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The Chinese healthcare system

Here we look at how some of the ‘big picture’ characteristics of a health system can impact on the organisation of provision and possibilities for improvement. We do so by focusing on China as an emerging and rapidly developing health system. In this step you will learn about the context of healthcare in China. This reading offers useful context for the next step in which you watch an interview with Professor Zhiong Liu Huazhong, University of Science and Technology. Professor Huazhong talks about the alliance between the Fifth Hospital and it’s affiliated seven community healthcare centres.

The health system of China operates within a unique geopolitical context. China is a country of more than 1.3 billion people, occupying a huge, diverse landmass, which has made an extraordinarily rapid transition to a developed market economy. Consistent with this picture, health care spending in China has increased rapidly.

According to a Deloitte report released in 2015, the country’s annual expenditure is projected to grow at an average rate of 11.8 percent a year in 2014-2018, reaching $892 billion by 2018 (Nofri, 2015). Per capita health expenditures have also risen significantly - from RMB 510 ($139) per capita in 2003 to RMB 3234 ($884) in 2013 - as a result of health insurance reform, population ageing, urbanisation and advances in healthcare technology (Mossialos et al., 2016). However, despite this, health spending, overall remains at only 5.6% of GDP, lower than most developed nations in the OECD (Mossialos et al., 2016). Until recently about 80 percent of the health and medical care services are concentrated in cities, although this situation has changed over the past decade following significant reforms of the system of funding and service delivery (Jiang et al, 2014).

In what follows this document charts the historical development of the Chinese healthcare system and focuses in on some of the major reforms, including those involving primary care (the focus of the Fifth Hospital Wuhan case study).

Historical context

Modern China’s health system has gone through various stages of development (Blumenthal and Hsiao, 2015). An initial phase followed the establishment of the Peoples Republic of China in 1949. This led to the creation of a state planned and provided health system, which successfully extended care to rural areas through development of community based health services (so called ‘barefoot doctors’). By the late 1970s China had achieved near universal social health insurance coverage. The Cooperative Medical Scheme (CMS), for example, covered 90% of rural population (Yip and Hsiao, 2008). At this time the basic three tier structure was created with remains today, consisting of large hospitals (first tier), intermediary hospitals (second) and community based services/facilities (third).

A second key phase in the development of China’s health system began after 1984 with the transition from a planned to a market economy. In this period government financial support for hospitals and community services fell dramatically, while social insurance schemes (such as CMS) were slowly starved of funding. As a result the vast majority of the population were left without insurance - the government did not provide coverage and no private insurance industry existed. By 1999 around 49% of the urban population had access to some form of health insurance (mostly from government and state enterprises), but only 7% of the 900 million rural Chinese had any coverage (Blumenthal and Hsiao, 2015).

The shift to a market model also led to a rise in out of pocket payments for healthcare in China, from 20% in 1978 to 60% in 2002. The lack of coverage was especially troublesome in rural areas, revealing sharp rural‐urban disparities in access to healthcare services and investment. According to Yip and Hsiao: ‘In less than two decades, China’s health care system was transformed from one that provided preventive and affordable basic health care to all people to one in which people cannot afford basic care…’ (Yip and Hsiao, 2008).

This period of ‘unbridled marketisation’ (Millar et al, 2016) also had consequences for the organisation of healthcare delivery. In the old, pre-1984 (three tier) system all health facilities were publicly owned, with government subsidies covering more than half of recurrent costs. The remaining revenue came from fee-for-service activities under a government-controlled price schedule. However, following the market reforms after 1984 government subsidies for public health facilities plummeted to a mere 10 percent of total revenues by the early 1990s. To ensure that facilities (such as public hospitals) survived financially, the government set prices for new and high-tech diagnostic services above cost and allowed a 15 percent profit margin on drugs. In this way, while hospitals remained state owned, a ‘preferential policy’ gave them freedoms to secure income from alternative (private) sources. The policy of marketisation effectively turned hospitals, township health centres, and village doctors into profit-seeking entities, relying on the sale of drugs and other services to cover their recurrent costs.

