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Healthcare Reform Faces an Uphill Battle

03-13 15:05 Caijing
Due to the “glass door” effect which has long prevented effective competition in monopoly industries, efforts to introduce social capital to the healthcare industry have encountered multiple obstacles.

By staff reporters Yang Zhongxu, Weng Shiyou, and Wang Kai

China’s healthcare reform program, which launched in the spring of 2009, is nearing the end of its first stage. Han Qide, vice chairman of the Standing Committee of the National People’s Congress, said that “universal coverage” is the greatest achievement of the latest round of healthcare reform.

The Implementation Plan for the Recent Priorities of Healthcare System Reform (2009-2011), a plan which was introduced at the same time as the new medical reform program, calls for the “separation of hospital management from operations” with corporate governance reform of public hospitals as its primary focus. The grassroots healthcare reform program also aims to alleviate the problems of “poor access and high fees” through improving the essential drugs system, implementing medical insurance payment mechanisms, and promoting primary care. However, with the exception of medical insurance coverage now reaching more than 90 percent of the population, progress on the above reforms has been far from satisfactory.

The slow progress thus far is largely the result of the lack of social capital in the healthcare industry. In 2005, the State Council introduced the “36 Guidelines” on encouraging and supporting the development of the non-public sector. It later followed up by releasing the “New 36 Guidelines” on public investment in 2010. The guidelines provided clear policy guidance to encourage private capital to enter monopoly industries that had previously been closed to public investment, including finance, energy, railways, and social programs. The medical services market was also among those listed. However, the force of implementation of these two sets of guidelines has thus far been insufficient. The industry has widely acknowledged this fact, and Premier Wen Jiabao has even called for supporting rules on the New 36 Guidelines to be formulated as soon as possible.

Due to the “glass door” effect which has long prevented effective competition in monopoly industries, efforts to introduce social capital to the healthcare industry encountered multiple obstacles, leading to the appearance of a number of distortions in three years of healthcare reform.

First, insufficient social capital allowed public hospitals to gain a monopoly in the medical services market. With little competition among large public hospitals, corporate governance structure reform became formalistic. Moreover, service costs for professional managers (hospital directors) and doctors and nurses are hard to define, which makes Multi-site Physician Practice just idle talk.

Second, the public hospitals’ monopoly exacerbated the problem of hospitals selling drugs at high profit margins, thereby distorting the medical insurance payment mechanism reform aimed at alleviating high payments for healthcare expenses. The monopoly held by public hospitals is closely linked with their ability to make high profits selling medicine, making it difficult for a single medical insurance payment mechanism to resolve the issue.

Third, in the area of healthcare reform at the grassroots level, the government has failed to clarify the boundary of the government and the market and prevented the entry of private capital through regional health planning. This has allowed the government, which should be an alternative in the healthcare industry, to become the industry’s primary supplier. State-run hospitals control drug prices through a “zero profit margin” drug policy and control staff income through a “separation between revenue and expenditures” policy. These two policies have made the stipulation that essential drugs should be “fully allocated and utilized” in government-funded primary care institutions mere empty words. They also caused a decline in the proportion of primary diagnosis and treatment in overall treatment, aggravating the problem of difficult access to medical treatment. 

The next step in healthcare reform faces many challenges. First, social capital urgently needs to be introduced to the healthcare industry; second, public hospitals must speed up the process of becoming real market players; third, following the example of Japan, a “secondary bargaining” system, which allows hospitals and medicine suppliers to set purchasing prices through negotiation with a maximum retail price for drugs set though bidding organized by the government, should be established. Open, competitive market mechanisms should be the focal point for the next round of healthcare reform.

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