NCMS s benefit package in order to increase enrollee s welfare and enhance scheme efficiency? This leads to further analysis on reimbursement mechanisms. China s current strategy to improve health care financing, promote health care services and reduce financial risks for rural residents are heading in the right direction, however much more remains to be done, with problems to be resolved critical to sustaining the NCMS in the long run. With its significant new injection of government funding and commitments, the NCMS provides some important and necessary changes to the establishment of the rural health care system. These changes are not sufficient if the NCMS cannot achieve its stated goals of providing affordable health care and reducing financial risk for the vast majority of rural people. As China continues this process of implementing its new rural health financing policies (the NCMS), its experiences should be closely monitored and evaluated as well as exploring an innovative and improved development strategy. 1.2 Research Objectives The objectives of this thesis are to fill the gap in empirical research studies of the impact of the New Cooperative Medical Scheme in rural China, providing strategy support in order to optimize risk management options and policy guidelines. Based on the findings and policy recommendations, governments would be able to take pertinent measures to improve both the effectiveness and efficiency of the NCMS, therefore enhancing the social welfare of rural residents. The specific objectives are: 5

8 To identify the determinants of demand for health insurance for households in different regions; To explore the heterogeneous impact of the NCMS on promoting health care utilization and reducing financial risk for distinct regions and income groups; To investigate the health care demand pattern of rural household and its determinants; To simulate the effect of various reimbursement modes on reducing financial risk and alleviating poverty, and comparing trade-off effects between the reimbursement mode and government fiscal costs. 1.3 Data sources The empirical analysis will predominantly use secondary data, with potential sources including the China Statistics Yearbook, the China Health Statistics Yearbook and the China Health and Nutrition Survey (CHNS). The CHNS data is collected from an ongoing international collaborative project between the Carolina Population Center at the University of North Carolina and the National Institute of Nutrition and Food Safety at the Chinese Center for Disease Control and Prevention. The first round of the CHNS, including household, community and health/family planning facility data, was collected in 1989, with seven additional panels convened in 1991, 1993, 1997, 2000, 2004, 2006 and However, the latest set of informational data is not yet fully available The structure of the thesis The remainder of the thesis is organized as follows. Chapter 2 addresses major issues in health risk management, health insurance layout and rural development by summarizing the theoretical literature. Firstly, this chapter revisits the relationship between health and health care and the determinants of the demand for health care. Secondly, various risk-sharing strategies and the function and standard features of health insurance are explored. Thirdly, the importance of health risks and the provision of health insurance towards poverty reduction are 9 As of the writing of this thesis in

9 discussed, and finally, the rationale for government intervention on the provision of health insurance is explained. Chapter 3 presents an overview of the health care system in rural China. Firstly, it briefly describes the profile of China and the demographic features of its rural households. Secondly, it depicts how the rural health care system evolved in China, particularly before and after market-oriented economic reform, as well as major aspects of the market-oriented economic reform itself. Thirdly, it explains changes or gaps in health financing, health care consumption and social welfare between urban and rural residents due to economic reform shocks, also discussing the re-construct of the rural cooperative medical scheme. Finally, this chapter elaborates on the background and features of the New Cooperative Medical Scheme. Chapter 4 attempts to estimate the demand for the New Cooperative Medical Scheme, evaluating its impact on targeted goals. Given the different socioeconomic conditions and health care needs in vast geographical rural communities, this chapter particularly endeavors to unravel demand factors for households in different regions. Furthermore, it studies the heterogeneous impact of the New Cooperative Medical Scheme on improving health care usage and reducing the financial burden for distinct regions and income groups, measured by the average treatment on treated effect (ATT) under counterfactual analysis. In conducting a differentiated analysis, this chapter aims to provide a better understanding of policy guidelines. Chapter 5 analyzes the health demand pattern of rural household, including its determinants, discussing the pros and cons of different reimbursement modes. Firstly, ex ante health care seeking behaviors 10 of rural residents are investigated under a longitudinal framework. Secondly, according to the implementation of the scheme, different cost sharing plans and reimbursement modes are designed and used for comparison of which layout has a better effect on reducing out of pocket medical expenditure and headcount and overshoots of catastrophic health expenditure (CHE). Finally, this chapter discusses government fiscal costs under 10 Here indicates the willingness-to-choice of various treatment types under the situation of illnesses. 7

10 various risk management options, comparing trade-off effects between reimbursement modes and fiscal costs. Chapter 6 summarizes the main findings and policy recommendations on the basis of the previous analyses. 8