A perhaps unsurprising consequence of this marketisation policy was a tendency of providers (such as hospitals) to over-prescribe drugs and tests, and invest in high-tech services that would secure higher profit margins. Hospitals and health care professionals are effectively incentivised to raise demand by increasing the prescription of use of high end drugs and technical services, driving up costs (Blumenthal and Hsiao, 2015). Even today, it is noted that 75 percent of patients suffering from a common cold are prescribed antibiotics, as are 79 percent of hospital patients—more than twice the international average of 30 percent (Yip and Hsiao, 2008). Such practices are not only costly and wasteful (ensuring that spending on health care services outstrips any performance improvements), but also potentially harmful to patients. This is exaggerated by collusion between providers and the pharmaceutical sector with hospitals (and sometimes doctors) receiving kickbacks from drug companies for prescribing their products. In rural areas, it has been noted that some village doctors buy expired and counterfeit drugs at low cost and sell them as valid products at higher prices. Partly for these reasons China’s healthcare providers have been characterised as “greed-driven” (Yip and Hsiao, 2008). It is estimated that wages constitute only one-quarter of physician incomes; the rest is thought to be derived from practice activities (Mossialos et al., 2016).

A third and still ongoing phase of development began in the late 1990s. Radical changes have been sought in a context of rising public discontent over spiralling out of pocket expenses and declining trust in the medical profession. Reforms focused on the introduction of three (partly) state funded social insurance schemes to cover different groups. The Urban Employees Basic Medical Insurance was launched in urban areas in 1998, while an Urban Residents Basic Medical Insurance (for non-employed) was unveiled in 2007. In rural areas, the New Rural Cooperative Medical Insurance was established in 2003. All three schemes include variable levels of government subsidies as well as employer contributions and out of pocket payments. More recently, the reform plan introduced by the Chinese government in 2009 (the 12th Five Year Plan) set out the ambitious goal of achieving national comprehensive universal health insurance coverage by 2020 (Millar et al, 2016). According to the State Council, universal coverage is now a primary goal, to provide safe, effective, convenient, and affordable basic medical services to all urban and rural residents (Nofri, 2015).

As a result of these initiatives the coverage of publicly financed health insurance schemes in China is near-universal - exceeding 95 percent of the population in 2011 (Mossialos et al., 2016). These schemes cover primary, specialist, emergency department, hospital, and mental health care, as well as prescription drugs, and traditional medicine. However, despite these achievements, significant gaps remain. According to Nofri:

“While in name China has achieved universal health coverage in recent years, benefits remain low and quality and extent of care and coverage vary widely. Co-pays are often very high, certain drugs are excluded from coverage, and out of pocket expenses are insufficiently reimbursed. The out-of-pocket cost issue is the most pressing, especially in rural areas. Driven by rapidly growing healthcare costs, high out‐of‐pocket expenses comprised a major challenge for those seeking healthcare.” (Nofri, 2015).

In 2013, out-of-pocket spending per capita still remained high by international standards, approximately 34 percent of total health expenditures (Mossialos et al., 2016).

A further key priority of the 2009 reforms was to establish a more affordable system for to supply essential drugs for all levels of medical facilities. As noted earlier, sales of prescription drugs have been a major revenue source for hospitals (allowed to charge a 15 percent mark-up). Concerns about rising costs led to a campaign in 2013 to fix prices for certain drugs centrally. As of 2015, 3,077 public county hospitals and 446 public city hospitals were participating in a government-financed pilot program to eliminate mark-up of prescription drug prices and so far the results have been promising (Mossialos et al., 2016). However, there has been some resistance to these changes and the government remains committed to further private sector investment in elite public hospitals (Blumenthal and Hsiao, 2015).

The reform of Primary care

Primary care services in China are delivered by a mix of providers including: village doctors and health workers in rural clinics, general practitioners (GPs) in rural township and urban community hospitals, and secondary and tertiary hospitals. In 2013, China had 194,310 licensed and assistant GPs (including preventive medicine), representing only 8.5 percent of all licensed physicians and assistant physicians (Mossialos et al., 2016).

Patients in rural and urban areas are encouraged to use these (generally lower cost) primary services in the first instance. However, they also have a right to access upper-tier hospitals directly. Registration with a GP is not required and, except for the very few areas that use GPs as gatekeepers (see below), referrals are generally not necessary to see an outpatient specialist. As a result China´s healthcare system has become heavily skewed towards the hospital sector where the bulk of resources are now concentrated. The largest urban hospitals in big cities (about 1,350 institutions in all) have the highest quality physicians and equipment, and account for the lion’s share of patients. By contrast, primary care services remain underfunded, under-developed and disconnected from larger hospitals.

Over time these dynamics have led to massive over-crowding of the secondary (acute) sector, as ‘patients are inclined to visit the best hospitals in the largest cities, regardless of the severity of their illnesses’ (Nofri, 2015). A further consequence is that China’s health care delivery system is fragmented, with limited co-ordination between preventive, primary, and tertiary services. Freestanding hospitals and clinics compete for patients, holding onto patients when they should be referred elsewhere, with tests often repeated when patients move from one level to another (Yip and Hsiao, 2008).

In order to tackle these problems the 2009 reforms (see above) tried to shift resources into primary care. This included measures to strengthen a nationwide network of community health clinics (CHCs) as well as investments in the training and remuneration of GPs. Related to this have been attempts to introduce more effective primary care gatekeeping systems to divert resources away from the expensive acute hospital sector. A key initiative here has been the development of so-called ‘medical alliances’. Medical alliances are groups of hospitals, often including a tertiary hospital and primary care facilities that work together in a more co-ordinated fashion. The main aim is to reduce the need for people to visit tertiary hospitals and speed up the process of moving patients with serious health problems back to primary care. It is hoped that this type of care coordination will meet demand for chronic disease care, improve health care quality, and contain rising costs (Mossialos et al., 2016).

There are three main medical alliance models (Jiang et al, 2014). In the Zhenjiang model have only one owner (usually the local bureau of health). Those in the Wuhan model (see the Wuhan Fifth Hospital case) do not belong to the same owner, but administration and finances are all handled by one tertiary hospital. Finally, hospitals in the Shanghai model share management and technical skills only; ownership and financial responsibility are separate (Mossialos et al., 2016).


To summarise, the Chinese healthcare system is undergoing significant reforms, with the government now committed to the goal of universal provision (Millar et al, 2016). However, the experience to date shows that it may be easier to reform the health insurance than the delivery system (Blumenthal and Hsiao, 2015). While attempts are being made to curb the worst excesses of marketisation (through control of drug and treatment pricing) these have not reversed older tendencies towards wasteful hospital provision, with extra resources ‘captured by providers as higher income and profits’’ (Yip and Hsiao, 2008).

The planned changes above to primary care represent a major step towards addressing some of these concerns (through more effectively gatekeeping). However, going forward, additional, more fundamental, reforms may be needed in the basic organisation and services and professional cultures, to ‘create a health care workforce that its leaders and the public trust to do the right thing’ (Blumenthal and Hsiao, 2015).


Nofri, E.M. (2015) The Chinese healthcare system; how it works and future trends [online] Available from:

Blumenthal, D. & Hsiao, W. (2015) Lessons from the east – China’s rapidly evolving health care system. New England Journal of Medicine, 372 (14): 1281-1285.

Yip, W. & Hsiao, W. (2008) China’s health system at a crossroads. Health Affairs, 25, (2) 460-468.

Mossialos, E., Wenzl, M., Osborn, R. & Sarnak, D. eds (2016) 2015 International Profiles of Health Care Systems. Commonwealth Fund.

Millar, R., Jian, W., Mannion, R. & Miller, R. (2016) Healthcare reform in China: making sense of a policy experiment? Journal of Health Organization and Management, 30 (3): 324-30.

Jiang, L., Song, S., & Guo, W. (2014) Study on the Models and Development Status of Regional Longitudinal Medical Alliance in China. Medicine and Society, 27 (5): 35-38.

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